Politicians in the United States have been debating the value of federal subsidies for industry at least since Alexander Hamilton, the first US treasury secretary, who argued that US manufacturing needed direct government support. The goal, as Hamilton saw it, was to protect infant industries with subsidies (paid for by tariff revenues) in order to promote domestic prosperity and progress.

The argument, opposed by Hamilton’s archrival Thomas Jefferson, survives to this day. In recent decades, as the United States has clashed with major and minor trading partners over their subsidies, it defends home-grown subsidies to shore up declining industries, capture markets abroad, attract foreign firms to domestic shores, and gain a march in emerging technologies. Many economists have deplored the escalating subsidy battles as ineffective, costly to consumers, a drag on productivity, and self-defeating over the long run.

If there is a legitimate economic argument for subsidies, it is that subsidies are necessary to compensate firms for benefits they provide to society at large but cannot capture in the prices they charge for goods or services (internalizing externalities). For example, tax credits for research and development arguably produce unanticipated benefits and innovations that strengthen the common good. Subsidies to renewable energy are defended because renewable energy limits carbon emissions.

Subsidies gained in popularity under President Donald Trump and are endorsed by President Joseph R. Biden Jr. Policymakers and public opinion, in both the United States and abroad, champion government leadership, question free markets, and support subsidies that go well beyond those with the laudable goal of internalizing external benefits.