Hard Truths: The Psychology of Subsidies

When we can’t face the truth of something, we often find new words for it: “pass away” for die, “right size” for layoffs, “merger” when one not-for-profit acquires another. There’re a lot of words for government subsidies: rescue, stimulus payment, tax incentive, handout. Whatever your preferred term, subsidies are everywhere, and they are a critical part of our debate around the appropriate role of government in society. They’re also government’s most powerful policy tool. We need to acknowledge that government as practiced in the United States is a giant wealth redistribution machine.

All Industries are Subsidized

Every major industry – from defense to agriculture to education – receives significant dollars from federal, state, and local governments. Republicans criticize subsidies that support public health; Democrats put defense subsidies in their crosshairs. Both parties also have their preferred recipients for subsidies. Voters have no clearer view of subsidies, often equating them with graft. An October 2021 poll of voters in Ohio and Michigan found 65 percent of them said corruption in government is America’s No. 1 “very big problem.”

So, if voters think subsidies are a corrupt and inefficient use of their tax dollars, are they right?

In 2013, the state of Washington gave a record $8.7 billion subsidy to Boeing to “to maintain and grow its workforce within the state.” At the time, Boeing was the state’s largest employer. The subsidy did not stipulate that Boeing was not allowed lay off workers. Boeing cashed its government check and then between 2014 and 2017 cut 15% of its Washington-based workforce. Today, the company employs 56,000 people in the state, down from the 72,000 it employed in 2020.

This Boeing subsidy was a pie-in-the-face moment for the Washington state legislature, an embarrassing case of a government not attaching enough conditions to money it appropriated for a specific purpose. Both Democratic and Republican lawmakers decried it, and it was partially responsible for the state of Washington repealing a tax break for Boeing and other airline manufacturers in 2020. The tax-break repeal was supported by Boeing itself and done to avoid EU tariffs, so it wasn’t as punitive as Washington politicians made it out to be.

Effectiveness of COVID Stimulus Checks

Sometimes a subsidy doesn’t need to have stipulations to be effective. The federal government issued COVID stimulus checks of $1,200 in April 2020, $600 in December 2020, and $1,400 in March 2021 to eligible Americans. These checks had no stipulations. They could be spent on anything a recipient wanted. And yet, the country did not see huge spikes in drugs and alcohol spending. Instead, according to Census Bureau surveys, food instability among families with children fell 42%, broader economic instability fell 43%, and frequent feelings of anxiety and depression fell 20%. All of that stimulus aid cost the federal government $585 billion. Since we can’t measure what didn’t happen – there was no economic collapse – it’s difficult to judge just how “efficient” the money was in achieving its desired effect of stability in a time of crisis. It’s certain the stimulus payments fulfilled their policy objective of keeping the poverty rate down and helping Americans through the darkest days of the pandemic.

Tennessee Government Subsidized by Federal Government

Many state politicians – including Gov. Bill Lee of Tennessee, where Fortune’s Path is based – proudly speak of their states’ “balanced budgets” in contrast to the out-of-control spending they see in Washington. But comments like Lee’s are misleading. Tennessee gets 40.28% of its total revenue from the federal government, good for 20th in the country in terms of state budget that comes from federal funds. According to a report from Truth in Accounting, Tennessee had an $8.7 billion surplus as of July 2020, but the state received almost $14 billion in federal aid, or subsidization. Without the federal government, Tennessee’s budget wouldn’t appear so balanced.

SmartAsset, a matchmaker between consumers and financial advisors, ranks every state by how dependent it is upon the federal government. The company uses three metrics – federal share of state revenue, ratio of federal funding to federal income taxes paid, and percentage of workforce employed by the federal government. In its 2022 study, SmartAsset found West Virginia is the state most reliant on the federal government, while Connecticut is the least reliant. Eight of the 10 states in the top ten are governed by Republicans, with New Mexico and Maine as the exceptions. Of the top 20 most dependent states, 14 of their legislatures are controlled by Republicans, including nine governed by Republicans with veto-proof majorities. Every politician loves subsidies, no matter what they say in public.

Can We Talk About Subsidies?

Subsidies can work if their objectives are well-defined and the process of granting them is transparent. But we are embarrassed by the appropriation process, and it’s too complicated to be explained with a tweet.

Public debate is how we decide if subsidies are a good idea, and if they are, how the money should be distributed. With the exception of government salaries, every tax and expenditure is a kind of subsidy. We should stop deriding them and and wake up to our responsibility for them.