Failed Crony Subsidies: From Washington (George) to Obama (Barack)

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For more than 200 years, politicians have tried to spark economic growth through government subsidies. Almost all of them have been expensive and demoralizing disasters. The Heritage Foundation recently estimated that most major corporations have taken federal aid, and that this spending has cost taxpayers $3,000 per second of every day since the year 2000.

One of us (Burton Folsom) has just finished the first historical study of government subsidies. The book, entitled Uncle Sam Can't Count, is published by HarperCollins and is available April 15. It starts with George Washington's failed aid to a fur trading company and analyzes later subsidies for steamships, railroads, the first airplane, ethanol, electric cars, and more. Some have been catastrophes; all have done more harm than good.

First, these subsidies have been expensive, and today they are moving the U.S. toward bankruptcy. Some criticize welfare for our financial mess, but federal aid for relief has been law for only 82 years; public sector unions, another source of debt, have only been powerful for 40 years. Corporate subsidies, however, have been with us for over 200 years, and often their presence has justified damaging federal spending in other areas as well.

Second, entrepreneurs with no federal aid have often outperformed those with large subsidies. History texts ignore these stories, but James J. Hill was the only builder of a transcontinental railroad to do so with no federal aid; and while the Union Pacific went bankrupt, Hill made profits each year. Samuel Langley received a federal subsidy to invent the airplane, but after twice crashing his plane into the Potomac River, the Wright brothers, with $2,000 of their own money, launched the first successful flight from Kitty Hawk, North Carolina.

Third, funding a business to solve a problem not only aggravates the problem, but also creates a sense of favoritism. Well-connected insiders get the federal cash and other, more worthy, enterprises must now compete with federally funded opponents. Our nation was founded on equality of opportunity, but that is undermined by the overt favoritism in the bailout of GM, the huge aid to Boeing through the Export-Import Bank, and the targeted subsidies to Archer Daniels Midland for ethanol.

If government subsidies to business have failed so often, why are they continued? In part, these failed subsidies are perpetuated because politicians don't know their history. People don't know that from federal aid to road building, to the telegraph, and to Solyndra our politicians are virtually incapable of picking winners and losers, and end up just picking losers.

Political corruption is another reason crony capitalism endures. For example, when Senator William Seward of New York supported federal aid to a major steamship company entering and leaving New York City he was winning votes in his state even as he was wasting other people's money. The steamship company Seward backed went broke and a similar company run by Cornelius Vanderbilt, with no federal subsidy, cut costs and made profits.

The greater danger here is that the federal aid to the leaders of Solyndra, General Electric, and Tesla--all of whom gave political contributions to President Obama--will destroy the affection Americans have for their political system. The Founders recognized this and narrowed the scope of federal aid in Article 1, Section 8 of the Constitution. The Declaration of Independence tells us we implement government to secure rights, not to distribute our wealth to favored political insiders. Uncle Sam Can't Count explains how more than 200 years of history show how right the Founders were to frown on government subsidies as a way to spark economic growth and solve economic problems.


Burton Folsom is professor of history at Hillsdale College and author (with his wife Anita Folsom) of Uncle Sam Can't Count: A History of Failed Government Investments from Beaver Pelts to Green Energy. Blaine McCormick is management professor at the Hamkamer School of Business at Baylor University.  

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