Opponents of federal aid and other forms of subsidy often base their objections on “the fact that subsidies won’t work.” Unfortunately for their argument, subsidies do work, and that is a major reason why they are objectionable.
Maybe the best way to get at this matter is to consider our common experiences as buyers and sellers in the market place. If we happen to offer an item for sale and it “goes like hot cakes,” we are likely to conclude that the customers want more and that we ought to produce and offer more of the item. Or, as buyers of an item especially to our liking, we do our best to make sure the seller keeps it in good supply. The function of pricing in a free market is to see that “the price is right” to keep the supply of anything in reasonable balance with the demand for it. A “high” price encourages production and discourages consumption; a “low” price encourages consumption and discourages production. Most anyone can understand, after a moment’s reflection, how and why this works in the market place.
And if a person will carry on that thought, he’ll see that subsidies work in somewhat the same way. For instance, it is fairly obvious, after years of experience in the United States, that a subsidy for wheat will encourage the production of wheat until it overflows the granaries and “Liberty Ships” and figuratively “runs out of our ears.” Subsidized surpluses of corn, cotton, tobacco, peanuts, butter, cheese, eggs—anything at all—accumulate in the same way.
Surpluses of coal miners, auto workers, steel workers, or specialists at any service are practically guaranteed if the price of the service is held high enough and a subsidy is offered to the unemployed. There is no surer way to have a high level of unemployment in an economy than to pay people for not working.
At first blush, one might suspect that subsidized housing would lead to a surplus of dwellings, but actually it is the dwellers who are subsidized, not the dwellings. Thus, the inevitable consequence of subsidized housing is an increase in the number of families seeking to occupy subsidized space.
Likewise, food subsidies increase the numbers of those qualifying for free food; transportation subsidies increase the numbers of free riders; education subsidies increase the numbers of those who need education; clothing subsidies increase the numbers of the ill-clad; medical-care subsidies increase the numbers of those who seem to be sick; old-age subsidies increase the numbers of the aged indigent; subsidies to the poor assure endless and growing poverty.
Opponents of Welfare State implementation of the gospel of Karl Marx—to each according to need—are wrong in declaring that subsidies won’t work! Subsidies always work to increase the supply—create a surplus—of the thing or the group that is being subsidized. Now, it well may be that those who advocated the subsidies in the first place did not understand what the inevitable consequences would be; perhaps they actually believed that subsidies would work backwards and that it is possible to diminish poverty by subsidizing it. Whatever their intentions, subsidies do work, and ought not to be trifled with.
Since subsidies are so deceptively dangerous—taking from some without their consent or knowledge and giving to others in a way that seems to aggravate rather than cure what ails them—it behooves us to seek other solutions to our problems.
We mentioned earlier that buyers and sellers, voluntarily offering and risking in a free market only what is their own, seem to gain phenomenal results if the “American Common Market” (the United States without welfarism) may be taken as an example. Competitive enterprise, regulated by consumer choice as reflected in the ups and downs of price in a free market, tends to reward according to merit—as our peers judge merit. And what is the measure of a man’s success in a free market? The extent to which he effectively serves others as these others want to be served! Wealth accumulates in the hands of those who most economically and abundantly produce the things which alleviate poverty, and thus people are stimulated to emerge and climb and help themselves. Multiplying wealth is by far the fastest way to help the poor. Dividing wealth and subsidizing poverty is the fastest way to starve everyone.
Let’s be careful what we subsidize, because subsidies work!
This blog post has been reproduced with the permission of the Foundation for Economic Education. The original blog post can be found here. The views expressed by the author and the Foundation for Economic Education are not necessarily endorsed by this organization and are simply provided as food for thought from Bigger Pie Forum.