Each year, the U.S. federal government subsidizes a wide range of economic activities that it wants to affect. Subsidies are cash grants or loans given to particular industries to promote growth or impact business and consumer behavior. Show
Find out about the most well-known subsidies, the history of these subsidies, and some of their costs. Definition and Examples of Subsidies Most subsidies are cash grants or loans that the government gives to businesses. It encourages activities the
government wishes to promote. The subsidy depends on the amount of the goods or services provided. For example, the U.S. government has long supported the agricultural industry through cash subsidies given to farmers to help control the supply of essential crops.
These are all considered subsidies because they reduce the cost of doing business. NoteOne level of government can also give subsidies to another. This includes federal grants given to state or local governments and state grants given to municipal governments. How Subsidies WorkThe government can subsidize an industry in a number of ways—through direct funding, loans, tax breaks or credits, the elimination of fees or penalties, etc.—but all of these amount to the same thing: financial support. And simply put, when an industry has more money (or fewer expenses) it can do more business. Subsidies are typically created to work with the industry at hand, so there is no one-size-fits-all formula. In the farming industry, for example, the government may assume the role of customer and directly buy farm products on a yearly contract. Or they may pay farmers to produce certain crops, or to avoid overproduction. In the oil industry, the government may enact subsidies that look like tax relief for the cost of extracting fossil fuels. NoteSome economists are opposed to government subsidies. They believe these end up doing more harm than good in the long run. Types of SubsidiesThe U.S. has implemented many subsidies and in many forms, supporting everything from ethanol to used cars, but here are some of the major players. Farm SubsidiesAgricultural subsidies were originally created to help farmers ravaged by the Dust Bowl and the Great Depression of 1929. The federal government guaranteed farmers a high enough price to remain profitable. How did it do this? It paid farmers to make sure supply did not exceed demand. The government subsidized farmers to keep croplands idle in order to prevent overproduction. It also bought excess crops. It then either stored them or gave them away to feed low-income people throughout the world. Over time, the agricultural subsidy program grew massively, though its original intent may have been buried. Between 2013 and 2022 the average spending on farm subsidies was about 17.6 billion a year on average. Here are some major touchpoints in subsidized farming in the U.S. in more recent history:
Oil SubsidiesThe oil industry subsidies have a long history in the United States. As early as World War I, the government stimulated oil and gas production in order to ensure a domestic supply. In 1995, Congress established the Deep Water Royalty Relief Act. It allowed oil companies to drill on federal property without paying royalties. Ever since, the oil subsidy scene has been on a political yo-yo:
NoteSubsidies can often bring political and social critique. Greenpeace argues that the oil industry subsidies impede solutions to climate change and promote racist systems. Export SubsidiesThe WTO bans export subsidies. But it allows certain U.S. federal government export subsidy programs. They help U.S. farmers compete with other countries' subsidized exports. For example, the U.S. Department of Agriculture promotes the following programs:
Housing SubsidiesHousing subsidies promote homeownership and support the construction industry. Housing subsidies come in two forms: interest rate subsidies and down-payment assistance. The biggest interest rate subsidy is the mortgage interest deduction on the federal income tax. There are also some smaller interest subsidies that reduce mortgage costs for low-income families. These direct homeowner subsidies paled in comparison to what the federal government spent to support its Federal Housing Authority mortgage loan guarantee program. The real trouble started when it created two government-sponsored enterprises. Fannie Mae and Freddie Mac provided a secondary market to buy these mortgages from banks. But they bought too many. That forced the government to spend up to $154 billion to bail out Fannie and Freddie. Was the bailout a subsidy? Yes, in a sense. Without it, there would have been no housing activity whatsoever after the subprime mortgage crisis. Fannie, Freddie, and the Federal Home Loan Guaranty Corporation were behind 90% of all home loans in the year following the housing crisis. The agencies replaced the private sector's role in the home mortgage market in the United States. Health Care SubsidiesThe most notable example of a healthcare subsidy came in 2010 with the Affordable Care Act (ACA), or more colloquially known as "Obamacare." It aimed to provide access to healthcare for those who could not afford it, primarily low- and middle-income families, and those who work in jobs that don't provide health insurance. The subsidy portion of the plan is delivered directly to eligible citizens in the form of a tax credit. In spite of a number of judicial challenges and political criticism, the ACA is still in effect through December 2022. Automobile SubsidiesAnother example of a less direct subsidy can be found in the changing automobile industry through the promotion of electric vehicles, though this can be thought of as an environmental subsidy as well. Starting in 2010 the Federal government began offering tax credits upwards of $2,500 for the purchase of plug-in electric vehicles. The credit increases for higher kilowatts, maxing out at $7,500. The tax perk incentivizes consumers and businesses to purchase electric vehicles, and as a result manufacturers have greater incentive to produce them. Key Takeaways
Frequently Asked Questions (FAQs)Why are government subsidies controversial?When the government gives money to a certain industry, it supports that industry's business, mission, and all the effects that go along with it. And it does so at the expense of the taxpayer. Federal spending always produces critiques, but subsidies are often viewed through a political lens, especially when they support industries that are polarizing or cause social harm. When did government subsidies start in the U.S.?After the Great Depression, the federal government took on a greater role in the social welfare of its citizens through the launch of the New Deal. The Agricultural Adjustment Program in 1933 was part of this effort. It protected farmers by setting prices and enacting measures to control supply and demand. Which of the following occurs when a democratic government becomes more heavily involved in taxing some in order to provide income transfers and subsidies to others?Which of the following occurs when a democratic government becomes more heavily involved in taxing some in order to provide income transfers and subsidies to others? Resources are channeled away from productive projects toward lobbying and other favor-seeking activities.
When the war on poverty programs were instituted and transfer payments expanded?when the War on Poverty programs were instituted and transfer payments expanded in the last half of the 1960s, what happened to the poverty rate? after falling for several decades, the official poverty rate has been relatively constant since the late 1960s.
Which of the following is a predictable secondary effect of a sharp increase in gasoline prices?Which of the following is a predictable, secondary effect of a sharp increase in gasoline prices? Producers will increase the production of fuel-efficient cars.
Why are the net gains of transfer recipients often substantially less than the funds they receive?Why are the net gains of transfer recipients often substantially less than the funds they receive? The transfer will reduce the incentive of the donor to earn. The recipient will often expend resources seeking to qualify for the transfer.
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