The trap of government subsidies

 

UnHerd has produced a masterly analysis of the trap into which government spending and subsidies has led much of American life today.  Here's an excerpt.

Democrats and Republicans alike, under the cover of good intentions, have been passing laws that undermine the economic well-being of American families. Even more disturbing, these policies have created a whole new class of robber barons, who rely on government policy to enrich themselves. But these new robber barons aren’t railroad tycoons or rapacious oil companies. Indeed, many of them are non-profits: they include universities and hospitals, drug companies, insurance companies, K-12 school districts, and real estate investors.

. . .

This is how it works: Claiming to be the guardian of “quality”, policymakers put up barriers to entry, making it extremely costly, for example, to launch a new university or hospital. This is the restriction of supply. At the same time, in the name of “helping” consumers, they push billions of dollars into student loans or healthcare payments. This is the subsidisation of demand.

. . .

... all of the universities, including elite colleges in the Ivy League, have reaped billions of dollars in economic rents — excess profits — from student loan programmes, even as the value of many of their degrees has fallen dramatically.

At the same time, the universities operate an accreditation system which makes it extraordinarily difficult and costly to launch a new university that might compete with them. In fact, you usually can’t get your new university accredited until four-to-six years after you open. That means that your first students aren’t eligible for federal student loans — their subsidies — until you get your accreditation. It’s a huge handicap for anyone who wants to disrupt the current oligopoly of higher education.

These dynamics play out in all of the most important sectors of our economy. In healthcare, new hospitals in many states have to apply for a “certificate of need”. Often that certificate has to be signed by the other hospitals in the area — in other words, their potential competitors. Meanwhile, federal and state governments flood the healthcare system with subsidies that increase demand and drive prices up: almost 50% of health care spending comes from governmental entities in the US.

In housing, similarly, we restrict supply by making it harder and harder to build new units, especially in city centres where demand is the highest. Meanwhile, we subsidise demand by providing government-guaranteed mortgages and by offering huge tax breaks for anyone who purchases real estate, especially investors.

And in K-12 education, school districts around the country are trying to stamp out charter schools, which increase supply, while at the same time arguing for higher and higher per-pupil spending. The cost to educate one child for one year has increased 173% (adjusted for inflation) since 1970, and half the kids still can’t read.

The pathologies of these sectors all follow similar patterns. Politicians proclaim their desire to “protect” quality and “help” consumers. Industry lobbyists step up to write bills that restrict supply and subsidise demand. Prices go up. Providers become more and more reliant on the government for their profits. Consumers become more and more reliant on the government to afford homes, healthcare, and schools. Instead of investing in innovation, providers spend their money on political donations and lobbyists. Politicians become dependent on those donations. Consumers demand more and more help because prices are going up, and they’re getting ripped off. And the beat goes on. “It really is a self-reinforcing process,” says Kling. “People don’t understand that the subsidies drive up prices, so they keep demanding more.”

There's more at the link.

To all those negatives, add two more:

1. All those subsidies and other government programs add layer upon layer of bureaucrats to government to administer them.  In other words, government becomes a fulfilment machine rather than an administrator.  More and more of its money is spent on such subsidies and fulfilment programs rather than on the business of government.
2. The level of government involvement in such programs affects how government governs.  Lower-level governments - e.g. town and city councils - don't have enough money to subsidize such programs, so they push it up to state level.  State legislatures don't have enough money either, so they put pressure on their congressional representatives and Senators to get that money from the federal government.  The feds duly provide it, but have to increase taxes and/or borrow more money to pay it;  and they also have to hire more bureaucrats to administer it.  The state governments also need more staff to administer where the money comes from and where it goes, expanding state government.  Finally, at the "coalface" where the money is paid out, more government staff are needed to administer, account for and report back on how it's used.

It's a self-perpetuating nightmare.

The only way to stop this perpetual motion machine is, of course, to take away many of the things it currently does that were never envisioned by the Founding Fathers.  They'd be horrified if they saw the myriad things on which the federal government spends its money, things that were never envisioned in or authorized by the constitution, but which now consume the vast majority of government income and effort.

The problem, as always, is this:  how do we break the cycle?  If we cut off the subsidies, those deprived of them will scream blue murder, and vote against the politicians who acted responsibly by terminating them.  That means the politicians dare not tackle the monster they've helped to create.  Argentina is trying to do so by dismantling whole swaths of its national government, but that's because the problem had grown so great there that the state had become a behemoth that was strangling the country as a whole.  President Milei has only just begun the job, and there's no guarantee his opponents - now united against him - will allow him enough space and time to finish the job.  I wish him every success, but the odds are against him.

Do we have a President Milei who can do the same for us?

Peter