Subsidies and Distortions

by Don Boudreaux on March 16, 2010

in Subsidies, The Economy, Trade

Suppose that Bill Gates, Warren Buffett, and Larry Ellison pool their wealth into what they call “The Subsidy Fund.”  Out of his fund, the three billionaires will subsidize producers of their choice.

Let’s imagine that Messrs. Gates, Buffett, and Ellison choose to bestow billions upon Blairex Laboratories, Inc., of Columbus, Indiana.  The three billionaires subsidize Blairex not out of any profit motive but, rather, simply because they want to do so – it makes them feel good.

Blairex manufactures and distributes over-the-counter medications such as Pertusin cough syrup and Boudreaux’s Butt-Paste.  (No connection to the co-proprietor of Cafe Hayek.)

With the windfall of billions of dollars from the three billionaires, Blairex is now better able to expand its operations beyond the size that these operations would obtain without the additional billions.  That is, Blairex is able to expand the quantity of output that it exports from its factories to households across America and the world.

In this hypothetical example, do the three billionaires distort the market?  Do they make Americans (or consumers, more generally) poorer?  Does their non-economically motivated subsidy pose a threat to the health of the economy over the long-run?

It’s very difficult to see how.  Each of these gentlemen made lots of money honestly.  How they choose to spend that money, as long as they do so peacefully, is their business.  They no more distort the market by spending a large chunk of their wealth on subsidies to Blairex than they would distort the market by spending a large chunk of their wealth, say, developing shopping malls or in trying to find a way to turn water into gasoline or on extravagant Tahitian vacations.

The details of market outcomes would certainly be different if the three billionaires chose not to subsidize Blairex, but the details of the economy as they look without a Blairex that enjoys the largese of the three billionaires is no more “correct” or “optimal” or free of distortions than are the details of the economy as they look with a Blairex that enjoys this largese.

….

And, from the perspective of Americans, so it is — or nearly so — with non-American-government subsidies to non-American producers.  We Americans cannot control Beijing or of any other national government.  Prudence and practicalities dictate that we treat the economic decisions of other governments as data, as states of the world.

If Beijing subsidizes the consumption by non-Chinese of Chinese-produced goods and services, we non-Chinese benefit.  And this benefit, from our perspective outside of China, is no more a distortion of the market than is the hypothetical billions poured by the three billionaires upon Blairex.

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