A Load of Really Rancid Pork from Congress

Subsidies and price supports for industries like energy and agriculture mean Americans fork over twice: As taxpayers and consumers

By Howard Gleckman

Welfare lives. No, not that welfare. The old federal handout for poor mothers and their children is long gone. But the real welfare queens of U.S. society -- the energy and agriculture businesses -- are still on the dole, big-time.

Just take a look at two bills working their way through Congress: a huge energy measure passed by the House on Aug. 1 and farm bills approved by the Senate on Aug. 3 and by the House Agriculture Committee on July 27. All are larded with the most rancid sort of pork.

The energy measure is little more than a package of special-interest tax cuts dressed up as a solution to the nation's fast-disappearing energy crisis. With gas prices settling back down and California's electricity shortages receding, last winter's problems are a distant memory. The energy markets have largely self-corrected. But for President Bush and Congress, the high prices of six months ago were a great excuse to cook up some sweet giveaways for their friends in the energy and appliance businesses.


  The House-passed bill includes nearly $34 billion in tax cuts over the next decade. Some would subsidize the production and use of alternative fuels, such as solar, wind, and, umm, chicken waste. Some would encourage conservation. Most would provide write-offs for the production of fossil fuels, such as oil and gas, or construction of power plants.

Here's one example: Taxpayers would pay appliance makers up to $100 per unit to build energy-efficient refrigerators. But they would also give electricity companies at least $8 billion in tax breaks, which should cut their prices. That, of course, will reduce demand for those fancy new iceboxes.

Think about this for a minute. First, we ask taxpayers to subsidize conservation. Then, we ask them to underwrite the cost of fossil-fuel production, which will reduce prices and encourage more -- not less -- consumption. Once tax subsidies have helped drive down the cost of producing oil to artificially low levels, taxpayers are then asked to make alternative fuels price-competitive by subsidizing their costs.


 This makes no sense. Here's how economics would solve the problem. Suppose, instead of subsidizing everybody in the energy business, we subsidized nobody. Fossil-fuel prices would increase, reflecting both growing demand and the true cost of production. As prices rose, consumers would conserve or look to alternatives. It may not pay to put solar panels on your roof when the price of oil is $25 a barrel. But it might very well make sense if the price is $40.

As more folks shifted to alternative sources, greater demand for them would drive new investment and innovation, and prices would fall. And as high prices drove consumers away from fossil fuels, oil and gas producers would scramble for new efficiencies to bring their costs down. Funny how real markets work.

Alas, market economics are something that agribusiness, too, knows nothing about. For generations, American farmers lived on government price supports. The system helped destroy the family farms -- but was a boon to big agricultural corporations. Back in 1996, Congress tried to wean farmers off subsidies. But the plan flopped. In the years since, Congress has approved $25 billion in "emergency" aid. The big fight this year: Will farmers get $7.5 billion in emergency money, or merely $5.5 billion? Bush, to his credit, is holding out for the lower number.


  The short-term funding is just half the story. Congress also wants to rewrite the farm law and restore the subsidies it scaled back in '96. The idea is simple -- and sweet. The government would set a "target price" for commodities such as corn, wheat, and cotton. If the price falls below that level, agribusiness gets a check from the taxpayers. So, consumers pay twice -- first at the grocery store, and again on income tax day. What a deal.

The ultimate price tag for all this? The congressional budget passed last spring sets aside more than $70 billion over the next decade.

Restoring the old law at least ends the pretense that the ag business is market-driven (we still like to pretend when it comes to energy). But these taxpayer-financed subsidies are bad news. They distort markets beyond recognition, reward inefficient producers, and do little to encourage their more efficient competitors. It's time for them to go.

Gleckman is a a senior correspondent in BusinessWeek's Washington bureau. Follow his views every Tuesday in Washington Watch, only on BW Online

Edited by Douglas Harbrecht

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