Article by Cal Nogov on Jan. 27, 2016
Government subsidies. Love ’em hate ’em. People tend to like the government subsidies they receive or think are beneficial to society, but are outraged by government subsidies they find distasteful. Name any government subsidy and there will be people who love it and people who hate it.
There are 3 reasons why governments give subsidies. Two of those reasons involve corruption and one reason is significantly economic in nature.
The corruption reasons are easy to understand. One is vote buying. You promise a group of people some government largess in exchange for their votes. –Vote for me and I will ensure welfare benefits are increased and extended–. The second corruption is political payoffs. –You, oil executives, donate one million to my campaign and I’ll make sure there’s plenty of government largess for “oil exploration”–.
The economic reason is a little more complicated. Subsidies are used as economic damage control for the economic damage caused by government. To understand this, we must understand how markets work. When there are free markets, the quality of goods and services increase while the price for those goods and services decrease. When the government controls a market, either through regulation or outright nationalization, the quality of goods and services stagnates or falls while the prices goes up, up ,up.
So once the government has its hooks into an industry like healthcare or food, for instance, the prices start rising and the quality starts deteriorating. Uh oh. This makes the people upset, and upset people start voting out politicians. The politicians have to do something to keep their jobs.
The first thing they do is point the finger at the business people themselves. –look at the greedy business people raising prices–. This does nothing to stop the market’s course and next to nothing to satiate the electorate.
The politicians have two courses of action they can take to “fix” the market. They can price fix. But, this leads to some nasty consequences. The more palatable course of action is to subsidize.
When governments subsidize, it doesn’t stop the government hampered market’s course of rising prices. It shifts the rising prices to the tax payers. This disperses the cost of the government interference and very few understand what’s going on. The people don’t recognize that the prices are rising because the government is disguising it with subsidies. The price doesn’t stop rising in the government regulated market, so the government subsidies also increase. But because the cost is so dispersed it’s hard to notice the growing problem until one day you ask yourself the question, “why does it cost $30,000 for a simple operation and hundreds of thousands for a complicated one?”
A couple of other side effects of having to subsidize a market is borrowing and insurance. The government can’t just raise taxes. The people resist. So, the government borrows, and borrows, and borrows. In the case of healthcare, the government can’t even keep up with the rising prices with subsidies so insurance springs up to cover costs. Once again, in the case of healthcare, the market is so out of whack the government now forces you buy health insurance (obamacare) to try to correct the problem.
Subsidies will bring back a small amount of innovation and quality to the market, but no where near what would have been if the market was left free in the first place.
A few heavily regulated markets are healthcare, food, and labor. The health care market is now so distorted by the government that the government pays nearly fifty cents out of every dollar spent and obamacare was passed to force you to buy insurance to cover costs. Agriculture is the 2nd most subsidized industry. 2nd only to healthcare. The price of milk, for instance, is both price fixed(price set at a Minimum) and then subsidized on top of that. The labor market is both price fixed (minimum wage) and subsidized (welfare programs).
What are some mostly unregulated markets? Personal electronics and computers. The quality of these items keep improving while the prices are going down. Cell phones used to be mostly unregulated which is why the prices fell all the way to free with an inexpensive service contract, but those times are over. Government has started regulating and the trend of improving quality while prices fall has stopped.
If the government kept its nose out of markets in the first place, we would all be living a higher quality of life at a lower cost. Instead we get higher costs and higher taxes.