If
you’re so smart, why aren’t you subsidized?
The market economies of Central Asia are a quarter of
a century old, and their first blushes of ardor for Adam Smith are fading. Expo
2017 illustrates the new paradigm: When in doubt, subsidize – particularly when
the subsidized will back you politically in return.
What’s wrong with subsidies? One urban legend argues
that the subsidized lose money. This confuses cause for effect: Losers qualify for subsidies. The real problem
is that subsidies divert resources – men, machines and ideas – to an industry
where they are less valuable than they had been in their original.
To see why, begin with an economy that already
maximizes value. This condition connotes
that the value of another labor hour is the same in all industries; had it instead
been worth, say, $10 in Industry A and $9 in Industry B, then we could have
raised the economy’s value by $1 by moving one hour from B to A, so the economy
must not have been at a max.
Subsidies move inputs in the wrong direction, from A
to B. Consider what happens. In the
beginning, another labor hour was worth $10 in both A and B. Now a subsidy to A enables an employer there
to lure away a labor hour from B. Since
workers have only so much machinery to work with, adding another worker to an
industry congests its capital, raising its value of production by a diminishing
amount. (Try baking more pizzas when you
add the tenth cook to your one oven.) Let’s say that the additional labor hour
in A is worth only $9. Since it had been
worth $10 in B, the subsidy slashes the value of total production by $1.
Of course, the honcho in A is delighted to accept the
subsidy, because it boosts his profits. Suppose
that the subsidy is $3. To hire the
labor hour away from B, he will need to pay the worker $11 (since she had been receiving
$10, the value of her product, in B).
That hour is worth only $9 to the A boss, so he loses $2 by purchasing
it. But the subsidy is $3, so the boss
comes out ahead by $1. It’s just the economy that loses. Analysts who argue
that subsidies must be good because they enable the subsidized industry to
survive, are missing the point.
Of course, subsidies are not always odious. They may give us what we want when the
producer cannot collect enough value to cover costs although the former does
exceed the latter. The textbook example in Almaty is clean air; since it cannot
be bottled, the producer cannot confine its consumption to payers, so he
doesn’t bother to supply it. The government could stimulate its supply by
paying auto owners in Almaty to install devices on their vehicles that control
pollution (or, in what amounts to the same thing, by taxing car owners who fail
to install the equipment).
The music industry offers a more complex example. A
song may cost $10,000 to record but $0 to distribute via the Web. The musician
must charge enough to cover the fixed cost -- $1 per listener if he has 10,000
fans; but because the song costs nothing to provide, he should instead give it
away to all who yearn to hear it. One solution is to have the government pay
the $10,000. The problems in this approach are evident -- Astana may favor
dreary pro-government tunes – but the example does show the brighter side of
subsidies. –Leon Taylor
tayloralmaty@gmail.com
