1/12/2005

Gov’t Grants Business Immortality

Why is the government handing out money through subsidies and regulations to preserve dying industries? The living and progressing industries are forced constantly to pay taxes, which keep dying industries alive. As Hayek, in the book “Economics in One Lesson" illustrates, do we keep the ‘horse and buggy’ industry alive because it is dying or do we support the growth of motorized vehicles? Perhaps many of the loans and help granted to such dying industries are because of special interests and the “good ol’ boy” attitude towards friends in high places.

Not only does the practice of subsidizing and regulating some industries promote “keeping the dead alive” but it prevents competition which can and will hurt consumers in the long run. The article "The Price of Deregulation: Subsidies" explains what happens in the long run when subsidies and regulations are taken away. “Just between 1976 and 1990 the estimated savings from deregulation were $5 billion to $10 billion per year (in the airlines industry). Taking the low estimate, that’s $70 billion in savings over just 14 years—and that’s just lower ticket prices. Add in better routes, safety, customer service, innovation, and 14 more years of low prices to the present, and that total’s much larger.”

It’s time to start deregulating and let the ‘horse and buggy’ industries die away. Sure, it will hurt in the short run but it will benefit us all greatly in the long run.

10 comments:

Dr. Tufte said...

-1 on Meg's post for mispelling Hayek.
-1 on Meg's post for an incomplete sentence.

The general principle here - that supporting dying firms/industries is a bad thing - is economically sound.

So why do we do it? There are two reasons. One comes from public choice - a branch of economics dealing with how people vote for policies that effect them. Public choice says that in democracies, the way to get something passed is to have the benefits tightly focused, and the costs widely dispersed - so that a vocal minority will fax Congress, and a silent majority will let the issue slide because the low costs are not worth worrying about. Most dying industries are very effective lobbyists, and very good at disguising the costs they seek to impose. The second comes from something that is starting to be called "folk economics". This is the set of precepts that people believe are true in economics, but which are in fact often misguided. One feature of folk economics is that many people think that: 1) the economy doesn't grow, and 2) that life is a zero-sum game (one in which for every winner there is a loser). Using these, it is easy to argue in favor of "saving" a dying firm/industry. If you believe that the economy isn't going to grow, then you can just claim that the death of a firm has got to be bad because nothing new will sprout in its place. If you believe that life is a zero-sum game, then the death of your firm/industry must mean that someone is gaining at your expense. Then you argue that this isn't fair. The problem is that neither one of these folktales is correct, but that doesn't keep people from believing in them, and acting accordingly.

Nick said...

I have a question about Dr. Tufte's comment on MEG's post. I was wondering where the idea that an economy never grows comes from? We all can see that the economy of the United States fluctuates regularly. One of the most famous fluctuations of the American economy was the Great Depression. The U.S. went from having a very high unemployment rate to being able to produce enough goods to supply an Army. Could someone explain this idea to me?

Dr. Tufte said...

That's a really good question. I think part of the point of calling the area I mentioned "folk economics" is that these are folktales that do not always have good grounding in reality. The bottom line is that it isn't very hard to find people who think that if you just go out and ask.

A useful refinement though, is that the economy has to do better than grow in order to make people feel better. How people feel about the economy matches up more closely with per capita real GDP rather than real GDP. Unfortunately, when we talk about the economy growing we are talking about the latter. In order for per capita real GDP to grow, the growth rate of the real economy has to beat the growth rate of population. That's about 2% per year in the U.S. currently - it is higher in most other countries, and has been higher in the U.S. in the past. Since World War II the U.S. has had negative real GDP growth in about 1/6 of the quarters. An additional sixth of them have had positive growth that was less than population growth. Both of those possibilities probably made people feel worse, although only the first one means the economy didn't shrank.

scott said...

I know that government subsidizing and regulating interrupts the natural evolution of the economy. MEG wrote specifically about the airline industry. There are several airlines, both regional and international, that have received government subsidies because of their inability to turn a profit. One of the greatest difficulties they are running into is increased competition. A price war has been dramatically increased with the establishment of dozens of online discount travel agencies. Perhaps it would be best to allow the decaying airlines to "take off" and let the rest of the industry recover some of their costs. There are several regional airlines which have proven that the industry can be profitable. They would have an even greater opportunity to grow if some of the failures quit dragging their prices down.

BOB said...

As other comments have mentioned, it is our system that seems to be holding the economy back. Many of the decisions our government makes are made because a small group of people complain loud and long enough to be heard. While the consequence of the decision may hurt more than it helps, it is still made. The solution to this problem would be for America to speak up and tell congress what she really wants for the economy.

C-Dizzle said...

In the book “Fair Play”, by Steven Landsburg, my point and feelings about regulation and subsidies is reaffirmed. Landsburg calls this idea protectionism, the cause of regulation and subsidies. In order to save one American autoworker’s $50,000 job, the automobile buyers must collectively pay an additional $150,000 per year. It just doesn’t make sense.

Landsburg states in his book, “Protectionism is wrong because it robs individuals of a basic human right: the freedom to choose one’s trading partners. The freedom, for example, to buy any car, at any price, from any willing seller.”

Luise said...
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Luise said...
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Anonymous said...

I hate to say it but I don't think subsidizing and regulating are so bad, especially in the airline business. Because of the subsidizing and regulating of airlines I’ve been able to travel to several places because of the low prices and price wars.
How much will people complain when the price to fly goes up? If the Government takes away the subsidizing for the airlines that will only leave a few in the market and prices will go up. Then people will complain about how those few airline companies have too much control and the Government should do something about it. We can’t have it both ways

Diane said...

In response to Meg's post, I do not think it is economically sound to spend so much money to save one job. The costs outweigh the benefits of paying to keep jobs in America. International trade has benefited our economy enormously. Our trade partners have also benefited. As Steven Landsburg said, "those Americans who leave their jobs rather than take wage cuts to match the new competitors are presumably those Americans who cared the least about their jobs in the first place." America is a leading provider in the service industry. Maybe Americans need to go back to school. Of course I can write this with a guilt free conscience because I am not unemployed because of job outsourcing.