In the game
of baseball, you live by the sword and die by it. You hit and get hit. Remember
that. ~ Alvin
Dark[1]
The world is awash in subsidies. Many
sorts of taxpayer-paid benefits to customers and producers inhabit all types of
markets. Unsurprisingly, benefited producers and consumers, like you and me, enjoy
them because they provide lower costs and prices. Subsidies are like ghosts;
most folks are not even aware of them; but they’re lurking in lots of marketplaces
including fuel and food. We do not relish it at all when subsidies are taken
away.
Around the world, when governments
attempt to scale-back costly subsidies, citizens get very offended. As it has
in the past, this has been happening recently. Just ask the leaders of Chile,
Ecuador, France, Iran and the US, among other nations.
Every subsidy is initially
justified as an incentive to promote the “public good” be it oil exploration in
1913 or mortgage interest tax deduction also in 1913. But inevitably, subsidies
soon become seen as deserved entitlements, when they are thought about at all.
That’s why the “best” subsidies should always have an explicit end date, like
the California state subsidy for solar panel installations.
Historically speaking the grandest
subsidy of all were the Homestead Acts, first signed by President Lincoln in
1862, that incentivized western migration. Any citizen, including freed slaves,
could claim up to 160 acres of federally-owned land. If they lived on the
claimed property for five continuous years, built a home and grew crops, they
could then file a deed to own the property. More than 160 million acres were
homesteaded, representing almost 10% of the US, mostly west of the Mississippi
River.
Subsidies have come in an
impressive variety of new, old and strange flavors. New ones include credits
for green energy technologies (like solar and wind power) and electric vehicle
purchases. Agricultural subsidies, probably created not long after farmers first
started purposefully tilling fields 10,000 years ago, are ancient as well as relatively
large and spanning the globe. Food – and subsidies supporting it – usually
comes first on anyone’s menu.
Downright strange subsidies include a
$47,000 grant to a New York jitney service to improve its shuttle operations
for wealthy New Yorkers going to their summer homes in the Hamptons on Long
Island; a $50,000 subsidy spent on a tattoo-removal program in San Luis Obispo,
California; and a $225,000 grant in Minnesota to determine whether poultry
litter (aka, chicken poop) could be used as a fuel for generating electricity.
Question: What is the largest subsidy that the US government
now provides?
No, it’s not the very tall heap of
Ben Franklins [over $26 billion (B) worth] that the fossil-fuel industry receives
from federal and state governments. This impressive sum fuels about $12B for
renewable energy and energy efficiency efforts. This total does not include $14B to corn farmers who
produce ethanol. We’ll get back to fuel subsidies in a moment.
The largest subsidy also does not
include the $150B per year of tax-breaks that home mortgage-holders receive as
well as other aid to encourage home ownership in America. This subsidy is the
second biggest.
American farmers have long benefited
from several types of subsidies, which total about $25B every year. Federal
support for agriculture (ag) includes the establishment of our land-grant
colleges beginning in 1862 with Kansas State University. In 1887 federally-funded
agricultural research was initiated. Direct subsidies that provide “farm income
stabilization” were first introduced in the 1930s.
We taxpayers provide subsidies that
seek to protect farmers against fluctuations in prices, revenues and yields
(the amount of crop produced per acre). These agricultural subsidies do cover
price-supports for commodity crops like corn, wheat, rice and soybeans, as well
as crop insurance. About 40% of the nation's 2 million farms receive subsidies.
A recent analysis
found that 60% of the largest ag subsidies go to the biggest 10% of farms.
Crop insurance can be vital. It is purchased by farmers and subsidized by the federal
government, to protect against the loss of their crops due to natural
disasters, or revenue losses due to declines in agricultural commodity prices. Over
80% of US crop acreage is insured via the federal crop insurance program. Five
years ago, the portion of total cotton acreage covered by crop insurance was 96%;
and soybeans, 88%. And who said commodity farmers are defenseless
against mother nature?
The $25B sum for all farm
subsidies does not include the additional $15.3B that the Trump administration
has provided farmers since 2018 as “trade aid” to ameliorate the nasty effects
that retaliatory Chinese tariffs have laid upon one of his most stalwart
constituencies. It is nearly certain that more trade aid will be provided to US
farmers, as the US-China tariff “war” drags on.
Agriculture subsidies cover much more
than US farms. The European Union (EU) spends even more money on ag subsidies;
37% of its budget is devoted to Common Agricultural Policy (CAP) subsidies, or about
$65B per year. These subsidies are designed to protect European farmers’
livelihoods. They are so substantial that according to the New York Times, the Hungarian Prime Minister, the Czech Republic
Prime Minister, as well as very senior officials in Slovakia and Bulgaria, have
re-directed part of their nations’ CAP subsidy gravy train to their family
members and political friends. Is there a quid pro quo down on the farm? Seems so.
Whenever EU politicians initiate
preliminary discussions about reducing their massive CAP expenditures, farmers
protest by driving their huge tractors into capital cities to disrupt commerce.
In late November this happened once again, in Amsterdam, Berlin, Dublin and
Paris.
Subsidy recipients in the US also
protest when valued benefits are threatened. In January 2015 the Obama
administration proposed ending the popular Sec. 529 tax benefit to pay for college
expenses. The hue and cry from many of the millions of folks who took advantage
of this tax-reduced means of paying for their children’s college was loud and
clear. President Obama abandoned his proposal within a week. His staff called it
“such a distraction” for the State of the Union address preparation. Back to
the drawing board.
Answer: The very largest subsidies that the federal and
state governments proffer are for healthcare, about $290B each year. In
addition to subsidized Medicare and Medicaid, healthcare supports include the key
tax-exclusion that employer-paid health care insurance receives. Employers
provide 56% of all healthcare policies in the US and pay over 80% of their
employees’ healthcare premiums (it used to be a higher percentage). Employers’
premium payments are exempt from federal income and payroll taxes. In addition,
there are direct subsidies that reduce premiums for lower-income citizens
through the ACA and tax-deductibility for large, personal medical expenses. If
Bernie Sanders or Elizabeth Warren is elected president next November, many of
these subsidies probably would disappear. Instead, the federal government would
directly pay for virtually all our healthcare expenses, perhaps over $3 trillion per year, ten times the
current healthcare subsidies.
Let’s return to another market
that receives significant subsidies in many nations, energy.
To get a sense of how large energy
subsidies can be, the table below calculates the implied subsidy for each listed
country, based on its domestic gasoline price versus the world average price.
As shown, Venezuela completely subsidies
(100%) its domestic price of gasoline, basically
Price of Gasoline by Nation
Nation
(Price rank in parentheses)
|
Price of Gasoline*
($/gal)
|
Implicit Subsidy
|
Venezuela (1)
|
$0.00
|
100%
|
Iran (2)
|
$0.47
|
89%
|
Ecuador (11)
|
$1.85
|
55%
|
USA (31)
|
$2.93
|
29%
|
World Average
|
$4.14
|
*Average prices
as of Nov. 25, 2019.
1 Bolivar, a price fixed in 1997
despite hyperbolic inflation since 2018. This giant subsidy is costly; it represents
over 20% of the Venezuelan GDP.
For perspective, a liter of milk –
when available – costs about 20,000 Bolivars in Caracas. On the Venezuelan
black market – the illegal, “parallel market” – one US dollar is worth well over
1 million Bolivars. The Venezuelan government’s official exchange rate states 1
Bolivar is worth about 10 US cents, which everyone considers a grotesque fiscal
joke. Gas may be free at pumps in Venezuela, but only if a person can afford to
wait in line for days to buy some due to significant shortages.
Iran provides the second most-subsidized (and thus
least-expensive) gasoline in the world, where it currently sells for $0.47 per
gallon; that’s a gasoline price level the US hasn’t seen since 1973. Iran’s gasoline
subsidy is 89%, relative to the world average price. Iran’s fossil-fuel price
subsidies represent more than 15% of its GDP.
Iranian gasoline consumers rioted
across the country in mid-November after their government increased the price
of fuel by about 50%. Multitudes of very unhappy demonstrators – most of whom
believe that super cheap gasoline is an entitlement – have continued to burn gas
stations and block traffic in Tehran and dozens of other cities. Many have been
killed. Iran’s theocrats have yet to back down.
In early October Ecuador’s
government removed its costly 40-year old subsidy, now 55%, on gasoline that
increased the price by about 25%; the price of diesel doubled. Protests
happened immediately led by indigenous groups that turned increasingly violent
despite a military-enforced curfew. With two weeks the President of Ecuador retreated
and re-imposed the subsidy.
Remember the country-wide “yellow
vest” protests in France? In November 2018 these protests were precipitated
when the French president raised the gasoline tax. That didn’t last long. President
Macron soon cancelled the tax increase due to the protests’ intensity and
potency. Despite this victory, the yellow-vest protests have continued.
Similar widespread, popular
protests against gasoline price hikes have occurred in Indonesia, Myanmar
and Nigeria during the past 20 years. Indonesian strong-man Suharto’s
government was deposed in no small part by gasoline price-induced protests. In
effect, he lived by the subsidized sword, and also died by it politically. Perhaps
baseball and politics really are not all that different.
The pervasive protests I have mentioned above raise a challenging dilemma
for political leaders: How can governments reduce and reform fuel (and other)
subsidies, which can be both fiscally and environmentally ruinous, without
setting off extensive protests? So far, there seems to be no answer. Once a
subsidy of any kind has been established, the beneficiaries (consumers and/or
producers) will cry wolf, bite back, or worse if it is reduced or eliminated. It
is a beyond-holiday gift we pay for that keeps on giving.
[1]
Alvin Dark won World Series rings both as a player and a manager during his 31-year
career. He managed five major league teams including the
Oakland A’s. He oversaw the A’s World Series championship in 1974.
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