US Budget Rules Hinder New Industrial Policy Tools

The U.S. government is increasingly using equity investments in private companies to pursue economic and foreign policy goals, but outdated budget rules are limiting the effectiveness of these efforts. The Development Finance Corporation (DFC) and other agencies have gained authority to take ownership stakes in companies, a practice gaining support across the political spectrum.

However, current accounting rules, focused solely on cash in and cash out, treat equity investments disadvantageously compared to loans and insurance, incentivizing agencies to prioritize those instruments even when equity might be a better fit. This discrepancy stems from the fact that equity’s balance sheet value isn’t recognized, and it doesn’t benefit from the same subsidy cost adjustments available to loan programs.

To address this, experts propose calculating an “equity subsidy cost” based on historical portfolio performance, similar to how loan programs are handled under the Federal Credit Reform Act. This reform would allow agencies to better utilize equity as a policy tool, aligning financial incentives with strategic objectives and ensuring the U.S. can compete with other nations employing sophisticated industrial policies. Without change, valuable investments may be overlooked, hindering long-term economic growth and national security.