Government Subsidies and Jobs

English: A diagram showing an expansion in a p...

A diagram showing an expansion in a production-possibility frontier. 

 

After reading today’s first installment of United States of Subsidies:  How Taxpayers Bankroll Corporations in the New York Times, I think it is time to think out loud.  Read along and see where you agree or disagree.

 

First, we keep hearing the argument that lower taxes for “job creators” — corporations, wealthy individuals, and small businesses — will create jobs.  Never mind the fact that we have cut taxes and went into a recession anyway and that the recovery — still with these tax cuts in place — has been a somewhat jobless one.  The argument prevails.

 

But explain the difference between a tax cut and a subsidy.  These subsidies are almost always tax credits (i.e., a tax cut), but in some cases businesses have a negative tax as an incentive to maintain business operations.  These should be added to the job creators’ opportunities, should they not?

 

In essence the “trickle down” argument  claims that if we give job creators money they’ll spend it creating jobs.  Some how, however, the facts don’t square with the rhetoric.

 

It isn’t any more true to say that a business owner will expand business simply because he has the money to do so than it would be to say I’ll spend money on baby diapers just because I have the money to do so.  There has to be a need — in the case of business, an opportunity — to drive investment and expansion.  In the current economic environment, the opportunity isn’t there because demand is low.  Demand is low because most Americans are economically disadvantaged.

 

And we have a little problem competing in the global labor market — especially in our traditional manufacturing sectors — where labor is cheap (and increasingly smarter and well-trained).

 

The auto industry featured in Sunday’s story has received almost $14 billion from taxpayers since 1985, but that hasn’t prevented auto factories from closing.  There are more cars on the planet today than ever and that number only looks to increase in coming years.  So it isn’t as if there is a decreasing demand for cars.  In this case the subsidies are given largely to offset the higher labor costs of doing business in the United States, but with mixed results.  The economics of these subsidies therefore don’t make sense and likely won’t make sense unless we expect the realities of the global labor market to change in our favor.  The subsidies, therefore, are short-term, incomplete fixes to a larger global labor problem.

 

Still thinking out loud…

 

There also exists the complaint that government doesn’t create jobs.  I’m not sure which side to come down on with this one.  It would seem that government subsidies don’t create jobs, at least not stable ones in dying industries.

 

taxsubsidieschartWhen governments choose to subsidize a business, government essentially is in that business.  (And if you listen to politicians today, you probably don’t want them making important business decisions.)  These subsides, both large and (relatively) small, rarely reflect thoughtful business partnerships today.  Instead they are politically motivated gifts.

Subsidies do make sense in some situations.  Smart subsidies work to reduce the variable costs of production, encouraging (or enabling) business to expand, but this doesn’t always work.  Again, looking at the labor issue in the auto industry, if the American economy cannot compete in the global auto labor market, the subsidy has effect only as long as it covers losses.  When that capacity is exhausted the benefit is gone.  It becomes a gift, not an investment.

 

So why do we subsidize?  The answer appears to be driven by politics, not business sense.  When you hear about state leaders occupying a hotel to beg for the opportunity to give away taxpayer money to an auto maker, for example, it sounds a lot like desperation.  Smart subsidies would be more like smart business investments and not political desperation.

 

On the other hand, dare mention that you might want to hire teachers or repair roads — in other words invest in the future — anti-government critics complain that government doesn’t create jobs.  Aren’t teachers workers?  How about the people working for the construction companies building your roads, are they not workers?  Of course they are workers and what they do are called jobs.  And they deserve our respect.  Even the guy in the funny hat running your parks is a worker with a job.

 

Schools, roads, parks…these are investments in public goods (in a broad, layman’s sense).  They are what they are because the private sector will not or cannot monetize them or perhaps we simply agree that a free and democratic society should provide some basic opportunities to citizens regardless of their ability to pay.  You know…roads, teachers, clean water, a healthy environment, courts, law enforcement.  That sort of stuff.  Free market economies thrive in the certainty and security these public services provide.

(Technically public goods are non-excludable, non-rivalrous so that you accessing them doesn’t interfere with me accessing them.  So, technically, teachers and roads, therefore, don’t count, but they do for my purposes here.  Cf Social Goods.)

 

save_the_buggy_whip_industryNevertheless, we seem hell bent on cutting our way to prosperity, but we don’t bat an eye when we subsidize the private sector, the so-called free market.

 

Still thinking out loud…

 

It seems like there is a question of fairness and maybe even justice at work here, but let’s not go down that road.  Look at common sense instead.  We seemingly have billions of dollars to throw at industry and offer in tax cuts.  (And many billions more to bomb foreigners, but don’t look over there.)  Maybe it is time to ask:  When is America going to start taking care of Americans again?

 

Perhaps we need to start looking at things differently so we don’t make the same mistakes again and again.  Bailing out the auto industry and Wall Street appears to have been the right thing to do under the desperate circumstances of just five years ago.  However we should now look to the future so multi-billion dollar bailouts are not again acts of desperation.

 

If we were thinking the way we think today 100 years ago, we’d still have Acme Buggy Whips suckling at the government teat filling warehouses with a product that might have some demand at an occasional parade or high school skit.  And the CEO of Acme would be installing a car elevator in his ocean front vacation home.

 

Nuclear FusionSubsidizing industry with a competitive opportunity to grow makes sense.  Let’s say the future is a newly discovered technology — nuclear fusion — and the world is racing to capitalize on it.  Can government lend a hand to build the infrastructure to make America competitive in this new industry?  Yes.  Look, mistakes will be made and some spending will go flat.  There’s no better example than research that goes on at research universities.  But supporting this research is a public good.  The discoveries there can lead to private sector economic growth.

 

So again…what are the differences between subsidies and tax cuts?  Where are the promised jobs that come with money hording at the top of the economic ladder?  If we can invest in subsidies, why can’t we invest in jobs elsewhere, something more long term and necessary like education, infrastructure, research, and new economy technology?

 

Perhaps what we need a new New Deal in this country.  At least in the near future, the dollar is the de facto world currency and the American economy remains the engine of the world.  Our debt is trusted and cheap.  We can afford to deficit spend to increase growth.  Keep in mind that it will be easier to pay down debt after 10 or 20 years of solid economic growth than it will be to make do with less if we continue to flounder for another decade.

 

Just for fun, let’s “waste” the taxpayer’s money on something he needs:  Growth.

 

 

 

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