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Discussion > Are state subsidies always bad?

There has been a long discussion today on Twitter between our Lord Bishop and Leo Hickmann of the Guardian with occasional contributions from others about state subsidies.

Twitter is a hopeless medium for such a debate due to the 140 character limit which prevents arguments to be developed. However the discussion seemed to be a very useful one so I have taken the liberty of starting this thread to enable it to continue (assuming that there is some interest!)

The argument started with the various subsidies for renewable energy sources being 'abused' but expanded into an argument that all state subsidies would be abused and thus overall were not worth having.

What do the denizens here think........

Jan 14, 2013 at 7:37 PM | Unregistered CommenterArthur Dent

I think that state subsidies that interfere with the market are wrong and possibly always wrong. Some subsidies for companies that have a good business plan or a new technology might be thought to be a good idea but the government (all governments) have proved almost totally incapable of picking winners.

Jan 14, 2013 at 7:50 PM | Registered CommenterDung

State subsidies for loss-making nationalised industries were held responsible for the economic problems of the sixties and seventies. You could argue that education and defence are 100% subsidised nationalised industries. So why not subsidise other vital activities eg coal mining, at least in order to iron out vagaries of world prices. You can’t close a mining industry or steel production temporarily to deal with a temporary world glut, then expand it again when needed.
At the height of the mining dispute, it was pointed out that the planned nationalised industry had created a thriving mining engineering private sector, which exported machinery to Germany.
So subsidise sectors which are vital to the nation’s future, and subject them to longterm strategic planning.
That’s my manifesto for the 1945 general election. I think it’s a winner. Clem Atlee for PM.

Jan 14, 2013 at 8:45 PM | Registered Commentergeoffchambers

The idea behind subsidy is to retain skills and capability in industries that we don't want to lose, but which can't survive on their own.

An example is farming - the free market capitalist (Dung!) would say if they can't make money then they are not viable businesses and we shouldn't prop them up. But then our food security is at the mercy of other countries, fuel prices, world food prices, and if a generation of farmers disappears without heir, we won't be able to recover it very easily.

I suppose power generation falls under the same banner of allowing us to be partially self-sufficient and less at the mercy of world conflict and price fixing by cartels.

Jan 14, 2013 at 8:54 PM | Unregistered CommenterTheBigYinJames

I like this discussion ^.^ I make a statement that seems perfectly reasonable and instantly someone points out the flaws hehe.
OK I stand by my first statement with the caveat that certain strategically important industries may need subsidies to keep skills and technological expertise alive within the UK.

Jan 14, 2013 at 9:12 PM | Registered CommenterDung

Ah but isn't that nearly always the reason advanced by governments for giving a subsidy. Our history is littered with examples: Concorde, Airbus, British Leyland,.

In the current case we have subsidies for wind and solar because they currently would not survive in the free market without. I have solar panels but wouldn't have them were it not for the FiT.

Jan 14, 2013 at 9:51 PM | Unregistered CommenterArthur Dent

Dung
I hope you don’t mind, but I’m going to agree with you. With caveats like that you’re well to the left of any Labour government since the seventies.
What needed doing (far too late now) was to identify with what was wrong with the disastrous management of state industries and what it had in common with the disastrous management of much private industry - eg BMW and fix it. Benn was working on it when he was Minister of Industry, much to the annoyance of the sensible wing of the Labour party and the sensible centre left press like the Guardian. Labour was so afraid of seeming socialist that they invented these privat partenership things, last seen in France as the Farmers General under Louis XVI.

Jan 14, 2013 at 9:56 PM | Registered Commentergeoffchambers

In principle subsidy for strategically important industry is a good idea, the problem is that the government couldnt manage their way out of a bag of crisps, heads your lose, tails you dont win.

Jan 14, 2013 at 9:56 PM | Registered CommenterDung

geoff everybody seems to be so concerned with "how it will look if I make decision A as opposed to decision B", the art of doing what you think is right (after consulting independent people who know more than you) appears to have been lost.

Jan 14, 2013 at 10:01 PM | Registered CommenterDung

Any subsidy is always bad in principle. But there are times when a short-term limited subsidy may be expedient. Never never never when it encourages subsidy-farmers. Never never never when it has no time limit.

The various state industries were always in trouble not because they were publically-owned per se, but because they were under-funded and managed for political ends rather than business ones. They had to compete, every year, for money in the budget. They had to compete with the NHS, the defence racket, each other, benefits, pensions and all the other things the govt has to spend money on. Private firms can go into the market for capital. That's the difference. Private firms can be badly-managed, and often are. The trick is to let them die or sell up. You can't do that with a nationalised industry, you have to subsidise it. You have to keep the various sites open when logic demands otherwise, for political reasons. This is not really a left/right issue. It is the way things are. As well to rail against gravity.

Jan 15, 2013 at 12:18 AM | Registered Commenterrhoda

The two main arguments for subsidies are the 'infant industry' argument and the 'strategic capability' argument, and they are both wrong.

The infants never grow up, but their voices do mature, until their squalling when someone tries to take the money away frightens politicians into the familiar, 'OK, just this once more' mode that we all know so well. Employees are held hostage for endless rivers of taxpayer funds. And, the reason they don't either grow up or die is because they don't have to.

The strategic capability argument is a more complex version of the same mentality, and is often used for agriculture - as it already has been in this thread. Another favourite is defence capability. This is just scaring people into giving you money.

In fact, there are very few places in the world where there is not the capacity to grow enough food for survival. Ironically, the less subsidised agriculture is, the more efficient and profitable it is, which is why Australia, with no agricultural subsidies, exports about 10 times as much food as it needs to feed itself. Mind you, winding subsidies back - we used to have lots of them - was a long and painful process, with screams of agony from the sector, which claimed we were heading for starvation. It's a con, but one that appeals to the visceral fear of starving which is hard-wired into us.

The defence argument is also silly. In a modern war, unless your entire defence industry is self-sufficient and on a war footing, it would make no difference in practical terms. By the time you got increased production of high tech planes or subs or missiles happening, it would probably be all over anyway. In the unlikely event of a long war, you do what Britain and the US did in WWII - bring in the best brains, convert facilities from other industries for production, divert resources from civilian use. Plus, the reality is that the costs of high tech defence are astronomical, and duplicating that in every country would rapidly send us all broke.

Successful industries don't need subsidies, and failures should never be propped up by forcibly extracting money from taxpayers.

Jan 15, 2013 at 1:14 AM | Registered Commenterjohanna

I mostly agree with johanna, I was putting forward the definition of the subsidy but not trying to justify it.

I think farming is a slightly special case, though, but that's a visceral feeling, I can't justify it on business grounds. For an agricultural nation to let it all go to waste to save 1p off a kilo of potatoes seems inherently wrong to me.

Jan 15, 2013 at 9:00 AM | Unregistered CommenterTheBigYinJames

There are of course hidden subsidies in the form of tax breaks of various sorts where the Government attempts, often successfully, to encourage investment from companies that could invest anywhere. At present th.e pharmaceutical industry benefits from research credits which the UK Government thinks is useful in maintaining highly skilled jobs in the UK that might otherwise go to China for example.

Also in the Pharma area the various orphan drug programmes provide drug companies with subsidies to do research into disease areas that would otherwise be unprofitable

Jan 15, 2013 at 9:15 AM | Unregistered CommenterArthur Dent

TBYJ
Any more "inherently wrong" than continuing to sell your milk to Tesco at below what it costs to produce the stuff?
I don't understand how it works but I am continually told that if it weren't for the CAP food in Europe would be cheaper than it is. Which is the more logical, on the one hand subsidising farmers to produce food that nobody wants and in the process distorting the world market or on the other hand paying those same farmers unemployment benefit and/or engaging them as "countryside wardens" or some similar function?
The net result would be pretty much the same in terms of cost to the taxpayer but the latter would be more honest and more transparent and probably — in the real world — more cost-effective.
Johanna is right about the food subsidies and probably about subsidies in general. Anything that distorts the market has more downside than upside though in some instances some form of central support (I'm trying to pick my words carefully!) may be essential to ensure the continuation of an essential service that either cannot be made self-sufficient or which has no realistic value in the marketplace — government and defence come to mind as obvious examples.

Geoffchambers will not be surprised to know that I do not include coal in that latter definition! Subsidising one form of energy against another simply hampers research and development. UK railways are at least 10 years behind where they would have been were it not for the 1947 decision to continue with steam power rather than convert to diesel or electric haulage. Correction: they are on a totally different track altogether since in a properly run railway using a cleaner and more efficient fuel for traction, Beeching would never have happened, at least in the form it took.
But 20/20 hindsight is a wonderful thing!

Jan 15, 2013 at 9:19 AM | Registered CommenterMike Jackson

Mike, would that 1947 decision be about the time when the dead hand of the government took over a bunch of railways which had been built entirely by private companies with no subsidy or central planning (but possibly a certain amount of skulduggery and corruption) ? My railophile brother-in-law always wants them re-nationalised, but I fail to see how they did very well at all when they were in government hands. I suppose they wanted to keep steam so they could use coal from the newly-nationalised mines. That is why public ownership is not a good idea.

Oh, and Arthur, tax breaks are not subsidies. You can only make money off a tax break if you make money. Subsidies carry no such proviso. Tax breaks are arguable, but the argument is a different one.

Jan 15, 2013 at 9:55 AM | Registered Commenterrhoda

That would seem to be about right, rhoda, but you have to remember the parlous state that the railways were in by 1947. The 1923 grouping which brought the myriad of small companies into the Big Four (Southern, GWR, LMS, LNER) was only brought about because the individual companies were going down the drain. And then there was WWII which didn't exactly help.
It's quite acceptable to argue for the nationalisation of infrastructure and there is no reason why a nationalised industry cannot be efficient and profitable. The trouble is there is no incentive to innovate. The reason why the railways in Europe are successful today (and the railways in the UK are successful as well whatever the opponents of a privatised railway might like you to believe) is not because they are publicly (or privately) owned and run but because of easyJet! Not competition for passengers but the introduction of innovative fare systems. The earlier you book (especially if you are prepared to take the gamble that if you can't travel you don't get a refund) the cheaper the fare.
If I want to travel from Dijon to London tomorrow at midday it will cost me 182€; on April 13 (and using my Senior Railcard) it will cost me 79€.
Without the incentive of a private enterprise looking for ways to improve its bottom line by doing what it does best only better (in this case moving people around Europe), we'd still be stuck in the "any colour you like as long as it's black" mentality.
Why bust a gut if government will always bail you out? And to compound the felony, nationalised industries (and, dare I say it, local government) tends to attract people who think that way. There are more of us — human nature at work — looking for a cushy number than are happy to put themselves to any inconvenience if they don't need to.

Jan 15, 2013 at 10:30 AM | Registered CommenterMike Jackson

Arthur, there is a whole other class of protectionist policies called "non-tax barriers to trade" (NTBs.) These include tax breaks, quarantine measures and international agreements.

Tax breaks are OK as long as they are competitively neutral - i.e. - your competitors get the same breaks. Quarantine measures are the oldest trick in the book in Australia - if a competitor's country has a nasty disease in their products that you don't (which, by definition, they almost always do) - keep them out or subject them to testing that makes them uncompetitive.

International agreements is a huge topic, but it is the kind of thing that says that Australians can't buy teak unless it has been signed off as 'sustainable' by the appropriate Indonesian general. It is also the sort of nonsense that is selectively used to ban imports because employees in Third World countries don't have the same working conditions as we do.

Then there are 'anti-dumping' laws, which prohibit selling of things below cost.

There are numerous ways that interest groups seek government protection for their markets, and all of them should be treated with extreme suspicion.

Jan 15, 2013 at 11:06 AM | Registered Commenterjohanna

I tend to agree with Johanna, however specifics sometimes do make you wonder.

You may well choose to ignore specifics, but as a former resident of Derby, when discussions of subsidies start I think of Rolls-Royce and development of the RB211 engine. The nationalisation of RR by Ted Heath undoubtedly saved the company (subsequently re-privatised by Mrs Thatcher). Now regarded as a world beater and directly employing about 12000+ people in Derby then, I think, that this is a textbook example of government intervention.

On the other hand the privatisation of the rail industry has been a bit of a disaster for those employed in UK manufacturing. I stand to be corrected, but I don't think any rolling stock orders were placed during the John Major years as the industry was going to be privatised. Many jobs in Derby were lost, as stated previously once lost these are like snowflakes on a river a moment white then gone forever, subsequently a contract was awarded (under a Labour government) to Hitachi who had not rail manufacturing in the UK. Then Labour had the brass neck to criticise the award of the Crossrail contract to Siemens and to be built in Germany. Both these may be direct subsidy neutral but a bit of a disaster for workers in the East Midlands.

Jan 15, 2013 at 12:45 PM | Unregistered CommenterSandyS

The privatisation of the railways was a classic example by the UK Civil Service as to how to **** up a perfectly logical and reasonable EU Directive.
There was never any need to privatise in the first place. All the Directive required was a separation between track and operator and a certain amount of opening up of the operation to competition. Nowhere else in Europe is there such a convoluted (and by extension, needlessly expensive) system as there is in the UK.
If privatisation was the preferred option the pre-1947 groupings could have been reformed (and would in my view have been popular with the travelling public) and the lines leased to them with BR retaining ownership of the track and signalling system. One intriguing prospect could have been the right of the operators to sub-let within their own region if anyone had a bright idea for re-opening closed lines or even starting new ones.
As it is the UK has ended up with a bureaucrat's delight, ie a total shambles from everyone else's point of view and the need to go cap in hand to the government for permission to breathe!

Jan 15, 2013 at 1:47 PM | Registered CommenterMike Jackson

Rhoda agrees that there are times when a short-term limited subsidy may be expedient, BYJ has a visceral feeling that agricultural subsidies may be justified, Arthur Dent sees the sense of keeping the pharmaceutical industry alive, SandyS sees the sense of nationalising Rolls Royce - you’re all a bunch of closet socialists!
The problem is that socialism has been declared illegal by Brussels. So decision-making about major industries and infrastructure has to be integrated into government policy by other means; you can give captains of industry a peerage and a government ministry like Blair, get as rich as them so they treat you as an equal like Mandelson, or jut ask them what laws they want passed and pass them like Thatcher. Or you can do it the socialist way like de Gaulle , decide you want an integrated high speed train service and a world-beating nuclear industry and do it, and bugger Brussels.

Jan 16, 2013 at 8:14 AM | Registered Commentergeoffchambers

I'm not really a closet socialist, I've often said here that I'm left of centre on most things, and a bit right on others. I think this is where UK parliamentary politics is running into sticky ground at the moment, there are lots like me - a mix of left and right views which don't sit with any particular party.

As for subsidy, sometimes it comes down to a bung for a company, or the devastation of a whole town on benefits, never to recover. You can see why govts give it a try. I think for most industries where the product has a definite lifespan, e.g. motor, then sometimes the industry is declining for good reason, and should be helped along, so the next thing can come along.

Jan 16, 2013 at 8:24 AM | Unregistered CommenterTheBigYinJames

There are still some of us around who remember the way Rootes Group were "encouraged" to set up shop in Linwood and British Leyland were "persuaded" that Bathgate was the ideal place to make trucks.
Further comment on government interference in industry ought to be unnecessary but I suppose it's part of the human condition — it certainly always has been in the UK — that when something goes wrong in our lives then someone else should be expected to step in and sort it out for us.
I've just finished reading Martin Walker's book The Cold War and the following struck me when I read it:

In 1961 ... Khruschev promised the Soviet people that, within two decades, they would be producing more industrial goods than the USA.
By 1984 the USSR was producing more steel, more cement, more oil, more fertiliser, more pig-iron, more iron ore, more tractors and more metal-cutting lathes.
In 1961, these products embodied the the sinews of industrial power. Had the world and its technologies stood still, the Soviet Union would have been its economic giant.
My emphasis
But of course the world did not stand still. Attempts to decide what industries are to be encouraged as a replacement for industries which are dying a natural death are simply a futile effort at getting the world to stand still.
Sometimes there is an arguable case. Rolls-Royce was one such and Heath was lucky. Aero engines are not something you can pop into Tesco for and governments through defence contracts are a major customer. They can at least give a company breathing space as TBYJ says to see if something else comes along. In RR's case they got the next generation of engines right.
There was never an excuse for BL. Their product was wrong; their marketing was wrong; and the people who decided that were the customer and the banks who, in an open consumer society, are the ones who ultimately make the decision. As they have just done (to my personal chagrin) with Jessops and as they have done to Woolworths and numerous other household names.
Nobody is suggesting any of them should have been subsidised so where is the line drawn?

Jan 16, 2013 at 10:50 AM | Registered CommenterMike Jackson

I'd put the rescue of Rolls-Royce as a reasonable example of subsidy. Although if I remember correctly there was an element of rescuing Lockheed which was possibly not so good. Temporary is the keyword here. There should be a real emergency requirement and a planned exit before commitment. There is a second example I'd support, where if you need the strategic ability to build, say, an aircraft carrier, and you don't want one this year, you might fork out to keep the facility viable for a while. Again, no longterm, no distortion of the market (don't keep a Scottish shipyard open and sacrifice a geordie one for political reasons). I really don't think either example is for social reasons, more strategic.


It occurs that the recovery of RR was largely due to the rehiring of Stanley Hooker, an engineer, than anything else the govt did, but the money was important too. RR failed because of a bad technology bet which groupthink prevented from being reversed early enough.

Jan 16, 2013 at 12:29 PM | Registered Commenterrhoda