Taxes Subsidies Ethan

Unintended Consequences: Invisible Problems of Government Programs

So here’s one economist‘s take on why politicians never truly have the incentive to make significant cuts to the federal budget. C’mon, take a peak, it’s only two minutes and has cool graphics.

There are strong reasons to support anything that questions the wisdom (or efficiency, fairness, legitimacy, etc) of the status quo, and on that front Prof. Ben Powell successfully makes his point: Federal programs often live on because if you just take a little bit from everyone to implement a public policy, it’s not worth the people’s time to fight it. Once a program’s in place, it’s incredibly difficult to remove it.

And when most people aren’t even willing to consider reducing the big boys (military, Medicare, Social Security), which cost thousands per person, how can we get people to care about most federal programs (of which there are tens of thousands) that cost us each only a few pennies?

The answer lies in analyzing both the philosophical argument involved with, and the real application of, these programs, using farming subsidies as the medium.

OK, let’s really think about what’s going on here, independent of the amount of money involved. The government takes something from all of us by force, and passes a benefit to two select and small parties: (1) the group who directly benefits from the program (here, farmers), and (2) the politician getting the campaign contributions, kickbacks, etc.

Right off the bat, we can see there is no clearer example of government picking winners and losers. The situation immediately fails in the philosophical “Is It Fair To All?” Department –- after all, the fisherman, TV manufacturer, or any other provider of goods isn’t getting that subsidy.

Worse, one of the winners is the government itself! Philosophically, it’s such an incredible problem (i.e. conflict of interest) when politicians directly and financially benefit from the distribution of our taxes. We should be appalled by this situation, whether it’s a penny or a million! Yet somehow we’ve all become so numb to it –- to the point where this type of transaction is commonly and shamelessly flaunted by the politicians. We’ve all heard about “pork legislation,” but do we ever do more than roll our eyes? This is something that needs to change in our society, and it can once the public loudly demands it. Remember, the government works for us, not the other way around.

OK, now for the application of the subsidy (or, what it really is, wealth redistribution). Let’s assume that the programs actually benefit more people than just the two small, aforementioned parties. We’ll revisit this assumption later, but for now I’ll pretend we “all” benefit in some capacity from the farm subsidy.

The most overlooked aspect of this transaction is the huge cost of physically collecting small amounts of money from everyone and distributing it to the small group (the farmers, in the amount of $10K). In reality, a big chunk of that $10K collected from the public meant to fund the farmers actually goes towards to bureaucrats, taxmen, planners and politicians –- they have to be paid for their time and energies.

So even ignoring the massive conflict of interest discussed earlier, this process is inefficient and wasteful; for every penny you give to theoretically drive down the price of, say, corn, only some fraction of that penny actually reaches the farmer to reduce that price. The rest of the penny goes to the government middleman, who has no competitors or legal checks on what cut he takes of your penny.

Let’s recap: You get less than full return on your penny, the farmer gets less of the funding allocated for the subsidy, and the central planners get their cut (do not ever forget this). So even if we do all receive some benefit from the decrease in corn price, we know it’s less of a benefit than if we all just gave the farmers a penny directly (who would’ve been able to reduce prices further with the set of full pennies, rather than the set of fractions of pennies they receive from the government).

Tying this back to the philosophical side, there are additional problems with this situation once you investigate the assumption that “everyone gains from farm subsidies,” which is how lawmakers will try to justify its existence. As French 19th Century theorist and political economist Frédéric Bastiat said, there is “what is seen and what is not seen.”

The price decrease of corn is what is seen. This is the “benefit for all.” But what is not seen?

First, we all could’ve afforded a slightly higher corn price had we not lost that penny to taxes –- we would have one additional penny to spend on the corn. As shown above, only a fraction of your penny actually went towards decreasing corn price, so what is not seen is that by passing it to the taxman, you did not get the full value out of the use of your penny. So you did not fully benefit.

Further, what if you don’t like/buy corn? You had no choice in how to spend that penny –- it was going to fund a corn subsidy whether you like corn or not. So what is not seen is that you lost the ability to spend that penny on beans, milk, or anything else you want (even investment: see what portions of your taxes could’ve earned if you had the choice to invest them). What is not seen is that the growers/makers of those products in turn lose customers and income because you were forced to spend your penny on corn in lieu of anything else. They (and their employees) most certainly did not benefit from the corn subsidy.

Next, farmers now have financial incentive to grow corn (to get the subsidies). This comes at the expense of what else could’ve been grown on the same amount of land. So, for example, let’s say a farmer now grows corn instead of cotton. Now the supply of cotton decreases and its price goes up. So what else is “not seen?” The subsidy caused the price of corn to decrease, but cotton to increase. Purchasers of cotton did not benefit.

Did the subsidy actually cause a net gain in the benefit to the public? At best, the answer is “It’s unclear, some win while some lose,” and at worst the answer is “absolutely not.” The only clear winners are the farmer and the central planner.

So we must ask: Does this process seem fair? Efficient? Moral? That is what we must debate, for all allocations of tax dollars (or, nowadays, government borrowing), no matter how insignificant the amount of money involved. These are the types of situations that need to come to the forefront in any discussion on shrinking federal budget and closing the deficit.

Ethan Goetz is a math geek, economics nerd and baseball junkie who loves a good argument. Also, it’s been said his nostrils are almost as big as his ego. Almost.

Ethan Goetz

Ethan is a math geek and baseball junkie who loves a good argument. Also, it’s been said his nostrils are almost as big as his ego.

Comments (6) Write a comment

  1. I’d like to see some data on whether people who receive subsidies really kick back more to their elected officials than people who don’t. Goetz, is that data available? I bet you could do a quick analysis looking at farm owners personal political contributions (all public record) in Iowa or something.

    I think this argument is also really interesting when you evaluate to other federal programs, ones that don’t help or keep people from doing their jobs as in the example of farm subsidies, but rather programs that keep kids fed or provide assistance to the homeless, etc. Those programs may even have a smaller “benefit for the whole” component, but I don’t know of too many people who think we don’t need at least some of them.

    What is the solution in that case? Maybe Uncle Sam would provide a figure based on your income and force you to distribute that amount to charity’s of your choice? That would certainly be great on an “act local” level.

    I think that your column’s point about “the man” essentially taking a cut of every federal dollar spent is a good one, but I think that it’s going to take a lot more than increased efficiency of funding mechanisms to balance this bad boy budget. It is something to consider, at least. I imagine many programs are funded more efficiently than others, and perhaps that would be a great criteria to evaluate them.

    But realistically, I think that people of my generation have to accept that we will not benefit from social security (for those who can, draw down now!) and that wars are expensive… we should maybe try not to have so many of them.

  2. agree with the sentiment and the importance of understanding unintended consequences, etc. however, the problem doesn’t go away even if people understand all the results of the policies and agree they’re inefficient.

    you still have the problem of untangling what essentially amounts to vote trading. people are still going to support bad policies as a way of getting the few policies that do benefit them implemented.

    for instance the farmer doesn’t care that the farm subsidies are a bad policy, right? presumably he votes for it because it benefits him. moreover, he’s going to be willing to also vote for up to 999,999 OTHER bad policies (using the model in the video of $10,000 and 1 penny) that are either bundled with his policy or as a “trade” to get the people who support those policies to support his.

    so even if you have a “perfect” democracy in which everyone votes on every issue, is perfectly informed, there is no bureaucratic waste, no lobbyists, and no politicians… you still will have bad policies.

    this is why it does not matter who you elect, or even if nobody is elected. the only ways to actually eliminate the problem of bad policies are:
    1) eliminate coercion (thus eliminating the compulsory participating in enforcement of bad policies)
    2) convince people somehow (moral arguments?) that its not ok to vote for a bad policy even if it benefits them.

    i do think that uncovering the true costs/benefits of policies and debating the morality/fairness can go along way toward helping out with #2, however.

  3. First, thanks for the thoughts!

    Well, you hit on a few really good points:

    (1) I agree that some programs are going to get better return (i.e. run more efficiently, see more results, etc), and that every existing program should be means-tested to see if it’s actually achieving it’s stated goal. And yes, this analysis is not going to necessarily balance the budget but would give a starting point for what things can be cut. For example, the department of education has clearly failed – $$/student spending has grown immensely over the past 20 years and results haven’t improved at all. The spending isn’t working there, so let’s not do it.

    (2) What is the effect of campaign contributors on financially getting what you want? This one, I think, is a lot trickier to quantify than it seems – while groups like farmers are giving so they get (~easy to track), many groups are contributing simply so that they don’t lose (e.g. the main goal of teacher unions is simply to maintain the status quo/not have their current “deal” decreased, even as it cripples state budgets). It’s difficult to quantify what they would potentially lose if their supporters lost control. But a very good question nonetheless (and like you say, likely already researched).

    But I think if you jump one level up on the discussion, though, whether we are funding programs to help the homeless or feed the poor or subsidize farms, the main thing to address is that it’s all being done by coercion (something ahren aptly addresses below). Even a plan that says “you can give where you want, but you have to give X” is still coercion. An improvement, but really just addressing a symptom rather than the cause in my opinion.

    I’m just of the belief that if something can only be achieved through coercion, it shouldn’t be done. Any time we force the public to pay for anything, it puts the need of that anything over the need of the person forced to pay for it. Robbing Peter to pay Paul, no matter the intentions, or “need” of Peter, is always a violation of Paul’s freedom. Let’s find another way! Or, at least explore other ways! Let’s use words, not guns, to enact policies people want!

    For example, in 2009 americans gave $304 BILLION to charity (roughly 1/3 of the amount collected via income tax!!). Is that not an avenue to feed the poor, shelter the homeless, etc? I think if taxes went down, you’d see this number go up too. People seem to cling tightly to the myth that social goals can only be achieved by the grace of the government, but it’s just so obviously not true. Successfully improving society is a bottom-up process empowered by individuals, not top-down forced by central planners.

    Additionally, I find it absolutely appalling when the public wants something “nice” done and, without making any effort personally (through volunteering or personal charity donations), simply want everyone else to pay for it! Everyone who wants to fight ‘social problem X’ should get out their own damn checkbook and volunteer their own time FIRST, instead of just immediately dipping into their neighbors pocket to fund a federal program. To do otherwise is blatant hypocrisy, and the act of a tyrant.

    This gets to something you hit on – act locally. I support this a gazillion percent. If there’s a widespread problem you think exists, individually act in your area to address it (and i know you personally do/have, so i applaud you!). If you can’t give money, give your time. Change starts with (the universal) “you”, not “everyone else”.

  4. yep, good points here as well. i sort of rolled my response to yours into my comments to msknight’s above…and thanks for the thoughts, of course!

  5. Ethan! Thanks for writing back.

    One sort of larger part that comes to mind for me in regards to people discussing these libertarian ideas: I think words like ‘coercion’ and ‘tryant’ have really STRONG meanings and that they kinda throw people off of these ideas. I know you and ahren both agree with the use, but for someone who’s a little more on the fence about these issues, it could potentially make the argument really distasteful.

    I think those words could also be construed as vaguely insulting to some folks by implying their government has been manipulating them with use of force for decades and they didn’t even notice or something.

    And my goodness. IT’s awesome that people gave that much money to charities! I had no idea.

  6. re: charities – I know, right?! People are good and generous, despite popular sentiment to the contrary! It’s nice to be reminded of that every once and while.

    Also, I definitely appreciate you bringing attention to the bad connotation of those strong word choices. It’s a tough one for me – i view it as a trade off between coming off as slightly crazy and possibly (hopefully!) opening some people’s eyes on the true hush-hush underlying premise of our social structure.

    Basically I think the (very real) risk of being insulting is worth the chance that some folks have the light bulb pop on and think (as you well put it) “hey wait a minute! Government HAS been manipulating me with use of force for decades and I didn’t even notice!”

    Additionally, I just don’t know how else to explain the situation with nicer words. Institutions that achieve their goals (whether its sheltering the homeless or building lavish palaces) through the use of force are all tyranical – they may differ in degree, but not in kind. Know what i mean?

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