Montag, Oktober 24, 2005

Subsidies Redux...

If you take a look at the archives, you can see my view on subsidies: that they're largely a bad idea, except perhaps - and this is not certain - for the companies involved.

The Economist, which I used to read all the time but now only rarely, reports on this, which, strictly speaking, isn't about subsidies.

But think of it this way: having government funding of retirement and health care means that the government taxes private individuals and corporations to provide a service to the general public. This is how it works in Europe and Japan, and is part in both countries of the body politic.

But it also means that companies there do not necessarily need to provide these services to their workers. There are some that do, but they tend to be the exceptions.

Here is my thesis: by providing health care and retirement benefits to the general public, governments provide an implicit subsidy to all businesses in that country, since they no longer have to provide those themselves. Take a look at the article: GM and Ford both bear heavy non-business related costs that must be financed on the open market (by sales) that competitors do not face.

Further: this subsidy doesn't really surface in international discussions of such subsidies, since they are implicit and not explicit.

How to solve this competitiveness problem?

Two ways.

1) Import levy on all goods that would cover the cost per unit that US makers have to pay, discounted, for explicit retirement and health benefits. Income from such levies would flow to the companies making the product domestically AND who provide health and retirement benefits for their workers.

2) Eliminate government provision of retirement and health benefits exceeding basic levels (i.e. social security, with its "too little to live, too much to die" payment levels).

The problem with the first is that US consumers pay the bill, traditionally seen as a major hindrance for acceptance. :-)

The problem with the second is that it means major political changes in other countries that can scarcely be palatable to the populations there.

No easy solution here, unless, of course, you want to subsidize US manufacturers. But given the problem with 2) above, hard to see any real alternative.

Which means that US consumers will ultimately pay for GM and Ford to get out of their problems with higher car costs.

Put it down to unintended effects of government intervention in markets, in this case retirement and health care.

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