What Are Subsidies?
The World Trade Organization (WTO) has a broader definition of subsidies. It considers a subsidy to be any financial benefit provided by a government that gives an unfair advantage to a specific industry, business or even individual. The WTO mentions five types of subsidies:
- Cash subsidies, such as the grants mentioned already.
- Tax concessions, such as exemptions, credits or deferrals.
- Assumption of risk, such as loan guarantees.
- Government procurement policies that give more than the free-market price.
- Stock purchases that keep the company's stock price higher than market levels.
However, America's food supply must also be protected from droughts, tornadoes, and recessions. In fact, agricultural subsidies were originally created to help farmers ravaged by the Dust Bowl and the Great Depression of 1929. This price support system lasted until the 1990s.
Basically, the Federal government guaranteed farmers a high enough price to remain profitable. How did it do this? It paid farmers to make sure supply did not exceed demand. First, the government subsidized farmers to idle crop lands to prevent over-production. Second, it bought excess crops, and either stored them or gave them away to feed low-income people throughout the world.
Most subsidies went to farmers of grains, such as corn, wheat and rice. That's because grains provide 80% of the world's caloric needs. By 1999, farm subsidies had reached a record $22 billion. (Source: U.S. State Department, American Agriculture: Its Changing Significance)
Between 2001-2006, farm subsidies tapered off a bit, averaging $19 billion a year. Of this, possibly 15% billion was wasteful, unnecessary or redundant. Between 1995-2010, farm subsidies had ballooned to $52 billion a year on average. Of this, more than 6% went toward four "junk food" components: corn syrup, high fructose corn syrup, corn starch and soy oils. Many people wondered why the Federal government was subsidizing food that contributed to America's obesity problem. (Source: Huffington Post, Billions in Farm Subsidies Benefit Underwrite Junk Food; Food Safety News, AG Subsidies Fund Junk Food, September 22, 2011)
During the recession, as lawmakers looked for ways to cut the budget, many asked "Do corn growers need subsidies?" In 2011, a record 14 billion bushels of corn was produced. In 2012, 94 million acres of corn were scheduled to be planted -- more than in any year since World War II. (Source: Washington Post, Harvesting Cash, December 2006)
As a result, the FY 2012 budget proposed a 22% cut to farm subsidies, including the $5 billion direct payment program. Half of farmers receiving subsidies made more than $100,000 a year. In fact, 74% of farm subsidies went to just 4% of the businesses. The House budget also proposed $180 billion in cuts to the farm subsidy program. However, $133 billion would come from the food stamp program, affecting 8 million consumers, not farmers. (Source: San Jose Mercury News, Subsidizing Big Ag, April 19, 2012)
Oil industry subsidies have a long history in the U.S. As early as World War I, the government stimulated oil and gas production to ensure a domestic supply. As recently as 1995, Congress established the Deepwater Royalty Waiver Program. It allowed oil companies to drill on Federal property without paying royalties. It encouraged this expensive form of oil extraction because oil was only $18 a barrel. The Treasury Department reported that the Federal Government has missed $50 billion of foregone revenue over the program's lifetime. It argued that this may no longer be needed now that deepwater extraction has become profitable. (Source: Energy Information Administration, Federal Energy Subsidies; LA Times Oil Companies Have a Rich History of Subsidies, May 25, 2010)
Here is an summary of 2011 oil industry subsidies compiled by Taxpayers for Common Sense in its report, Subsidy Gusher.
- Volumetric Ethanol Excise Tax Credit - $31 billion.
- Intangible Drilling Costs - $8.9 billion.
- Oil and Gas Royalty Relief - $6.9 billion.
- Percentage Depletion Allowance - $4.327 billion.
- Refinery Equipment Deductions - $2.3 billion.
- Geological and Geophysical Costs Tax Credit - $698 million.
- Natural Gas Distribution Lines - $500 million.
- Ultradeepwater and Unconventional Natural Gas and other Petroleum Resources R&D - $230 million.
- Passive Loss Exemption - $105 million.
- Unconventional Fossil Technology Program - $100 million.
- Other subsidies - $161 million.
Some organizations, such as Greenpeace, argue that oil industry subsidies should also include these additional activities:
The corn subsidy, a tax credit of $.46 a gallon, ended in January 2012. However, ethanol producers would like to see a larger credit, of $1.10 per gallon, remain. This credit is to continue further research for cost-effective ways to convert other bio-fuels, like switch-grass, wood chips and non-food corn byproducts. (Source: MSNBC.com, Ethanol Subsidy Dies But Wait There's More, December 29, 2011; NPR, Congress End Era of Ethanol Subsidies, January 3, 2012;
Once the corn subsidy ended in 2012, ethanol producers were left with a bit of a glut. However, they expect demand to strengthen for three reasons:
- The glut resulted from gasoline refiners stocking up on subsidized ethanol before prices went up. The glut will be absorbed in time.
- Demand will increase during the U.S. summer driving season.
- Growing markets, such as Brazil, can't keep up with their own need for ethanol, and are looking to import it from the U.S. (Source: NPR, Ethanol Subsidy Loss, February 28, 2012)
Converting corn for fuel became highly controversial when it helped drive food prices higher in 2008, causing food riots throughout the world. However, part of the high price for corn and other commodities was because investors fled to the commodities markets in response to the global financial crisis of 2008.
Many exports argue that using corn for fuel is a poor allocation of natural resources when 60% of the world's population is malnourished. Furthermore, corn is not an efficient fuel source. Even if all the corn in the U.S. was converted to ethanol, it would only meet 4% of America's fuel consumption needs. (Source: Harvard International Review, Corn Ethanol as Energy, October 26, 2009)
- The Export Credit Guarantee Programs provides commercial financing to enable the exports of U.S. farm products. Specifically, the USDA guarantees the credit of foreign buyers when they can't get credit approval locally.
- The Dairy Export Incentive Program (DEIP) pays cash subsidies to dairy exporters to help them meet the subsidized prices of foreign dairy producers. (Source: USDA, Export Programs)
These direct homeowner subsidies paled in comparison to what the Federal government spent to support its FHA mortgage loan guarantee program. The real trouble started when it created two government-sponsored enterprises, Fannie Mae and Freddie Mac, to provide a secondary market to buy these mortgages from banks. When they bought too many subprime mortgages, the government spent $130 billion to bail out Fannie and Freddie, and eventually nationalize them. Was the bailout a subsidy? Yes, in a sense, because without it, there would have been no housing activity whatsoever after the subprime mortgage crisis. That's because Fannie, Freddie and the Federal Home Loan Guaranty Corporation were behind 90% of all home loans, effectively replacing the private sector's role in the home mortgage market in the U.S.