Hidden subsidies in supposedly über-modern business models

Published by marco on

In order to provide a service, a company must generate enough revenue to cover costs. Rent has to be covered, utility bills must be paid and employees must get their salaries. Let’s assume that the main goal of the business is actually not to make the owners rich, but rather to provide the service and also provide employment. This is what we are trained to think of when we think of a small business.

Another goal of our economy in general is growth. When a company grows, it can provide its ostensibly valuable services to more people and hire more employees. Again, all of this is generally thought of as valuable for the local economy. When revenues exceed costs, a company earns profit and can invest this money into the company in order to grow. It can also recompense its backers—the owners—for having taken risked their capital in the company.

This is all quite straightforward and sounds not only innocuous but laudable. Issues arise, however, when we fail to realize that a company is generating profit not because its service is so valuable but because it has managed to externalize or reduce its costs in a decidedly non-laudable way. Even worse, some companies don’t even care about providing the service they’re purportedly in business to provide, focusing instead on a short-term, slash-and-burn approach that makes money only for a select few and leaves to others the task of recovering from the “disruption”.

Ride-sharing services

As described in the article Uber and Lyft Get a Lot of Hype – But Ridesharing Is a Parasitic Business Model by Darwin Bond-Graham (AlterNet), it turns out that some of the highly touted, so-called disruptive business models of some Silicon Valley darlings only work at all because they take advantage of such hidden subsidies.

Citing from the article,

“Their business model relies on marketizing formerly non-economic spheres of life, like giving a friend a ride in your car, and they have aggressively externalized costs like gas, insurance, payroll, etc. so that profits are maximized and expenses are as close as possible to nonexistent. […] Taxis have been strictly regulated to ensure that the industry’s companies and contractor-drivers pay revenue into the city for the infrastructure they use […]

“In San Francisco taxis generate over ten million dollars each year in revenue for the city to spend on maintaining transport infrastructure. […] It’s this public transportation infrastructure, a big part of which is comprised of taxis, that is being disrupted by the ridesharing companies who have inserted themselves as for-profit brokers in the transportation commons.”

A company that takes advantage of a hidden subsidy like this is a parasite with an almost deliberately short-term business model. That is, it is expected to generate profit for its owners and backers in the very short term and will quickly fall apart once the subsidizers notice what is going on. It will most definitely fall apart when no one is paying for infrastructure in a few years after the taxi industry has been replaced with something that pays no taxes and has no actual employees.

It seems so simple on the surface: people are driving places anyway, so why not pay them to take other people along with them? And why shouldn’t these companies collect a fee for brokering the transaction? Well, because they’re taking advantage of an existing infrastructure that they don’t plan to pay to maintain (else there would be no viable business model). What seems like a great idea starts to sound less viable once all real-world factors are considered. We are, of course, encouraged to ignore these factors in favor of promoting innovation. Those that point out such unavoidable conclusions are chastised for being against progress and anti-business.

Also affected are other factors like making sure that “environmental standard[s]” are maintained and improved (something none of these companies could possibly be interested in, since they’re unregulated) as well as ensuring that drivers don’t “discriminate among passengers [and] serve all parts of the city, among other things that might not be maximally profitable.”

Amazon.com

Uber and Lyft are not the only ones that benefit from an unwitting public largesse (well, the public is mostly unwitting—there are almost certainly public officials who are well-aware of the ramifications but who are well-paid to look the other way). As has been pointed out (way back in The Success of Amazon: Welfare As We Should Know It by Dean Baker on October 2007 (Beat the Press) and again in The Smart Boys: Larry Summers and Jeff Bezos by Dean Baker on August 2013 (Beat the Press)), Amazon benefits from the subsidy of not having to pay sales tax in most states.

“In the vast majority of states Amazon has an advantage […] because it does not have to collect sales tax. […] In many states, including California and New York, sales taxes are in the range of 7-8 percent.

“[…] Last year Amazon.com’s sales in North America were $34 billion. […] if we assume an average uncollected tax rate of 5 percent, Amazon and Bezos effectively got a subsidy from taxpayers of more than $1.7 billion last year. […] if we go back through Amazon’s history, the size of the implicit subsidy through Amazon’s sales tax exemption vastly exceeds the company’s cumulative profits. This raises the question of whether Amazon would even exist today without the generosity of taxpayers in being willing to subsidize Amazon’s business […]”

Alarm-system companies

Another good example comes from David Cay Johnston in his book Free Lunch, which details the massive subsidy from which alarm companies benefit by externalizing the cost of responding to calls onto the taxpayer. The interview ”Free Lunch”: David Cay Johnston on hidden government subsidies for the very, very rich on January 2008 (The Scribe).

“[…] local taxpayers pay over $2 billion a year providing those companies with free labor. That free labor provides 100% of the profits of that industry. Here’s how it works. You buy a burglar alarm. […] the alarm goes off. […] The police are on their way. That’s the subsidy! […] The police spend about $50 every time they check out the burglar alarm. All the burglar alarm company does is install an electronic device that calls them if the burglar alarm is tripped. 99% of burglar alarms are false. ”

Taxpayers pay for the police, who respond to calls for the alarm company, which has to pay almost nothing in continuing services. Since only about 20% of homes have an alarm, the other 80% heavily subsidize the alarm systems of the 20%.

Airlines

And, last but not least, there are America’s airlines. These are not only engaged in a customer-hostile race to the bottom, but they’ve been feeding on the public largesse for as long as it has existed. The article Skyway Robbery: 6 Ways the Out-of-Control Airline Industry Is Ripping Off America by Lynn Stuart Parramore (AlterNet) explains that “up until the 1970s, taxpayers, through the federal government, provided more than $155 billion in direct support for the aviation industry”. Not only that, but “[a]fter September 11, the industry received approximately $8 billion in federal assistance that continued even after most airlines returned to profitability.”

It’s fine for these companies to detect a need in the market—and an accompanying opportunity for profit—but we’re fools for lauding them to the heavens for their business acumen even while our tax dollars are the primary reason for the primary profit margins.

We should stand up and take back what we’ve already paid for and demand proper, inexpensive service from industries that are all-but-indistinguishable from public services. They’re privatized the profit and socialized the costs. All the while convincing us of their business acumen and gouging us all the way.

The first step is recognizing that this is happening and revoking our respect and adulation for these con artists. The next is to demand the control we’ve paid for—or else just stop paying for a service that doesn’t serve our interests.

Parramore’s airline article sums up what we have to do quite nicely,

“[…] we have to decide once again that corporate America exists not just to make short-term profits that enrich executives, but for the benefit of the taxpayers, workers, and citizens that allow it to exist.”