Friday, December 28, 2007

Adam Smith's View On 'Fishy' Subsidies to Business

Brian Doherty (a Reasononline) writes (28December)(here: “The Cost of a Free Lunch”, which interviews David Cay Johnston, New York Times Reporter [WHICH I INADVERTENTLY GOT THE WRONG WAY ROUND IN MY FIRST POST OF THIS REPORT! APOLOGIES]and author of “Free Lunch: How The Wealthiest Americans Enrich Themselves At Government Expense (and Stick you With the Bill)” about “a world of government interference in the market to privilege the privileged”.

What I’m asking in Free Lunch is: Are you better off than you were a generation ago when Reagan was elected? Government is just as big, there are vastly more regulations, and as I show, we have many new rules and regulations that handcuff the invisible hand of the market and instead, in subtle, sometimes hidden, ways, extract money from the pockets of the many and funnel it to the politically connected few. It’s the very thing that Adam Smith said would ruin the benefits of markets. I would think libertarians would like everything in the book, except for the parts about health care [where he calls for nationalized health care, European-style].”

You might think that companies that get subsidies would make bigger profits than normal. But Adam Smith told us that subsidies bring in brash adventurers who often end up making no profit, and the evidence is that Cabela’s at least as it publicly trades, doesn’t appear to be particularly profitable. Cabela’s in fact, in its first three years as a publicly traded company, had $223 million in profit, and subsidy deals worth $293 million. I argue that they are not in the business of selling sporting goods; they are in the business of reeling in subsidies.”

What excellent reporting! It really puts the unholy alliance between businesses seeking subsidies and government contracts with politicians seeking to look good in photo-shoots outside or inside a new plant built with tax breaks (only needed because business taxation is too high).

From the article of the interview (here) the US business subsidy scandal borders on moral corruption. Some of them are not in the business of making a profit from selling their products; they are in the business of getting subsidies to make their products.

In the case of Cabela mentioned above, they are not making fishing rods to catch fish but they “are in the business of reeling in subsidies.”

Reminds me of Adam Smith’s line about the tonnage bounty paid to the white herring fishery and how ‘it has, I am afraid, been too common for vessels to fit out for the sole purpose of catching, not the fish, but the bounty’ (WN IV.v.a32: p 520)

I recollect somewhere reading about the licence racket in Nigeria some years ago. You needed an expensive government licence to open a factory to make shirts and the main role of middle-men, go-betweens, and chancers, was to work diligently to get hold of a licence, not to make shirts to make a profit, but to sell the licence at a profit to someone who might do the same. Meanwhile shirts were imported.

Whenever there is a proposal to cut business taxes in a specific geographical area, or in a product type (both selected by the government or its agencies) it is clear sign that taxation is penal and by existing it is depressing business everywhere.

First best, is to slash taxation, including business rates; second best is to slash taxation on a partial basis; first worst, is to offer subsidies in competition with nearby regions or countries.


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