November 19, 2023

by Stephen Stofka

In this week’s letter I will continue to look at subsidies. Subsidies are created by legislation or agency interpretation that dispenses benefits to people, businesses and institutions. There are two forms of subsidy: a monetary credit of some sort, and an ownership credit, i.e., the granting of a property right. The monetary form includes tax credits and tax expenditures that can be calculated or estimated in dollar amounts. Last week, I noted that some of the biggest tax expenditures were the non-taxability of employer paid health insurance premiums and pension plans. The ownership form includes water rights and land use rights. Unlike the right to vote, these are rights related to the ownership of a physical property or the benefits of a property.

An ownership subsidy can be indirect. A century ago, the western states divvied up water rights to the Colorado River according to the doctrine of prior appropriation which mandates that if one party does not use their share, it is available to the other parties. Water is a scarce resource in this arid region of the country so this principle makes sense. In the wetter eastern states, water rights are based on a common law riparian system where ownership of the right is not coupled with use. Federal water rights are based on this common law system so there is an inevitable conflict whenever the western states cannot resolve their allocation treaties. Today, Colorado does not use all of its allotment while California uses more than its allotment. California does not send the state of Colorado a check every year for the water they use and is a form of indirect subsidy.

Monetary subsidies include agricultural subsidies that I discussed last week. Others include tax credits for buyers of electric cars and homeowners who install solar panels. The oil and gas industry as well as renewable energy producers receive many tax credits. Spending on public transportation includes subways, buses and light rail as well as the roads and highways that motorists use to get to work. Subsidies that support social welfare include public and private schools as well as the school vouchers doled out to parents of schoolchildren. Support programs include subsidies for housing, food and health expenses that involve many tangled cross subsidies. A large retail company can offer discounted merchandise by paying their employees lower wages and the reduced income makes those employees eligible for social assistance programs.

In this jungle of subsidies, it is difficult to compute a net subsidy benefit or deficit. Two-thirds of a homeowner’s property tax might support public schools in their district but they have no kids. Is that fair? They shop at a discount retailer and save hundreds of dollars annually because the retailer can pay its employees lower wages. When this homeowner buys gas, they provide a small subsidy to fossil fuel producers and the farmers who grow corn for ethanol. They buy milk at a lower price because of a government milk support program that is paid for by all taxpayers, even those who do not drink milk. If they eat hamburger, they benefit from grazing subsidies on federal land. The homeowner does not use bus or light rail but they live in a district that includes a sales tax for those systems. Why can’t we just have a free market with no government interference?

The concept of the free market is a useful abstraction but a dangerous idea when politicians and economists advocate for that reality. A “free market” and a “fair market” are oxymorons. A market cannot be free of government influence because all three branches of government are adjudicators, instrumental in awarding and enforcing property claims and the rules of exchange. Whatever the form of money used in a market, governments regulate it. To be fair, a rule giver would treat everyone equally but the world is composed of discrete goods and services that are not infinitesimally divisible. We live in a “clumpy” world and there is no universal standard of fairness to divide the clumps. Some people advocate for equality of opportunity. Others argue for equality of outcome. These abstractions help us analyze the world but we cannot build a society with either and retain a dynamic flow of both opportunity and outcome.

Governments award monopolies for the public good. Companies secure monopolies and market restrictions from government to reduce competition. The government is part of the market as a buyer of goods and services. Some authority must regulate the exchange of ownership that accompanies the exchange of goods and services. The protection of person and property in a market requires either a police presence or an impromptu coalition of people who enforce rules with force if necessary. Some authority must certify weights and measures or a “free market” becomes a “market of force,” a melee of arguments and fights.

We live our lives in a storm of electromagnetic waves, unaware of most of them but dependent on many of them. We rarely make a transaction without the involvement of some subsidy yet many of us live with the illusion of independence. Some pay more in income tax or property tax. Some help coach the school soccer team. As nodes in a social web we cannot calculate the cost of our contribution to the strength of that web. At any point in time some of us contribute more, some less. Over a lifetime our contribution varies from less to more and less again. Our society flourishes when we spend less energy keeping score.

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Photo by Jezael Melgoza on Unsplash

Keywords: monopoly, public goods, property rights, water rights