Subsidies: A Bridge to Nowhere, or Manna from Heaven?

Rushad L. ThomasProgram and Editorial AssociateCalvin Coolidge Presidential Foundation

What is a Subsidy•Def: a sum of money granted by the government

or a public body to assist an industry or business so that the price of a commodity or service may remain low or competitive.

•Usually associated with governments, but they can relate to subsidies from sources like NGOs.

•Their many forms include direct bequests (cash grants, interest-free loans), and indirect ones (tax breaks, insurance, low-interest loans, depreciation write-offs, rent rebates, etc…)

Understanding the Effects of Subsidies

Production Subsidies• Encourages suppliers to increase the output of a

particular product by partially offsetting the production costs or losses.

• Objective: to expand production of a product more than the market naturally would, but without increasing the final price to consumers.

• Problems with Production Subsidies:▫Can incur additional costs for storage of excess

product.▫ Increases in supply without concurrent increases in

demand can collapse prices on the world market.▫ Incentivizes overproduction.

Farmers Never Have Made Much Money: The Case of Calvin Coolidge

• The 1920s was an era of general prosperity for everyone but the farmer.

• Many in Congress, including Sen. McNary of Oregon and Rep. Haugen of Iowa, wanted to institute price supports and subsidies.

• Coolidge wanted Ag to stand on its own two feet on “an independent business basis.”

• Coolidge vetoed the McNary-Haugen Farm Relief Bill TWICE.

Consumer Subsidies

•Subsidizes the behavior of consumers.•Most common in developing countries for

commodities like food, water, electricity, and education.

•Example: Supplemental Nutrition Assistance Program (SNAP), also known as “Food Stamps.”

Export Subsidies

•Government support for products that are exported.

•The Chinese Example, from The Economist.

Employment Subsidies

•Provides an incentive for firms to hire by offsetting the cost to the business for their wages.

•Example: Temporary Jobs Programs during an economic slump.

•Also includes old age pension programs like Social Security.

Tax Subsidies• Selective tax breaks that benefit particular groups

of people or industries.• May be available to an entire class of economic

activity, or may be more narrowly tailored.• Also known as “tax expenditures.”• Government forgoes revenue that would have been

collected otherwise, and must make up the lost revenue through higher taxes.

• Primary reason the U.S. Tax Code is so complicated.• Examples: Film Tax Credits, Renewable Energy

subsidies, Sports Tax Exemptions...

For More Information Visit…

•http://www.investopedia.com/terms/s/subsidy.asp

•https://www.iisd.org/gsi/subsidy-primer/•https://

www.foreignaffairs.com/articles/tunisia/2011-03-23/let-them-eat-bread

•http://www.cato.org/publications/commentary/save-farms-end-subsidies%20

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