Selection from "The Iron Fist Behind Invisible Hand"

by Kevin Carson

INFRASTRUCTURE.

Spending on transportation and communications networks from general revenues, rather than from taxes and user fees, allows big business to "externalize its costs" on the public, and conceal its true operating expenses. Chomsky described this state capitalist underwriting of shipping costs quite accurately:

One well-known fact about trade is that it's highly subsidized with huge market-distorting factors.... The most obvious is that every form of transport is highly subsidized.... Since trade naturally requires transport, the costs of transport enter into the calculation of the efficiency of trade. But there are huge subsidies to reduce the costs of transport, through manipulation of energy costs and all sorts of market- distorting functions ["How Free is the Free Market?"].

Every wave of concentration of capital has followed a publicly subsi- dized infrastructure system of some sort. The national railroad system, built largely on free or below-cost land donated by the government, was followed by concentration in heavy industry, petrochemicals, and finance. The next major infrastructure projects were the national highway system, starting with the system of designated national highways in the 1920s and culminating with Eisenhower's interstate system; and the civil aviation system, built almost entirely with federal money. The result was massive concentration in retail, agriculture, and food processing.

The third such project was the infrastructure of the worldwide web, originally built by the Pentagon. It permits, for the first time, direction of global operations in real time from a single corporate headquarters, and is accelerating the concentration of capital on a global scale. To quote Chomsky again, "The telecommunications revolution... is... another state component of the international economy that didn't develop through private capital, but through the public paying to destroy themselves...." [Class Warfare p. 40].

The centralized corporate economy depends for its existence on a shipping price system which is artificially distorted by government intervention. To fully grasp how dependent the corporate economy is on socializing transportation and communications costs, imagine what would happen if truck and aircraft fuel were taxed enough to pay the full cost of maintenance and new building costs on highways and airports; and if fossil fuels depletion allowances were removed. The result would be a massive increase in shipping costs. Does anyone seriously believe that Wal-Mart could continue to undersell local retailers, or corporate agribusiness could destroy the family farm?

Intellectually honest right libertarians freely admit as much. For example, Tiber Machan wrote in The Freeman that

Some people will say that stringent protection of rights [against eminent domain] would lead to small airports, at best, and many constraints on construction. Of course--but what's so wrong with that?

Perhaps the worst thing about modern industrial life has been the power of political authorities to grant special privileges to some enterprises to violate the rights of third parties whose permission would be too expensive to obtain. The need to obtain that permission would indeed seriously impede what most environmentalists see as rampant--indeed reckless--industrialization.

The system of private property rights--in which... all... kinds of... human activity must be conducted within one's own realm except where cooperation from others has been gained voluntarily--is the greatest moderator of human aspirations.... In short, people may reach goals they aren't able to reach with their own resources only by con- vincing others, through arguments and fair exchanges, to cooperate ["On Airports and Individual Rights"].

The logjams and bottlenecks in the transportation system are an inevitable result of subsidies. Those who debate the reason for planes stacked up at O'Hare airport, or decry the fact that highways and bridges are deteriorating several times faster than repairs are being budgeted, need only read an economics 101 text. Market prices are signals that relate supply to demand. When subsidies distort these signals, the consumer does not per- ceive the real cost of producing the goods he consumes. The "feedback loop" is broken, and demands on the system overwhelm it beyond its ability to respond. When people don't have to pay the real cost of something they consume, they aren't very careful about only using what they need.

It is interesting that every major antitrust action in this century has involved either some basic energy resource, or some form of infrastructure, on which the overall economy depends. Standard Oil, AT&T, and Microsoft were all cases in which monopoly price gouging was a danger to the economy as a whole. This brings to mind Engels' observation that advanced capitalism would reach a stage where the state--"the official representative of capitalist society"--would have to convert "the great institutions for intercourse and communication" into state property. Engels did not foresee the use of antitrust actions to achieve the same end [Anti-Duhring].

"MILITARY KEYNESIANISM". The leading sectors of the economy, including cybernetics, communications, and military industry, have their sales and profits virtually guaranteed by the state. The entire manufacturing sector, as a whole, was permanently expanded beyond recognition by an infusion of federal money during World War II. In 1939 the entire manufacturing plant of the U.S. was valued at $40 billion. By 1945, another $26 billion worth of plant and equipment had been built, "two thirds of it paid for directly from government funds." The top 250 corporations in 1939 owned 65% of plant and equipment, but during the war operated 79% of all new facilities built with government funds [Mills, The Power Elite p. 101].

Machine tools were vastly expanded by the war. In 1940, 23% of machine tools in use were less than 10 years old. By 1945, the figure had grown to 62%. The industry contracted rapidly after 1945, and would probably have gone into a depression, had it not returned to wartime levels of output during Korea and remained that way throughout the Cold War. The R & D complex, likewise, was a creation of the war. Between 1939 and 1945, the share of AT&T research expenditures made up of government contracts expanded from 1% to 83%. Over 90% of the patents resulting from government-funded wartime research were given away to industry. The modern electronics industry was largely a product of World War II and Cold War spending (e.g., mini- aturization of circuits for bomb proximity fuses, high capacity computers for command and control, etc.) [Noble, Forces of Production pp. 8-16].

The jumbo jet industry would never have come about without continuous Cold War levels of military spending. The machine tools needed for producing large aircraft were so complex and expensive that no "small peacetime orders" would have provided a sufficient production run to pay for them. Without large military orders, they would simply not have existed. The aircraft industry quickly spiraled into red ink after 1945, and was near bankruptcy at the beginning of the 1948 war scare, after which Truman restored it to life with massive spending. By 1964, 90% of aerospace R & D was funded by the government, with massive spillover into the electronics, machine tool, and other industries [Noble, Forces of Production pp. 6-7; Kofsky, Harry S. Truman and the War Scare of 1948].

OTHER SUBSIDIES. Infrastructure and military spending are not the only examples of the process by which cost and risk are socialized, and profit is privatized--or, as Rothbard put it, by which "our corporate state uses the coercive taxing power either to accumulate corporate capital or to lower corporate costs." ["Confessions of a Right-Wing Liberal"]. Some of these government assumptions of risk and cost are ad hoc and targeted toward specific industries.

Among the greatest beneficiaries of such underwriting are electrical utilities. Close to 100% of all research and development for nuclear power is either performed by the government itself, in its military reactor program, or by lump-sum R & D grants; the government waives use-charges for nuclear fuels, subsidizes uranium production, provides access to government land below market price (and builds hundreds of miles of access roads at taxpayer expense), enriches uranium, and disposes of waste at sweetheart prices. The Price-Anderson Act of 1957 limited the liability of the nuclear power industry, and assumed government liability above that level [Adams and Brock pp. 279-281]. A Westinghouse official admitted in 1953,

If you were to inquire whether Westinghouse might consider putting up its own money.., we would have to say "No." The cost of the plant would be a question mark until after we built it and, by that sole means, found out the answer. We would not be sure of successful plant operation until after we had done all the work and operated succes- sfully.... This is still a situation of pyramiding uncertainties.... There is a distinction between risk-taking and recklessness [Ibid. pp. 278-279].

So much for profit as a reward for the entrepreneur's risk. These "entrepreneurs" make their profits in the same way as a seventeenth-century courtier, by obtaining the favor of the king. To quote Chomsky,

the sectors of the economy that remain competitive are those that feed from the public trough.... The glories of Free Enterprise provide a useful weapon against government policies that might benefit the general population.... But the rich and powerful... have long appre- ciated the need to protect themselves from the destructive forces of free-market capitalism, which may provide suitable themes for rousing oratory, but only so long as the public handout and the regulatory and protectionist apparatus are secure, and state power is on call when needed (Chomsky, Deterring Democracy p. 144].

Dwayne Andreas, the CEO of Archer Daniels Midland, admitted that "[t]here is not one grain of anything in the world that is sold in the free market. Not one. The only place you see a free market is in the speeches of politicians." [Don Carney, "Dwayne's World"].

Big business also enjoys financial support through the tax code. It is likely that most of the Fortune 500 would go bankrupt without corporate welfare. Direct federal tax breaks to business in 1996 were close to $350 billion [Based on my crunching on numbers in Zepezauer and Naiman, Take the Rich Off- Welfare]. This figure, for federal corporate welfare alone, is over two-thirds of annual corporate profits for 1996 ($460 billion) [Statistical Abstract of the United States 1996].

Estimates of state and local tax breaks is fairly impressionistic, since they vary not only with each critic's subjective definition of "cor- porate welfare," but involve the tax codes of fifty states and the public records of thousands of municipalities. Besides money pimps in the state and local governments are embarassed by the sweet deals they give their corporate johns. In my own state of Arkansas, the incorruptible Baptist preacher who serves as governor opposed a bill to require quarterly public reports from the Department of Economic Development on its special tax breaks to businesses. "[K]eeping incentive records from public scrutiny is important in attracting business," and releasing "proprietary information" could have a "chilling effect." [Arkansas Democrat-Gazette 3 Feb. 2001]. But state and local corporate welfare could easily amount to a figure com- parable to federal.

Taken as a whole, direct tax breaks to business at all levels of government are probably on the same order of magnitude as corporate profits. And this understates the effect of corporate welfare, since it disproportionately goes to a handful of giant firms in each industry. For example, accelerated depreciation favors expansion by existing firms. New firms find it of little benefit, since they are likely to lose money their first few years. An established firm, however, can run a loss in a new venture and charge the accelerated depreciation against its profits on old facilities [Baratz, "Corporate Giants and the Power Structure"].

The most outrageous of these tax expenditures is the subsidy to the actual financial transactions by which capital is concentrated. The interest deduction on corporate debt, most of which was run up on leveraged buyouts and acquisitions, costs the treasury over $200 billion a year [Zepezauer p. 122-123]. Without this deduction, the wave of mergers in the 1980s, or the megamergers of the 1990s, could never have taken place. On top of everything else, this acts as a massive direct subsidy to banking, increasing the power of finance capital in the corporate economy to a level greater than it has been since the Age of Morgan.

A closely related subsidy is the exemption from capital gains of securities transactions involved in corporate mergers (i.e. "stock swaps")--even though premiums are usually paid well over the market value of the stock [Green p. 11]. The 1986 tax reform included a provision which prevented corporations from deducting fees for investment 'banks and advisers involved in leveraged buyouts. The 1996 minimum wage increase repealed this provision, with one exception: interest deductions were removed for employee buyouts [Judis, "Bare Minimum"].

Right libertarians like Rothbard object to classifying tax expenditures as subsidies. It presumes that tax money rightfully belongs to the govern- ment, when in fact the government is only letting them keep what is rightfully theirs. The tax code is indeed unfair, but the solution is to elim- inate the taxes for everyone, not to level the code up [Rothbard, Power and Market p. 104]. This is a very shaky argument. Supporters of tax code reform in the 1980s insisted that the sole legitimate purpose of taxation was to raise revenue, not to provide carrots and sticks for social engineering purposes. And, semantic quibbling aside, the current tax system would be exactly the same if we started out with zero tax rates and then imposed a punitive tax only on those not engaged in favored activities. Either way, the uneven tax policy gives a competitive advantage to privileged industries.