Monday, December 05, 2005

Do government subsidies really help the economy?

Updated, 10:58 a.m.: one of my favorite Bastiat passages seemed appropriate to add. I introduced it with another paragraph about subsidy proponents' typical claims.

The following is something I just sent to the Life, Liberty, Property community's e-mail list. Someone had asked for assistance, indicating he's discussing subsidies with a friend who believes they generate economic growth. I can be a bit verbose at times, but he asked for it!

If I don't offer an answer on this, I will no longer be qualified to call Frédéric Bastiat my patron saint.

First, read Bastiat's "What Is Seen and What Is Not Seen" to see why $1 in government spending necessarily means $1 less spent by everyone else. Because government spending necessarily deprives people of what they would have spent (or saved), it is only a transfer of consumption; there is no economic gain. Yes, there will be a benefit to the local economy when a government helps subsidize an auto plant, but that same money, untaxed and in the hands of private individuals, would have circulated through the economy anyway. It also works in the other direction: if government reduces its spending by $1, that does not mean the economy is reduced by $1.

Your friend is relying on government being wise and prudent in spending tax monies, which it rarely is. I recommend Hayek's "The Use of Knowledge in Society" essay as the definite explanation of why government bureaucrats cannot possibly plan economies: they lack the knowledge. Second, your friend ignores that companies seeking government subsidies engage in very expensive rent-seeking. They can afford to spend (and waste) whatever money it takes to lobby whichever public officials, because the companies can generally get it all back in the handouts, tax breaks, etc. It is very different when private companies compete for private individuals' patronage. Advertising is superficially similar to rent-seeking, but companies cannot spend as much as they'd like, lest they make the products unaffordable.

Both Republicans and Democrats have touted sports stadiums as economically stimulating, but Cato and others have done studies demonstrating little (if any) net economic gain in those areas. Then consider the hundreds of millions taken from everywhere else, and the fact that taxation inherently discourages production, and you'll see that "public works" in any form are not the boon politicians claim they are.

Now what if government borrows money to finance consumption? It's the same thing: that was money that private individuals could have borrowed. It's also the same even if it's a foreign bank lending money to our government. If China did not buy hundreds of billions of dollars in U.S. Treasury bills (that's another topic, but it's far more to their benefit than ours), what would they do with all the dollars they earned from us? They would invest them in the American private sector, which isn't as safe, but the money would still come back to us in one form or another.

One claim about the supposed benefit of subsidies is that government spending on massive projects is better, because it allegedly has a greater "multiplier effect" than if the people spend their own money. This is absurd, and not just because it denies people the freedom to work, to earn, and to dispose of their property as they see fit. Whether we're dealing with a $2 billion sports stadium or $2 billion spent in two billion small transactions, the same amount of money is being spent, therefore the multiplier has the same potential. And even a $2 billion stadium is still an aggregate itself, the sum of many small transactions.

"But," others who favor subsidies tend to claim, "if government does not promote this economic growth, the people would not by themselves." Those who tout this are a more dangerous creature, because they are the worshippers of the state Bastiat warned about in The Law:
Do those worshippers of government believe that free persons will cease to act? Does it follow that if we receive no energy from the law, we shall receive no energy at all? Does it follow that if the law is restricted to the function of protecting the free use of our faculties, we will be unable to use our faculties? Suppose that the law does not force us to follow certain forms of religion, or systems of association, or methods of education, or regulations of labor, or regulations of trade, or plans for charity; does it then follow that we shall eagerly plunge into atheism, hermitary, ignorance, misery, and greed? If we are free, does it follow that we shall no longer recognize the power and goodness of God? Does it follow that we shall then cease to associate with each other, to help each other, to love and succor our unfortunate brothers, to study the secrets of nature, and to strive to improve ourselves to the best of our abilities?
In a mere paragraph, Bastiat explained a beautiful concept of individual freedom for which others would need entire volumes.

Some of my entries dealing with subsidies:

Paul Krugman thinks the U.S. economy can be taxed at 28% of GDP. At best, Bastiat taught us, there's only a transfer in spending. The problem is that such spending is grossly inefficient.
Krugman never met a spent tax dollar he didn't like

Do government subsidies really create jobs, on net? No.
Government's chief sin: robbing Peter to pay Paul
Neither [the transportation bill nor energy bill] helps the economy

These two deal with the old fear that reduced government spending means higher unemployment and hence reduced economic growth:
Preserving defense-related jobs
Mr. Mayor, please define "essential"

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