I am currently reading Lou Marinoff's book "The Middle Way" -- which I highly recommend based on what I've read so far. I thought I would comment on things as I ran across them. So let's start in order, meaning we're going to have to start with something that is insightful, yet wanders off into being wrong, despite starting off in the right place. He is talking about where the West and Indian Civilization clash:
"Dire poverty in India and its neighboring states, afflicting hundreds of millions of people, is proving inescapable not only because of endemic corruption and socioeconomic rigidity in thse nations. But in addition, enormous agricultural subsidies paid to farmers in the affluent West, in tandem with prohibitive tariffs imposed on produce from developing nations, impede many of our Indian counterparts from bettering their lives. So the West's affluence depends partly but far from wholly on India's poverty."
Marinoff is completely correct right up to the last line. He makes the false and, quite frankly, anti-economic, assumption that subsidies and tariffs enrich the West. They certainly have the effect he attributes to them when it comes to India -- however, he does not realize that subsidies and tariffs are themselves overall impoverishing to the country using them.
Let's take a look at subsidies. A subsidy is a government payment to a business to support that business. This is done for two reasons: to keep unprofitable businesses in business, and to drive down the price of the goods produced by that business. The first reason results in government rewarding people for making bad decisions, thus encouraging people to continue to make bad, irresponsible decisions. The market rewards good decisions, encouraging people to make good, responsible decisions. The second reason, to drive down prices, is something we should look at in more depth, as it is the aspect of subsidies Marinoff is talking about.
Let's create a simplified economy. Let's say we have 100 taxpayers, 10 bureaucrats, and 1 subsidiezed businessman. The taxpayers all make $10,000 each, as do the bureaucrats. The businessman is making a product at $1000 each that all 100 taxpayers want. The businessman is subsidized 10%, meaning his product will be sold at $900 now. Are the taxpayers buying this product better off? Well, the bureaucrats all have to be paid, so to pay the bureaucrats and get enough money for the subsidy, the taxpayers will each have to pay $1100 in taxes in order to give $10,000 to the businessman so he can sell his product to them for $900 instead of $1000. In other words, it will actually cost the taxpayers more for the product + the subsidy than it would have for the non-subsidized product. The net loss is $100. And even if we could magically transfer the subsidy without any money going to bureaucrats, the price for the product would be the same -- all we have is an accounting trick of the sort that results in Enron-like scandals.
Supporters of subsidies will point out that we have to do this to get the businessman's price below overseas competitors'. In other words, to get the price, say, below $950, we subsidize. Thus, we end up with a net loss of $50 for each of the taxpayers. So who is better off here? Certainly not the taxpayers/consumers. The inevitable argument is that the businessman is not working in a bubble, and that someone is paying wages to the taxpayers/consumers, meaning someone must hire them. Fair enough. But what people fail to mention is the underlying assumption that the economy is a finite pie, and to make money, others have to lose money -- and this is simply not true. If the businessman can't make money selling what he was selling for $1000 each, he's not going to just give up and crawl off into a cave somewhere and die. No, he's going to go find something else to make that can make him money. Or he'll try to find a way to bring his costs down. But if he's receiving a subsidy, why should he bother to do either one of these things?
In other words, subsidies stagnate the economy where they're used, they impoverish the consumers, and they reward bad business behavior. Now tell me, how is this making the West more affluent? There is no denying our affluence, but, as Henry David Thoreau pointed out in "On Civil Disobedience," "Trade and commerce, if they were not made of India rubber, would never manage to bounce over the obstacles which legislators are continually putting in their way; and, if one were to judge these men wholly by the effects of their actions, and not partly by their intentions, they would deserve to be classed and punished with those mischievous persons who put obstructions on the railroads." Indeed, if any outside group of people were to try to impose on the U.S. economy much of the anti-economic laws our governments have imposed on it, we would declare it a terrorist act. Yet we tolerate it from our legislators. It is incredible just how wealthy we have become despite the subsidies and tariffs.
Which, of course, gets me to the issue of tariffs. Tariffs act in a way opposite to subsidies, but have the same effect. A tariff is a tax on imports, which of course drives up the price of those imports, making them more expensive for consumers. And, as everyone who has taken Econ. 101 knows, if the price of something goes up, fewer products are sold. Now I am sure that someone will object that we could take the money from the tariffs and use them to subsidize. Let's look at that. Say Import costs $900, but Homebilt costs $1000. If we subsidize Homebilt $100 by taxing Import $100 (we'll ignore the pay the bureaucrats are making for now), then IMport will cost $1000, and Homebilt will cost $900. But wait a minute: how are we supposed to collect taxes on Import if nobody will buy Import now that it costs $100 more? You can't collect sales taxes if you're not selling anything. Which means you won't have the money to give to Homebilt. So, if we are going to have the subsidy, we will still have to get it from the taxpayers, since it is impossible to get it from Imports. Now if we try to solve this problem by making the tariff $50 and the subsidy $50, then what have we really gained? And if human nature is any guide, we still have the same problem, as tribalism will cause people to choose Homebilt over Import if they cost the same, meaning the tariffs still won't pay for the subsidies.
In other words, we are impoverishing ourselves to impoverish places like India. And for what? To help a few incompetent businessmen in our own country? The fact of the matter is that even if (and this is a big if in my mind) we are purposefully impoverishing places like India because we think it will make us rich, then we are incredibly stupid and do not understand the nature of economy. The U.S. will only become wealthier as India and China and Africa and the Middle East and Central and South America become wealthier. Economic growth causes economic growth. We're not dividing up a pie. We're dividing up rapidly breeding rabbits.
One final note: it is not poverty which is historically unusual. It is wealth. Only when we realize this will we be able to do anything about poverty.
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