Challenging Business Assistance Under the American Jobs Plan

4/30/21

The “build back better” agenda of the Biden administration and its reliance on multi-trillion dollar legislative packages has made me do a lot of thinking about fiscal policy and how it should be designed.

By way of background, fiscal policy involves government spending and taxation, with the idea that by manipulating those levers, we should be able to engineer some desired economic outcome. Sometimes those economic goals may be broad in scope, like, for instance, faster economic growth or reduced unemployment; and sometimes they can be more narrow, like addressing the requirements of a particular industry or a particular socio-economic group. (Concerns relating to inflation are largely relegated to monetary policy.)

This dichotomy of broader versus more targeted fiscal assistance has prevailed certainly though my lifetime, but I hadn’t really thought about the issue through this lens until Congress passed the initial CARES act. Faced with the ravages of the pandemic, in my judgment, Congress acted appropriately by the enactment of an aggressive fiscal stimulus policy; but even so, I had reservations about some of the Act’s provisions.

The CARES act had a mix of support programs for individuals and households as well as for businesses. I was largely supportive of the aid to individuals and households, but I was less enthusiastic about the aid for businesses. I was particularly critical of the payroll protection program, which offered assistance to small businesses in the form of loans that most typically became grants. My objections to this program were largely because (a) the distributions failed to reach all legitimately eligible businesses and (b) the design permitted too large an opportunity for business owners to monopolize the benefits at the expense of their workers.

Now that Congress appears to be contemplating additional business support under some form of the American Jobs Plan, I now realize that my unease with initiatives targeted to businesses actually derives from a broader philosophical foundation than I had originally thought. I’ve come to appreciate that many if not most of these support initiatives have imposed no qualifying wealth (or lack of wealth) criterion.

I don’t believe the public appropriately appreciates that when the federal government assists private companies — whether through tax credits or other subsidies — those benefits directly benefit company owners and shareholders. Admittedly, such support generates trickle-down effects that accrue to other stakeholders (i.e., workers, suppliers, customers), but if our aim is to assist those stakeholders, we should do so directly. With this recognition, I pose the question: shouldn’t federal assistance be restricted to those with limited wealth? Of course, defining the boundary condition is difficult, but I expect to find a fair amount of a consensus that federal assistance shouldn’t go to people who live at the top of our economic ladder. More directly, rich people don’t belong on the federal dole.

This orientation opens the door to criticism of a host of policies like the deduction for mortgage interest and tax deferral and avoidance features relating to employment benefits that frequently benefit high net worth households and individuals, but that’s a topic for another day. Today, my focus is on subsidies for businesses.

I started to think seriously about this issue in connection with my last column, which dealt with the semiconductor shortage and consideration of federal support being directed to such companies as Intel — a major producer of chips. I should point out that this support is far from a done-deal, and Intel wouldn’t be the only recipient, but as the largest producer of semiconductors, it seems likely to be on the receiving end of some measure of assistance; and this aid would be an example of exactly the situation that I find most unsettling. Somehow, I feel like when the CEO of Intel Brian Krzanich is paid an annual compensation package of $19.1 million, that, on its own, should disqualify the company from receiving any federal assistance.

With or without federal support to the semiconductor industry, market signals are already justifying investment to build capacity. Have those prospective manufactures been holding off on making their investments because the potential rewards have not yet become sufficiently generous? If that’s the case, I’m not sure the expansion of capacity is really justified. It’s hard to imagine that those investments have been held up by a lack of federal subsidies, thus far. Rather, I expect that if subsidies are forthcoming, they will go to enrich the existing stockholders, to make the market payoff even sweeter than it would likely be without that support.

Again, as the coming provisions relating to subsidies for businesses have yet to be finalized, so it may be that I have nothing to worry about … or maybe not. Time will tell; but in any case, I think the idea of imposing a wealth consideration when bestowing federal assistance is worthy of further consideration.