PRESIDENT Clinton is desperately looking for places to cut the budget. He even hints of hitting the Rural Electrification Administration. REA is an egregious example of government subsidies that enrich the wealthy while retarding environmentally beneficial innovation.

REA was established in 1935 by President Roosevelt. It subsidized the delivery of electric power to remote rural locations at a time when few rural areas were electrified. Because the costs of stringing miles of power lines to isolated customers was so high, and alternative energy just developing, only 10 percent of farms had electricity.

Lack of electricity contributed to low rural living standards. With collectivism in vogue, it appeared reasonable for the public to pay for power delivery. Taxpayers were to lose nothing: Federal subsidies were made at interest rates higher than the government's costs of borrowing. However, being a political promise, it was short-lived.

Economies are like ecosystems in that you cannot do only one thing. REA had unintended, perverse consequences. Once these consequences are understood, the REA's appeal shrinks. But it has built a constituency and it won't quietly go away.

First, few of the REA's subsidies actually benefit poor, rural areas. They did for a while, but do not now. Today, subsidies go to wealthy resort communities such as Vail, Aspen and Beaver Creek, Colo., and Hilton Head, S. C. They also go to wealthy suburbs of Atlanta, Minneapolis-St. Paul, and Washington, D.C. Over half the subsidies benefit Fortune 500 companies. The REA is subsidizing skiers, suburbanites, resorts and big businesses with middle-class taxes.

Second, the REA loans almost $2 billion annually, and more than 60 percent of these loans will never be repaid because interest rates on the loans are less than the rates the government must pay to borrow money. However, subsidies for the rich and increases in the federal deficit pale in comparison to the third consequence of the REA: nearly 60 years of discouraging research into alternative energies and conservation.

The REA subsidized centrally generated power. This created a bias against small-scale alternative energies. Centralized power plants sometimes have cost advantages, what economists call economies of scale. But if delivering this power is expensive, alternative energy sources (e.g. biomass conversions, solar, wind, small-scale hydroelectric, and tidal power) become competitive. Also, people are encouraged to conserve by seeking more-efficient appliances, machinery and tools.

The REA eliminated the delivery-cost advantages of alternative energies and discouraged their development. Research into solar and wind power and organic fuels declined sharply after the creation of the REA. Inventors and investors realized that oil, coal, large-scale hydroelectric and eventually nuclear power were favored over small-scale alternatives.

For example, Marcellus Jacobs, founder of the once-successful Jacobs Wind Electric Co., states that the spread of REA-subsidized facilities signaled the end of his business. The solar water-heating industry, resurging after World War II, was also stunted by cheap electric rates. Likewise, the ultimate demise of research into tidal power is attributable to the subsidized introduction of cheap electricity.

Subsidies usually have negative environmental consequences. In this case, some of the environmental costs are the loss of nearly 60 years of research and development in conservation and alternative energy. In rural areas, the cost of centrally generated power is high. This gave incentive for research and development into small-scale alternative energy and energy conservation. But REA subsidies favored central power.

Even when subsidies do some good, such as electrifying rural America, they frequently do great hidden harm. In the case of the REA, the harm is almost 60 years of lost alternative energy research. Subsidized rural electricity has deepened dependence on foreign oil, on dirty coal, on big dams, and on expensive nuclear power.

Since alternative futures are unknowable, we cannot know the costs of stifling innovation with subsidies. But we do know there will be costs, and that they are often significant. We know that government subsidies often become twisted to serve the interests of the rich and powerful at the expense of the weak and vulnerable. In the case of the REA, the financial and environmental costs of subsidies have been huge.

Government subsidies are dangerous and costly, even when originally intended for good purposes. And once in place, they are very hard to eliminate. Let the public remember this when considering the Clinton administration's new budgets.