Region Forward Blog

Cut wasteful subsidies and use funds to spur innovation and growth

Jun 28, 2011


While The Yardstick has urged against hasty spending cuts for the sake of spending cuts in the past it’s clear that as a country we have to make some tough decisions on our fiscal situation. However it is important that any such decisions be made very carefully – our economy is too fragile to make sweeping spending slashes arbitrarily. Programs which have proven outdated or ineffective are likely targets for cuts. On the other hand initiatives or programs that will yield return on investment for decades to come – infrastructure education clean energy etc. – should actually see increased spending.

Given the scarce funding situation we find ourselves in where will investments in things like mass transit and solar power plants come from? How about starting with cutting unproductive subsidies? That’s the advice from two top folks from Brookings Bruce Katz and Mark Muro. Although each of them is tackling a different subsidy – Katz focuses mainly on mortgage interest deductions for the wealthy while Muro goes after subsidies for large oil and gas producers – they both come to a similar conclusion: these subsidies are wasteful and the funds lost on them could be put to better use by investing in innovation.

Writing on Fareed Zakaria’s CNN blog Katz argues that the mortgage interest deduction “is among the most regressive tax subsidies in the U.S. code. It disproportionately benefits high-income households and it largely fails to fulfill its primary purpose of increasing homeownership rates.” Furthermore it’s sucking up precious resources that could be better spent on things that could actually make our economy more vibrant in the future. “The single act of capping the mortgage interest deduction at current levels would save $166 billion over 5 years. This would be more than enough to invest in innovative growth.”

Likewise Muro notes that subsidies to energy companies need major reform: “The time is right for a convergence of agendas that links fossil fuel subsidy reform and smarter renewables supports. Sheer fiscal necessity the array of subsidy problems in need of response and the need to decide what to do with so many expiring renewables provisions are going to force a debate in the next two years.” Muro also suggest a “significant remodeling of the shaky array of renewable energy provisions” many of which are time-limited unlike the more permanent subsidies for fossil fuels. In a time where 1) oil companies are making record profits 2) the federal deficit is huge and 3) climate change requires us to dramatically shift our energy production and consumption patterns providing subsidies to oil and gas companies is ridiculous.

Roger Cohen argued a similar point in The New York Times yesterday calling on the President and Congress to pursue an energy and industrial policy for America aimed at breaking through the ideological impasse that has prevented the U.S. from making more significant investments in clean energy.

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