The addiction to the state subsidy

If there is something that most of Latin American and Europeans politicians agree is that the State should distribute subsidies to private companies. It will never be heard in a parliament of Latin America or Europe that a parliamentarian criticizes the subsidiary policy. This isn’t just another Latin American socialist custom; No, even in the United States since the crisis of ’30, the fact that the State distributes money to everyone is accepted.

The subsidy is nothing more than a transfer of money (direct or indirect) from the State to a private company to make up for a difference between the real price and the price charged to the consumer. In its good period this was only used at times of great economic collapse, always in the short term and sometimes even with return contracts, with the sole objective of preventing prices from skyrocketing.

However, Keynesianism and the New Deal found another use; stimulate the economy. This new application was based on the fallacious theory of the broken window: it’s good that a person breaks restaurant’s window of the premises as it must buy another window to change that broken and thus stimulates trade.

This argument forgets the famous opportunity cost. Yes, the restaurant’s owner will pay the glassmaker, but that money that he was gathering, for example, to buy a new oven, loses it repairing the window and loses trade with the appliance seller. This demonstration of the fallacy of the zero sum didn’t convince the Keynesians and with the desire to take it to the macro-economic, they gave the State the role of the restaurant with the broken window.

These state policies lead to what we know today as corporatism; “Does the production of cars go down? Subsidy the automotive factories. Does the price of medicines rise? Subsidy to pharmacies…” and so on. But this doesn’t stop there, in the US entire private companies have been founded with a prior agreement with the State of X years of state subsidy. For example, Elon Musk, after selling Paypal to eBay, won 4 contracts with the State for almost 5 billion dollars to found Tesla, SpaceX, etc.

Clearly, this’s an addiction. It helps the businessman who does not have the capital to invest, avoiding savings and encouraging waste. On top of this, we add a politician who takes advantage of spending the taxpayer’s money and finally, maybe worse, creates dependency of the private sector to the public. This vicious circle is responsible for a small crisis typical of business cycles to become a giant as the Great Depression.

Like any addiction, the best way to end this, is with a rehabilitation, cutting with the supply and being rigorous. Yes, I mean a shock. Gradualism has failed throughout the world, while countries like Chile, Estonia, Singapore or Panama have managed to emerge successfully from an interventionist economy by cutting subsidies and lowering taxes overnight.

Finally, I recommend this video by Stefan Molyneux, which perfectly explains the evils of corporatism, or what he calls “Crony Capitalism”