Long before the government bailed out specific struggling companies, during the so-called Great Depression, the U.S. government subsidized many business sectors that were essential to the economy and the nation's prosperity.
There are so many industries that receive government assistance, so in this article we will focus on three subsidized industries: energy, agriculture, and transportation. Each of these industries receives billions of dollars a year from the government.
Key Takeaways
- Many industries receive government subsidies, but the three biggest beneficiaries are energy, agriculture, and transportation.
- The government provides subsidies to companies that develop renewable and non-renewable energy sources, issues bonds for certain generating facilities it owns, and imposes tariffs on certain biofuels.
- Agriculture is subsidized through cash transfers and essentially non-repayable loans to farmers, and the USDA provides affordable insurance against the risks of severe weather and pests.
- Transport companies receive cash grants from the government, funding for infrastructure development such as airport and railway construction, and tax incentives.
Energy Sector
America and the world run on energy, primarily petroleum and petroleum products, but there are other forms of energy that are economically important, including non-renewable sources (such as gas, oil, and coal) and renewable sources (such as ethanol, biodiesel, and wind).
The federal government provides grants to companies that are developing and researching new and existing energy sources. Grants are also given to energy producers who are developing more efficient and economical production and distribution procedures.
The federal government offers energy producers a variety of tax accounting deductions, credits, exemptions, allowances, depreciation, and other economically advantageous tax incentives.
Government grants are cash payments or tax cuts given to businesses or institutions to ease the burden on struggling sectors or businesses or to boost the economy.
Types of Energy Subsidies
The government provides funding for research and development in the form of grants and loans with favorable interest rates and repayment terms. Federal support is also provided to the nuclear industry and the associated debt.
For example, the federal government owns approximately 2,800 dams that generate hydroelectric power, which acts as a subsidy to the energy industry by making electricity available at below-market prices. The bonds will be issued by generating facilities owned by the U.S. Department of Energy, such as the Tennessee Valley Authority.
In addition, some government land is leased or sold at below market prices for oil and coal exploration, and import tariffs are imposed on biofuels (such as ethanol) to protect prices.
The “Catalogue of Federal Domestic Aid” provides a complete list of all grant recipients, including businesses, individuals and nonprofit organizations.
Agriculture
Food is the most important product of the agricultural sector, but there are other non-food products that are important to the economy, such as cotton, wool and tobacco, that are produced in this multi-billion dollar industry.
Prior to the Great Depression, government subsidies to the agricultural sector were relatively limited. But in 1933, with the start of President Franklin D. Roosevelt's first administration, new laws were enacted to maintain commodity prices, control production, limit competition, insure crops, and impose tariffs on imports. These subsidies supported many agricultural commodities, including corn, wheat, peanuts, honey, and dairy products.
The agricultural sector, which provides the food we eat every day, is one that governments cannot allow to fail. Farmers need to stay in business and consumers need to have food. Food prices will fluctuate, but they need to remain relatively low and affordable.
Types of agricultural subsidies
There are many ways in which governments can subsidize the agriculture industry, both monetary and non-monetary. These include:
- If agricultural prices fall, cash payments are made directly to farmers to compensate them for their financial losses.
- The USDA provides loans to farmers with no penalty for defaulting. Because there are no penalties for defaulting, the loans are effectively a gift.
- The USDA sells affordable insurance for crop damage caused by weather and pests.
- In addition to receiving payments from government insurance, farmers can also receive disaster assistance (cash payments) from the government if their crops are damaged.
Transport Sector
The transportation sector includes the vehicles, trains, aircraft, and surface vessels that move from one place to another, as well as the vast supporting infrastructure across the country.
These include railways, roads, highways, bridges, waterways, airports and rail terminals, lakes, rivers and port facilities for marine traffic.
Governments subsidize many elements of the transportation sector to ensure fast, efficient, reliable, and economical movement of people, goods, and mail from one place to another. Domestic and international trade depends on the smooth functioning of the nation's various modes of transportation, and major support began after World War II. One of the most costly and far-reaching subsidies in the sector was the Federal-Aid Highway Act of 1956, which funded the intercontinental highway system.
Types of transportation subsidies
Subsidies to the transportation sector are similar to those mentioned above. In some cases, user charges levied on air, rail, and highway users help governments recover some of the funds spent on subsidies through direct cash payments, funding for the construction of airports and railroads, and tax incentives (or exemptions) to private transportation systems.
For example, in 2022 the federal government added funding to a program to help states and localities plan and build electric vehicle infrastructure on the national highway system, accelerating the planned switch to electric vehicles.
Why does the government subsidize companies?
Subsidies are a way to encourage businesses to provide services that are needed and in demand. They make it easier and cheaper for businesses to operate.
Are subsidies good for businesses?
The answer is yes and no. It depends on who you talk to. Subsidies help companies in certain industries, but seem unnecessary in others. Either way, subsidies are designed to steer companies in the direction the government wants them to go.
What are the advantages and disadvantages of subsidies?
Subsidies help governments encourage businesses to offer services or products they haven't offered before and encourage growth in areas that align with government policy. But because subsidies are funded through tax revenues, one of the most obvious drawbacks to subsidies is that taxpayers must foot the bill for the program.
Conclusion
Government subsidies to important business sectors have made many businesses more profitable and ensured national prosperity and domestic well-being. Subsidies have not always helped struggling businesses or industries, but in most cases, subsidies are a great way to encourage growth in certain sectors, but they come at a cost.
