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Unintended Consequences: Invisible Problems of Government Programs

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By Ethan Goetz
May 12, 2011 at 5:57 pm



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.

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