Subsidies

Last night during the CNN/YouTube debates there was a question asked about supporting/opposing farm subsidies by the Federal Government. Obviously, the Austrian answer is to oppose subsidies of any sort by the Federal Government. Mitt Romney stated that he would support subsidies, because other countries have subsidies, which give them an unfair advantage. In order to get away from subsidies, Romney suggested that all countries must do it at the same, it it were to work. I was looking forward to a Ron Paul answer, but he was side stepped once again. How would an Austrian respond to Romney's statement? Would US companies provide competitively priced goods WITHOUT subsidies? Would countries WITH subsidies provide better pricing? Should there be a tariff to adjust for the subsidized prices? Look forward to your insights.

No there should not be a tariff to protect goods.  If I understand Mises correctly, subsidizing foods only keeps prices high and keeps marginal concerns afloat.  In other words companies that should go bankrupt because they can't compete effectively don't go under when they should.  That compounds the problem.  Not only do you have a distorted price being charged, you also have inefficient companies doing business causing further distortions.  It's all around bad for the consumer.  It's good for those who hand out the subsidies because the hand that feeds doesn't get bitten.  It strange that we have supposedly the most free nation in the world but also have the most legal form of corruption in the world at the same time.  If there were no subsidies, the price of domestically produced food would fall, possibly out-competing the foreign suppliers of food.  The end result would be good for the consumer.  Since the price point would not artificially be high, consumers save.  Since inefficient companies would go under, only competent efficient companies would be in business, again a benefit to the consumer.

 The funny thing about this is that other countries having subsidies gives US an unfair advantage. If we cut our subsidies and other countries do not, then we get cheaper food and the other countries pay for it through taxes. Talk about unfair!

ViennaSausage:

Mitt Romney stated that he would support subsidies, because other countries have subsidies, which give them an unfair advantage. In order to get away from subsidies, Romney suggested that all countries must do it at the same, it it were to work.

Translation: Trying to removing subsidies would cost him the powerful farm lobby support and the election.

But yeah, removing subsidies would only lead to lower food prices and capital freed up for other productive enterprises.

ViennaSausage:

How would an Austrian respond to Romney's statement?

If other countries wish to susidize their farmers and thereby make their produce cheaper, let them.  Imported food becomes cheaper, and the U.S. consumer benefits, courtesy of foreign taxpayers.

ViennaSausage:

Would US companies provide competitively priced goods WITHOUT subsidies?

Maybe not.  Some marginal domestic farmers might go out of business, but that just means capital would be freed for more productive uses.

ViennaSausage:

Would countries WITH subsidies provide better pricing?

Quite possibly yes. But that's a good thing for everyone except the countries doing the subsidizing.

ViennaSausage:

Should there be a tariff to adjust for the subsidized prices?

Absolutely not, under no circumstances. Tariffs just keep marginal producers in business at the expense of the taxpayer, and lead to misallocations of capital.

 

ViennaSausage:

Would US companies provide competitively priced goods WITHOUT subsidies?

Probably not price-wise, but in quality US companies would provide a superior product.  One of the problems with subsidies is that it allows for companies that should fail to continue to do business.  No only does this lead to the misallocation of capital but another consequence of allowing those companies to exist is the fact that those companies will provide an inferior product/service or both.

 

ViennaSausage:

Would countries WITH subsidies provide better pricing?

 

Sure their prices would be better, but I think the quality will suffer.

ViennaSausage:

Should there be a tariff to adjust for the subsidized prices?

Then the domestic consumer would suffer as much as the foreign consumer.

 A final point is that this also corrupts the political process and leaves us with what we have today.  Coutnless groups all jockeying for influence and power.  The most legal form of corruption anywhere.

Imperator03:

Since the price point would not artificially be high, consumers save.

 

 The artificially higher price causes over-production since the higher price creates an incentive to produce additional crops.  Without the subsidy, assuming that the marginal costs remain the same, production will fall and the price will remain the same (in the long run).  However, in the short run, prices will fall so that the excess crops will clear the market.  

ViennaSausage:

Would US companies provide competitively priced goods WITHOUT subsidies?

 

If there are firms that have a cost advantage and can produce crops at a cost that will allow them to sell on the market and still earn the going rate of interest on their investment then there will still be some US companies providing competitively priced goods.  However, I would guess that most US companies are only profitable because of the subsidies and most would have to stop production.

 

ViennaSausage:

Would countries WITH subsidies provide better pricing?

 

If foreigners want to continue to help us pay for our crops then we have no reason not to let them since it frees up our capital (currently being used for food production) for more efficient uses.

Funny thing... I am a rancher, who farms wheat to feed cattle.  Farmers could make real money at farming wheat and corn without governmental assistance, if it weren't for the governmental assistance.  the government pays farmers to produce, regardless what the market says.  The overproduction reduces the price of the crops, which puts more farms out of business because they can't afford to continue operations.  If subsidies were to go away, and the market were to do its thing, farming would be a profitable profession. Fields would have to go fallow for a couple of years to get the price to a sustainable level, but it would create real profitability, which right now is a problem for family farmers.  Don't prop us up!!!

 How many farmers think like you? I'm just curious.

Thanks for the insights everyone. In summary, the market would correct itself if US Federal Subsidies no longer existed. Now a corollary to the initial question, what if those subsidies were given by the individuals States as opposed to the Federal Government. A County? A City? Would the same argument apply?

ViennaSausage:

Now a corollary to the initial question, what if those subsidies were given by the individuals States as opposed to the Federal Government. A County? A City? Would the same argument apply?

Yes.  Except it would be the taxpayers of the state, county or city that would suffer. All the same arguments apply. It doesn't matter what the size of the governing entity is.