Monday, July 14, 2014

More than Money Transfers: How Government Subsidizes Industries and Businesses

The government will not stop picking winners and losers in the area of economics. Instead of staying with the original purpose of government, government officials decide to subsidize any and all organizations that they think (or profess to think) would be quite beneficial to the American people.

We have on this here blog already tackled the subject of subsidization in some detail. I have not come anywhere close as of yet to exhausting all possible theses for blog posts. Thus, this post is not a rehash of why subsidies are generally disadvantageous. That has already been done. This post is about describing what a subsidy is.

Merriam-Webster's Online Dictionary defines subsidies as,
"A grant by a government to a private person or company to assist an enterprise deemed advantageous to the public"

This definition describes what most people would automatically think of when they hear the word subsidy, but I believe that this definition is just a tad incomplete. You see, the government utilizes more means to "assist an enterprise deemed advantageous to the public" than just direct money transfers.

Black's Law Dictionary explains,
"A grant, usually made by the government, to any enterprise whose promotion is considered to be in the public interest. -Although governments sometimes make direct payments (such as cash grants), subsidies are usually indirect. They may take the form of research-and-development support, tax breaks, provision of raw materials at below market prices, or low-interest loans or low-interest export credits guaranteed by a governmental agency." 

Looking at this definition may cause some to look at subsidies in a whole new way. Some are not going to be convinced just because this credible source says so, that this is really what subsidies are. So let's break down the various parts of this definition, so as to show that what it claims are subsidies are actually used by the government to aid the promotion of certain companies above others.

It is not difficult to see why research-and-development support should be considered a subsidy. This is a form of direct cash transfer to organizations to aid research and development.

Bear in mind that there is a difference between research and development. Research is intended to search out facts that may or may not have practical use. Development on the other hand is intended to specifically search out practical applications to facts already established. It's similar to the difference between science and applied science.

According to a 2007 study by the Congressional Budget Office, the federal government funds 50% of the research, and 17% of the development in this country. This money has been largely going to development of such items as could be essential to national security.

As far as the intention goes, this form of subsidy is actually not that heinous. It is not intended to advance one company above another in a given industry. However, it is still subsidization. In this case, the intention is to advance one industry above another.

Picking winners and losers in economics after all is not always limited to individual companies. For instance, if the government sponsors research and development on wind energy, so as to ensure lower prices in the end, it is picking wind power as a winner, and other forms of energy, like nuclear, fossil fuels, and solar power as losers.

But the more traditional picking winners and losers from individual companies does occur too. Let's take a look at tax breaks. Now I know that no one wants to pay more taxes, and thus, tax breaks are seen as advantageous. But tax breaks if not universal, have a tendency to benefit one company or industry above another.

Let's say that Sauron has placed a 20% tax on the gardening industry. This forces higher prices upon Sam's Roses and Herbs. Sam's customers are turned away to an organization with horrible customer service, and a far inferior product - Saruman's Farm Market.

Astonished, Sam investigates Saruman's Farm Market. He discovers that Saruman's Farm Market is able to provide lower prices because it only has to pay 5% in taxes. You see, Sauron and Saruman are allies, so Sauron decided to help Saruman's business with a hefty tax break.

Since Sam doesn't know the dark lord, he does not get this tax break, is suffocated by the higher rates, and ultimately goes out of business. Don't worry about him though, a miser named Frodo Baggins hires him to be his personal gardener, and the two become fast friends.

Of course, the end for a business can't always be as pleasant as this one here, but the closing of a business isn't that unlikely an event. Maybe that itself won't happen, but the higher taxes will definitely cripple the business and subsequently the business owner and the employees.

Of course, if the tax break is universal, then it will not be subsidization and we can all celebrate the benefits to the businesses and the customer.

Sometimes though, the government is just a little bit more sneaky. You see there are times when the government acts as a corporation itself. In these particular situations, it hardly ever sells its items at a  fair price. Rather, the price is far below market levels. This is precisely what Black's Law Dictionary means when it says, "Provision of raw materials at below market levels."

In this instance, since Saruman's Farm Market pays less to buy his fertilizer from the government, he doesn't have to charge as much to make a profit, as Sam's Roses and Herbs does just to make ends meet.

It's not just in Middle-Earth either. This type of experience is prevalent within our country today. The government gets involved in industries and sells the fruits of their labor to selected organizations, thus picking the winner and losers.

The last point made by Black's Law Dictionary refers to subsidies by low-interest loans. The most obvious examples of these loans are the institutions of Fannie Mae and Freddie Mac.

These institutions work to provide lower interest rates to their clients. It sounds like a phenomenal idea, but then we all know about the collapse of both of these well-known organizations quite well. According to the Cato Institute in 2007, the greatest difficulty lies with the distortion of the lending market, and the diversion of loans away from private corporations.

And if you really think it doesn't matter that banks and other lending agencies might struggle because they are tyrannical and need to be stopped anyway, I suggest you watch It's a Wonderful Life. There are good and bad companies in every industry. And the government is just not well equipped to determine which is which.

But of course they just keep trying, and with harmful consequences. Not just the giving of money to corporations, but almost any governmental policy can be twisted and abused by legislature to give support to one company above another. We must be vigilant to watch the government's legislation carefully to ensure that they do not use subsidization to control our economy.

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