Introductory-level economics is based on the principle that perfect competition is theoretically possible – this means that all buyers and suppliers are equally well-informed, that all firms holds equal degrees of market power, and that entry and exit of the market can occur at any time without barriers. In the real world, this concept is laughable – any competitive industry consists of firms of varying sizes (the exceptions being oligopolies or monopolies) with varying degrees of market power. There are also external actors looking to ease or impose pressure, primarily by reducing the monetary burden placed upon suppliers or consumers to make specific products more appealing to purchase or produce. These are known as subsidies, often offered by the state, that provide direct support to incentivize certain behaviours.
The theory of economics is that markets, within a free market system, will self-regulate as supply adjusts to changes in demand and vice versa. The provision of subsidies is one of the more minor ways of distorting this “balance” (a more extreme version being currency manipulation or any other action taken in a planned economy), as the reality of free-market systems is that they are riddled with power structures that reduce the buying power of consumers, especially in larger global markets. Often, subsidies and support on the supply side are directed towards essential but non-competitive sectors (agriculture) or industries in their infancy (clean technology). By artificially lowering the cost of production and adoption, governments have the ability to encourage or reduce the cost of certain behaviours, which often include essential services like providing education, lowering the cost of health insurance, or providing rebates on installing solar panels.
But here a snag arises – subsidies are funded through taxpayer dollars, meaning that the effectiveness of programs must be judged against the potential ROI of investment into a venture with a lower opportunity cost. This is part of the fundamental divide between fiscal hawks and doves – ensuring the finite resource of taxpayer funding is not wasted in areas where greater utility could be generated elsewhere (a true conservative often believes the greatest utility of a dollar is to be had in the hands in the consumer). The line between direct and indirect subsidies is often that the government can either provide support directly and recoup a percentage of their investment, or can provide funding indirectly and see no fiscal return, hoping that this method is indirectly funded by increases in support-related GDP or employment growth in targeted sectors. So, government subsidies play an essential role in ironing out the gaps left by the free market – right?
To simplify a technical explanation, a subsidy to a firm acts as revenue, which mimics increased demand for a product. It allows the producer to reduce their costs of production per unit and sell on the market at a reduced price, passing savings onto consumers. Governments often claim to operate with a mandate of only providing support to industries with a societal benefit – but the vague nature of this definition makes it easily exploitable for political opportunists. Deciding where subsidies are allocated can be the result of careful policy-decisions or “pork barrel spending”, an American term coined to describe government spending in a specific congressional representative’s district. Subsidies can be provided either to sectors – oil & gas, telecoms, utilities and the financial sector received 56% of total US government support from 2008 to 2010 – or to individual companies, which include struggling companies such as Alphabet/Google and Walt Disney, with the former receiving over $630M USD since the year 2010.
But the aid provided to organization does trickle down to employees and consumers – the USDA offers rebates on insurance for farms to make it more affordable, supporting domestic industries that may otherwise get outcompeted on the world stage. And until recently, the same theory was used to lower premiums for out-of-pocket costs for health insurance on low or middle income households in the United States. These examples of how providing support to industries impacts employment and lowers costs for consumers illustrate just how complex these discussions can be – even Alphabet/Google, beneficiary of potentially unneeded support, has used it to grow into the world’s 2nd most valuable firm, become a cutting-edge innovator and employ over 72,000 people.
Theoretically, in the case of successful organizations or industries, subsidies can be removed once they are established enough to no longer require support to be successful. But once a subsidy exists, removing it is a tricky process. In theory, industries are supported until they are capable of being competitive in a free-market. But the transitional effect of removing subsidies can see the costs of certain goods actually increased above market value, since firms would have remained profitable without the need to implement the same efficiencies as competitors. Additionally, continued support of an industry can result in lower mobility amongst the labour force, as workers become dependent on subsidies in highly specialized industries and can lack the education needed to find another job when those subsidies are removed. This can create a whole new set of policy problems, where the marginal benefit experienced by many is offset by the severe cost to a smaller few. Saudi Arabia’s recent struggles also illustrate how easy reversing this progress can be – the Crown Prince Muhammad bin Nayef eliminated a layer of government support before reinstating it only months later once he realized it was not politically favourable to attempt to break down the deep state.
So the provision of government subsidies, a monetary tool used to level an unequal playing field, is subject to political whim, is difficult to eliminate without regressive ripple effects, and can result in taxpayers directly funding discounted land taxes for conglomerates. But that does not mean mistakes cannot be rectified – ensuring support can justify a societally favourable return (often generated in non-monetary terms) and can be readily eliminated when the time is right is key. Take Nigeria: a dip in oil prices saw the government remove the national fuel subsidy and increase the price of oil by almost 60% overnight. While previous such attempts has resulted in protests, results this time were more measured, with the majority of Nigerians accepted that higher costs were necessary to relieve the fuel shortages that had arisen. The lesson? Waiting until wasteful subsidies cripple the economy appears to be the only way to remove them without pissing everyone off.