As California struggles with another budget shortfall, consumer advocacy and union groups have argued for a rollback of the billions in state tax subsidies to area businesses. But do these subsidies actually encourage economic growth and increase job activity, as originally intended? In a recent conversation with Knowledge@Emory, author David Cay Johnston builds a strong case against these subsidies, and he discusses his bestseller ““Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You with the Bill)”.  

In the book, the Pulitzer Prize winning investigative journalist and former New York Times tax reporter argues that tax breaks to large companies only serves to undermine local businesses and bankrupt public coffers. In a recent Q&A with K@E, Johnston responds to questions on corporate tax breaks, market regulation, and the obligations of Corporate America to its workers.

Knowledge@Emory: The book describes the economic conditions of the 1970’s as an era of “skyrocketing energy costs, deficits, [and] high unemployment.” To quote the late Yogi Berra, “It’s déjà vu all over again.” Now, as the current administration looks to repair the financial crisis, gas prices are creeping up, the federal deficit is at a record number, and unemployment is at 9.4 percent. In the 1970s, over-regulation was blamed for the country’s economic woes. Today, the lack of regulation is being blamed. How can we hope to achieve the right level of give and take on this point?

Johnston: The best regulation is self-reinforcing because it requires the least government intervention and gives wide latitude. By organizing legal and accounting firms as partnerships, in which each partner was fully liable for the acts of every other partner, we encouraged virtuous behavior, or at least discouraged vicious conduct. But after the savings and loan meltdown two decades ago, the states allowed LLPs and LLCs for professional firms, which vitiated the incentive to inquire into and police the conduct of partners. That example is crucial because it goes to show how structures matter, boring as they may be.

Good regulation also requires letting white-collar detectives do their jobs. The Securities and Exchange Commission failed to properly investigate Bernie Madoff because of a recent rule that required formal commission approval of investigations by the securities police. In 1998 Congress similarly handcuffed IRS agents—the tax police. And to save money, Congress has cut and cut Labor Department inspectors until today we have half as many as we did back in 1942.

Our financial mess is largely the result of a fundamental shift, bought and paid for with campaign donations and made possible because Washington advocacy is so heavily financed on the side of capital. There was a host of decisions that separated risk from responsibility, as with unregulated energy trading and securitizing mortgages. Keep risk and responsibility tied tightly together—that should be a principle in all regulation.      

Knowledge@Emory: Your book describes the many different ways that some of the most successful corporations benefit from tax incentives and government subsidies that they really didn’t appear to need. One case you mention involves Cabela’s, the large and publicly traded fishing and hunting supply company, and the tax benefits and free land it received in Pennsylvania—amounting to $30+ million in local taxpayer money. Wal-Mart, the world’s largest retailer, benefited from the same thing, and you term it “corporate socialism.” But aren’t corporate subsidies designed to encourage businesses to grow and create jobs?

Johnston: Giving subsidies to retail cannot generate jobs. Retail is the end of the economic system. Retail grows when people have more money to spend or there are more people. Subsidizing a Wal-Mart does not create jobs there. It just destroys jobs at existing, usually locally owned, businesses and transfers them to the subsidized Wal-Mart. Generally retail cannot move offshore. Subsidies work best when they benefit everyone. So subsidize research, education and most infrastructure and we all benefit. Subsidize specific retailers and we are just taking from the many to enrich the few.          

Knowledge@Emory: Healthcare is one area that causes great contention, since the public good is obviously and directly at stake. Your book notes the wealth generated by the healthcare industry, yet as one of the largest industrialized nations, we have one of the highest uninsured rates. This section of the book is especially salient now, as President Obama begins a discussion on universal healthcare. Your book makes the point that we have one of the largest, expensive and inefficient systems available. What can be done to facilitate universal healthcare in this environment?

Johnston: Our competitors are gaining because we are unique in regarding healthcare as a business, and an insurance business at that. Healthcare is a service, just like policing, highways, parks and education. Our economic statistics fail to count the costs of people trapped in jobs over insurance, who become disabled or die prematurely for lack of care. We also ration healthcare, in a manner both cruel and costly, by tying this benefit to employment for most people. I spent seven weeks last year interviewing people in Canada and Europe about their economic lives, and while there were complaints here and there about healthcare, condemnation of the American healthcare system as immoral was widespread, almost as frequent as derision of our system as economic stupidity. 

Knowledge@Emory: You point out that even as corporate profits have grown, so too have corporate subsidies. And, while the book mentions that the national economy has certainly grown, average incomes continue to shrink. The book states that corporate profits have grown much faster than wages, with average individual income falling from $33,000 in 1973 to $29,000 in 2005. Obviously, there is growing discontent with the increasing income disparity in the U.S. But to ask a very harsh and direct question, why should businesses care about individual income rates?

Johnston: As a businessman I care about individual incomes because unless people have money to spend they will not stay in our hotel (soon to be hotels, we hope). As John Maynard Keynes pointed out in 1932 “there is no possibility of balancing the budget except by increasing the national income, which is the same thing as increasing employment." As a citizen I care because incomes determine people’s ability to raise families, buy shelter and advance themselves through both formal education and self-education.

That all of the gains are going to the top should alarm us because it means the rules of our economy are not rewarding people who contribute, but rather people who control the economic levers. In the long run that is a prescription for revolution. In the meantime it means that we have the highest rate of child poverty among the major world economies. It means that 400,000 young people who qualify for college each year do not go and that many who do must work, taking away time that should be devoted to study.

The typical family with children now devotes more than 900 hours more to paid labor than in 1973 and in a society where one in four jobs pays $8 an hour or less. That means 900 hours, plus commute time, taken away from child rearing – does anyone think that occurs without a social cost? But what matters are not just incomes, but what we spend our taxes on. We spend a growing share of our taxes on subsidizing corporations and the rich who own them, and it is slowly dragging down not just our economy, but also our society.