How Government is Good for Business

Conservatives routinely exaggerate the costs of regulations for business and turn a blind eye to the many significant ways that government aids the business community.

The Doge’s Palace is a popular tourist destination in Venice. It was the seat of government when Venice was one of the most powerful and wealthy city-states in the world. In the 16th century, the rooms where the various councils of the “Serene Republic” met were decorated with paintings by the leading Italian Renaissance artists – works now considered masterpieces. In one room, the paintings on the ceiling are by Paolo Veronese and they are intended to represent the virtues of the Republic’s government. On one panel are figures of women representing “Peace” (with an olive branch) and “Justice” (carrying a sword and scales). Another contains the figure of “La Prosperita” – prosperity. She is dressed elegantly and is surrounded by mounds of fruit. She is clearly meant to celebrate the idea that the various activities of the city’s government – managing trade, conducting foreign policy, and defending against the armies of rival city states – played a large role in creating the incredible financial success of Venice.

What a difference five hundred years makes. These days, in the United States, many people see the government as the enemy of business and economic prosperity – a notion that is relentlessly promoted by anti-government conservatives. Their complaints and those of the business community are familiar ones: environmental and workplace regulations raise the cost of doing business and hamper corporate expansion; minimum wage laws raise costs for employers; and consumer protection laws raise the prices of goods and discourage innovation.

Crying Wolf: Exaggerating the Costs of Regulation

There is no denying that some government policies – particularly regulations – do raise the cost of doing business for some firms. This is true. But advocates of active government argue that companies and conservatives often “cry wolf” about regulations and that they are often not as economically damaging as claimed. For example, a report by Public Citizen called “Not Too Costly After All,” found that businesses routinely exaggerate tremendously the potential costs of regulations and usually end up adapting to them with much less cost than they predicted. Public Citizen also found that government critics typically ignore the fact that environmental regulations that impose costs on the companies that must comply with them often also generate large economic gains for companies that make pollution control technologies, like catalytic converters.1

A current example of crying wolf is the corporate complaints about the Sarbanes–Oxley Act. Though not perfect, these regulations go a long ways toward preventing the kinds of massive corporate frauds perpetuated by Enron and WorldCom. But many in the business community have been warning that these rules are stifling business. In particular, Wall Street firms have been arguing that these regulations are discouraging foreign investment in the U.S. and are threatening to dethrone New York and its stock markets as the financial capital of the world. But New Yorker writer James Surowiecki looked into these concerns and found no evidence of the economic harms alleged by critics. It is, he concluded, just one more example of how Wall Street has consistently claimed impending dire effects from any attempts at regulation:

Wall Street … has greeted practically every important market regulation introduced in this century with howls of dismay and predictions of disasters. In 1934, the head of the New York Stock Exchange told Congress that if the Securities Exchange Act, which became the foundation of market regulation in the U.S., was made law there was a chance that stock trading in the U.S. would be “entirely destroyed.” Needless to say, it wasn’t. In 1975, when the S.E.C. abolished fixed commissions, the Street claimed that its business would be demolished. Instead, after transaction costs fell, trading volume shot up. And in 2000, when the S.E.C. required companies to disclose material information to all investors, rather than just to insiders, we were told that this would strangle the flow of information to the market and make stock prices swing wildly. But, as numerous academic studies have found, it has actually done the opposite.2

 

Examples like these make it clear that we cannot trust the business community to tell us whether it is being harmed by regulations. In many cases, the reality is that the costs to business of complying with regulations are often not that onerous.

Regulations Make Us All Better Off

Defenders of the public sector also point out that the benefits we enjoy as a society from these government regulations far exceed the costs to most businesses. These policies may have a negative impact on some businesses’ profits and growth, but they also produce a better society. Environmental regulations ensure drinkable water and breathable air for all of us. Consumer and workplace regulations protect millions of people from harm. Minimum wage laws help raise families out of poverty. And so on. In general, government regulation of business and markets has made Americans safer and healthier, and has created greater economic security and economic equality.

Apparently even a conservative administration cannot deny this. In 2003, George W. Bush’s Office of Management and Budget issued a report that summarized the cost and benefits from 1992 to 2002 of the most significant 107 regulatory rules implemented by eight main federal agencies. As Table 5 clearly shows, the benefits that Americans enjoy from these regulatory programs far outstrip the economic costs. The benefits of these regulations are from $147 to $231 billion versus $37 to $43 billion in costs – so the net benefits to society are huge. And what makes this study’s result even more impressive is the fact that it comes from an administration generally hostile to regulation and uses traditional cost-benefit techniques that are notorious for underestimating social and environmental benefits. In any case, the record clearly shows that Americans are much better off for having these rules and regulations.

  

Table 5: Estimates of the Total Annual Benefits and Costs of Major Federal Rules, October 1, 1992 to September 30, 2002 (Millions of 2001 dollars)

 

Agency

Benefits

Costs

Agriculture

3,094 to 6,176

1,643 to 1,672

Education

655 to 813

361 to 610

Energy

4,700 to 4,768

2,472

Health & Human Services

9,129 to 11,710

3,165 to 3,334

Housing & Urban Development

551 to 625

348

Labor

1,804 to 4,185

1,056

Transportation

6,144 to 9,456

4,220 to 6,718

Environ. Protection Agency

120,753 to 193,163

23,359 to 26,604

Total

146,812 to 230,896

36,625 to 42,813

 

Source: Office of Management and Budget, Informing Regulatory Decisions, 2003.

  

Government Can Also be Good for Business

Not only are the economic impacts of active government not as bad as business claims, many of the programs and policies of the modern democratic state are often actually good for business and the economy. But you will rarely hear about this from the advocates of reduced government. They deliberately turn a blind eye to the many significant ways that government aids the business community. The rest of this article will detail some of the main ways that government actively supports a growing economy – ways that most Americans often don’t think about. This more accurate and complete view of the relationships between government and the business community reveals that the democratic state often functions as a friend of business, not its enemy. We will see, for instance, that numerous government policies provide crucial direct and indirect subsidies to the business community. In another article, "Capitalism Requires Government,"  I will continue this analysis and document how government establishes the elaborate legal and regulatory infrastructure that enables a market economy to function efficiently and grow. Understanding all of this will get us much closer to understanding the true relationship between government and business in the United States.

Companies Can Benefit Economically from Regulations

It may seem counter-intuitive, but government regulations can often work to increase the profitability of business. That's because the success of a business requires a certain crucial amount of consumer confidence. For example, consumers want to be sure that the products they buy are not going to hurt them. When this confidence is lost, this can be a disaster for a company as customers become less likely to buy their product. Consider the case of salmonella-tainted peanut butter in 2008. Even though only one large peanut company was implicated, many consumers stayed away from all peanut products. This lead to a loss of revenue for the peanut industry that was estimated to be a billion dollars – a huge economic impact.

Government rules that ensure the safety and efficacy of products function to maintain consumer confidence in those regulated industries. The peanut company involved in the salmonella scandal chose to use private inspectors – who were poorly trained and who rarely pushed companies to correct unsanitary conditions. Undoubtedly this saved the company some money in the short run. But the resulting scandal and loss of public confidence drove that company into bankruptcy and severely damaged the entire industry. In the long run, then, many industries can actually benefit from strict enforcement of regulations designed to ensure that their products do not harm the public. This is clearly one way that more government can be good business.

Government Subsidies to Business: Obvious and Hidden

A more obvious way that government helps business is through direct government subsidies of various corporate activities – what is sometimes called “corporate welfare.” Reasonable estimates of corporate welfare from the federal government range from $100 billion to $200 billion dollars a year – depending on what is counted as “welfare.” The main forms are direct grants to business, aid for corporate research and development, subsidized loans and insurance, tax loopholes and tax breaks, and discounted fees for use of public resources. A typical example is the Import-Export Bank, which spends about $1 billion a year to help private companies like Boeing and General Electric sell their goods abroad. Typical tax breaks include accelerated depreciation and elimination of taxes on profits earned abroad. One study estimated that in 1996, government subsidies and tax breaks to corporations outpaced all the federal money spent on programs for the poor, including welfare, food stamps, housing subsides, and student aid.3 State and local governments also have their own extensive corporate welfare programs – often designed to attract businesses to their area or to keep them there. They include such things as tax deferrals, abatements and credits of property and income taxes, low-interest loans, tax-free enterprise zones, tax-exempt industrial development bonds, and employee training subsidies.

These kinds of business subsidies are controversial. Many anti-government and libertarian types do not like them because they believe businesses should go it alone without government handouts. Many on the left criticize them because they resent government help going to big corporations when it is being cut back for the poor. But all of this controversy is misleading. It gives the false impression that these policies are the only government subsidies for business and that it they were discontinued, business would be on their own without any government aid. This is far from the truth. Besides these direct subsidies, they are many indirect and hidden government subsidies designed to promote businesses and economic growth in the United States.

One of the largest and most significant indirect subsidies for business is the hundreds of billions of dollars local, state, and federal governments spend on creating and maintaining crucial infrastructure facilities – things like roads, bridges, harbors, navigable rivers, clear water facilities, waste disposal facilities, airports, and so on. Businesses cannot grow and prosper without these things. Imagine trying to run a profitable large business without a well-functioning interstate highway system or adequate airport facilities. Another enormous public investment necessary for a well-functioning business system is education. Companies need skilled and well-educated employees. The public education system – from grade schools to public universities – plays a key role in providing that kind of workforce. Also, community amenities – such as well-planned and vibrant urban centers, well-funded and successful schools, a clean environment, public funded parks and cultural activities – also help to attract skilled workers to an area. The crucial importance of such hidden subsidies are shown by studies that found that good schools, a skilled workforce, clean water, and community amenities often do more to attract a business to a particular area than the obvious subsidies like tax breaks.4

Another immense source of hidden subsidies for business is government-sponsored research and development. Actually, the business community is highly aware of these benefits, even if most Americans know little about them. They are more than willing to accept this kind of government aid – even if it contradicts their stated position of opposing government “intrusions” into the private sector. Direct government R& D spending amounts to over $80 billion a year. The federal government alone runs over 700 research laboratories and funds 49,000 fellowships and research assistantships in graduate level science and engineering programs. Virtually all of the research done in “basic science” – whose payoffs are often in the future – is sponsored by government. The government has also heavily subsidized R&D work in many ostensibly “private” research institutions such as Bell Labs. It is not an exaggeration to say that this spending is part of the reason that Americans industries remain on the technological forefront in areas such as medicine, communications, and engineering.

The direct economic payoffs to businesses of this kind of research have been immense. If we only consider the commercial spin-offs from military research done during the Cold War, we find such things as supercomputers, advanced microprocessors, computer-controlled machine tools, advances in metallurgy and materials science, and optical fiber cables.5 Spin-offs from research for the space program are also numerous. In medicine: cool laser surgery technology, body imaging systems, infrared thermometers, cardiac monitors, and digital mammography. For the airline industry: lightening protection, wind shear predictors, and collision avoidance systems. The pay-offs of NASA research also find their way into many products like scratch-resistant eyeglass lenses, sports protectors, golf balls, infant formula, ski boots, firefighters’ breathing systems, smoke detectors, home insulation, cordless power tools, and many others.

One business sector that benefits tremendously from government R&D is the drug industry. Our government conducts fully half of the research and development of new drugs – the economic benefits of which are then largely captured by pharmaceutical companies. The National Institutes of Health alone spend about $20 billion a year on research, a good portion of which is devoted to developing new drugs. One study found that publicly funded research played a part in the discovery and development of 67% of the 21 most important drugs introduced between 1965 and 1992.6 Another found that all five of best-selling products of the drug industry for a recent period – Zantac, Zovirax, Vasotec, Capoten, and Prozac – were initially aided in their development by tax-payer funded government research.7

Subsidies are Only Part of the Story

But here is the most interesting thing about all this: even if we add these various hidden government subsidies to the more obvious kinds of corporate welfare, all of this together is only the tip of the iceberg of how government aids the business community. To see the rest of the iceberg, we need to go to a different and deeper level of analysis. We need to appreciate not only how government subsidizes particular businesses, but how government activities are necessary to make business and free market capitalism possible at all. This is the topic of the next article, “Capitalism Requires Government.” 

 


1. Public Citizen, “Not Too Costly, After All: An Examination of the Inflated Cost Estimates of Health, Safety and Environmental Protections,” February 2004. http://www.citizen.org/documents/ACF187.pdf

2. James Surowiecki, “Over There,” The New Yorker, February 5, 2007, p. 29.

3. Charles Noble, The Collapse of Liberalism (New York: Rowman and Littlefield, 2004) p. 5.

4. See Mimi Abramovitz, “Everyone is on Welfare: The Role of Redistribution in Social Policy,” Social Work, Vol. 46, No. 4, October 2001, p. 305.

5. Robert Kuttner, Everything for Sale (New York: Alfred A. Knopf, 1997) p. 215-216. I rely heavily on Kuttner’s analysis throughout this section.

6. Public Citizen, Rx R&D Myths, July 2001, p. 8. http://www.citizen.org/documents/ACFDC.PDF

7. Public Citizen, Rx R&D Myths.