“Nothing is so permanent as a temporary government program.”
Milton Friedman, “Tyranny of the Status Quo,” (1984) p. 115
Friedman was a free-market economist critical of government intervention. With this quote, he was making the point that government intervention can invariably lead to government failure and inefficient use of resources.
One example, Friedman used was the introduction of agricultural subsidies by the US government. During the 1930s and the Great Depression, farmers were struggling with low prices and low incomes. There was widespread poverty within rural areas.
To combat this temporary decline in living standards, in 1933, the US government passed the Agricultural Adjustment Act, which offered subsidies to farmers to reduce supply and therefore increase prices for agricultural products. In 1938, this was replaced by the Soil Conservation and Domestic Allotment Act.
However, with the end of the Great Depression, agricultural subsidies were not removed but continued to grow – even though the initial reason for them (the Great Depression) was no longer valid.
Part of the reason for this temporary bailout becoming permanent was the political influence of farmers. Farmers in rural states have an influential sway on elections because of the electoral college which gives a certain number of Senate seats and electoral college votes to each state. This gives rural states a disproportionate influence over elections.
The drawback of government subsidies to farmers is
- Higher prices of food for consumers
- Cost of subsidies leading to higher tax for the general population.
- Subsidies can distort economic behaviour (e.g. reduce incentives to cut costs and innovate products demanded by the market.
However, most consumers remain unware they are paying slightly higher food prices and slightly higher taxes because of agricultural subsidies. There is a political cost to reducing farm subsidies, but no real political benefit to cutting subsidies.
Tariffs, subsidies and government failure.
Recent news about the US trade war, made me remember this quote of Milton Friedman
Donald Trump has vowed to ‘protect’ US manufacturing industries and tackle the ‘unfair’ US current account deficit with China. Trump perceives the US is ‘losing out’ to China. As a result, he has placed tariffs on Chinese exports to try and protect US industries.
However, because of the trade war between the US and China, rather predictably, China has retaliated by increasing tariffs on the export of US agricultural exports. As a result, US farmers, especially soy farmers, are sitting on crops they cannot sell as usual to Chinese markets. US farmers were an important voting block for Trump, so to ease the economic loss of the trade war, Trump has pushed for a direct subsidies to US farmers. (US $16 billion subsidies to soy farmers)
The government intervention of the trade war has led to more government intervention – subsidies to farmers.
However, everything has an opportunity cost. The $16 billion subsidy to farmers means higher taxes and/or less money to spend on infrastructure. But when the trade war ends, will the subsidy be revoked or will farmers wish to protect their subsidy from the government? If farmers get used to receiving subsidies for not selling goods, it can also influence their behaviour and investment decisions
The farming subsidy becomes another cost of the trade war.
You could argue one government failure (trade war) is leading to another government failure (inefficient subsidies to counter last government failure)
Social security and permanent government schemes
Another example of Friedman’s statement is the example of social security payments. Designed to offer temporary support to the unemployed. Free market economists argue that offering social security payments can discourage incentives to work and lead to a growth in social security payments over time. Pressure groups, such as the elderly, become adept at pushing for more government benefits.
Evaluation of Friedman’s statement
In the case of agricultural subsidies, there is a strong economic case for abolishing agricultural subsidies or at least linking them to environmental externalities. However, some government schemes offer good value in overcoming market failures – such as improving health care and life expectancy.
Health care spending has increased faster than economic growth. Friedman may criticise this growth in government spending. But, another way of looking at the issue is to see health care as a ‘luxury good’ As income rises, we can afford to spend a higher percentage of income on improving life expectancy. Rising health care spending is not a failure, but a sign of society shifting resources into more socially useful spending.