Saturday, September 03, 2011

All subsisidies reek of the sulfurous stench of Hades

All other things being equal, (food production, installed PV systems) doing well is a sign that policies are on a good path. The problem is, as soon as you start subsidizing same, things are no longer equal, and the rule no longer applies. To get a quantitative analysis on what I am saying is that the theoretical test that there is a net positive is to calculate the effects of removing the subsidy and seeing if future taxes on the industry can repay the sum cost of the subsidy over the period it operated over. To be fair, one can include taxes intrinsic to the industry during and after the subsidy period.
Quantitatively, to measure the net effect of the subsidy, consider it like an investment, the return on investment being how much extra tax can be extracted from industry for the amount of subsidy spent. It is clear that on this count, that virtually all subsidies ever devised are loss making black holes. It is highly unfair to assume illeffects of taxes on commerce, when the root cause is the black hole of subsidies.

14 comments:

Dr Clam said...

Here we come back again to a fundamental difference in our understanding of the role of government. I think everything a government does should be unprofitable: a 'government of the gaps' that fills whatever social needs are unmet by the market or charitable organisations. Thus, an industry ought *never* to be subsidised with a view to making a profit, but for some other purpose: to reduce the social disruption that would be occasioned by its collapse by managing a slow decline, for instance; or to meet international treaty obligations; or to meet rash environmental goals made for political rather than economic reasons.

Marco said...

Looks like I will have to break it down further. I am trying to find an axiom here to put into principia Marconomica. What is Government, for instance.

Marco said...

I imagine I would define government as a not for profit organization that is too big to fail. Citizens are like members. How would you judge economic activities by not for profit organizations over normal private companies doing similar things?

Marco said...

Surely the government, like any not for profit organization, must still have the twin goals of being financially sustainable and for its broad goals( albeit as you say, including black holes that are acceptable to it's members) to be met at the least cost to it's members. The financial consequences of its policies that affect the broader economy, should be looked at in the context of it's internal financial decisions and how "profitable" they are in their own right.

Marco said...

Just to get back to subsidies again, I, rightly or wrongly attribute Europe's economic woes to the entrenched belief that subsidies are a net benefit to their own economies only at the expense of other countries, when it really is the other way around.

Dr Clam said...

I should say that I completely agree with your post as regards the *economic* impact of subsidies, I only felt like dashing off and making the more fundamental off-topic argument. You outline a sensible criterion for assessing the economic impact of particular protectionist policies that is very like (if I remember correctly) one I read in a book once called (if I remember correctly) "Economic Development in the Tropics", in a chapter trying to assess whether actions taken by various developing countries to hothouse flegling industries were wise or not. If you had said "all subsidies are loss-making black holes", I would have to violently disagree, but you have said "virtually all subsidies are loss-making black holes", with which I can heartily agree.

As for the question: How would you judge economic activities by not for profit organizations over normal private companies doing similar things?
I think I will have to quote several paragraphs of a Chesterton essay on my blog come morning.

Marco said...

Well, I can only really think of one subsidy in history in which there can even be a *case* for it not being a loss making black hole. Now, getting back to the case that you make specifically in regards to my previous post. It is an economic case you make. I think my point was that loss making subsidies are the intrinsic cause of having to raise revenue via taxes. Whether they are raised via GST or income taxes or whatever, they equally have potential to be deleterious to industry. If the Government eventually decides to raise the carbon tax (or lower the carbon cap), that should lead to a war chest of revenue that ideally would cause a reduction in other taxes that harm industry. Preferably not to be "wasted" on subsidies.

Dr Clam said...

Well, I can only really think of one subsidy in history in which there can even be a *case* for it not being a loss making black hole.

Well, these are only things I have read and can't recall any references, so they may not be true, but I do recall reading: (a) that before becoming an advocate of free trade, England became the paramount economic power of the world behind a protectionist wall, and (b) no countries were more assiduous in following the free-trade creed you espouse in the time of its ascendancy than the South American republics, focussing on primary production to the exclusion of all else, which left them in a deep deep hole when the integrated global economy was violently de-integrated c.1914. You seem to be positioned here very dogmatically at one of those pointy ends of a one-dimensional idea space.

Now, getting back to the case that you make specifically in regards to my previous post. It is an economic case you make.

No, it is not an economic case. In its essentials it is exactly the same case I make in my first comments on each of your posts.

Marco said...

My assessment would rest instead on: how severely will this policy impact our international competitiveness in the short term? and, how does this policy serve to increase/decrease regulatory complexity and the centralisation of power?

How would you go about calculating it objectively. I can really only agree with you on the third point. Subjectively, I believe on the first two points I come to the opposite conclusion as you. I want to dig a little deeper and work out why.

Marco said...

You seem to be positioned here very dogmatically at one of those pointy ends of a one-dimensional idea space.

That is a complete illusion, as I haven't even mentioned protectionism as a whole. I am breaking it down and am only talking about subsidies. My views on tariffs are different again, especially as they are an important source of revenue in certain cases. The subsidy I am thinking of as a special case is Brazilian ethanol subsidies. Potentially, the government may recoup the black hole investment in the industry if they stop subsidizing and start taxing it.

Marco said...

I think something simpler is happening with our argument with input tariffs and carbon tax. I am saying the *tarriff that has been used* generally at 4 times the retail shamefully wastefully, does not justify the ends, while you are arguing that at the retail value it is fair, justifiable and will give good results.

I am arguing that the carbon tax *in the way that it is proposed* will barely be noticed in terms of added burden on industry, while you are saying that a carbon tax *big enough to modify our energy usage* will have a tendency to cripple our local industry. I stil disagree with you, but I don't know where the goal posts are, or should be.

A 1:1 tarriff ratio will not realistically attract new investment, at current economies, I believe. And I also believe that the carbon tax will both be an important price signal to the coal power station economies, and at the same time not need to be very high.

The fact that the market value for energy commodities varies by orders of magnitude without having much effect on demand is irrelevant when it is the demand/supply issues *causing* the variety. Once a small but long term tax *above market price* comes into play demand will be magically effected by a seemingly tiny differential. This is my verdict based on observations on GST related tax implementation.

Dr Clam said...

I can really only agree with you on the third point. Subjectively, I believe on the first two points I come to the opposite conclusion as you. I want to dig a little deeper and work out why.

What are the three points to which you refer? I can only see two in the comment you refer to in this comment.

I am saying the *tarriff that has been used* generally at 4 times the retail shamefully wastefully, does not justify the ends, while you are arguing that at the retail value it is fair, justifiable and will give good results.

Yep, that's a fair summary. If you had stuck to your position outlined here instead of pushing on towards Moscow with your 'all subsisidies reek of the sulfurous stench of Hades' assertion, I would just have nodded happily and gone off to bother Dave... ;)

I am arguing that the carbon tax *in the way that it is proposed* will barely be noticed in terms of added burden on industry, while you are saying that a carbon tax *big enough to modify our energy usage* will have a tendency to cripple our local industry.

Yep, again this is a fair summary and I agree with you. We divert so many man-hours into *actively hindering* other people from doing productive work anyway, the impact of the tax *as proposed* on our grossly inefficient system will be marginal. The whole idea as I see it is that it is intended to be a "thin end of the wedge" though, such that it does eventually have an industry-hobbling function.

Marco said...

The third point you made was regarding big government. The carbon tax does lean towards big government and the state based tariffs don't. If this was the sole basis of your argument I would have left it at that. I really give this issue less weight, and I also believe individual policy is way less a determinant of centrality than is constitutional, electoral maths, and structural causes.

Marco said...

One more thing. The argument currently from greens regarding 1:1 tariffs is basically that they cannot see why it shouldn't be the default feed in. Using it as your basis misses the point that we don't really know whether anyone at all would have installed solar panels on that basis. To me this is moving the goal posts. I do not accept that the fault lies in the tarriffs being too generous. There is considerable feedback in that slight differences in the generosity of the tariffs make Huge differences in the take-up. A tariff that was 1:1 in perpetuity would have been derided for not having much takeup and utilities would still feel they were at long term risk. My only evidence for this is other country's experience(Japan, US)