March 10, 2015 by JImbo
Why Protectionism and Subsidies Don’t Work
(Based on the writings of Frederic Bastiat)
I don’t take credit for this. Just noticing the SAME ignorant arguments being made over and over. They’re not new. In fact they are VERY VERY old. Hundreds if not thousands of years old. Let’s see if we can put some to rest with a simple example of why all the cries of “Protect American Jobs” and “Subsidize the Arts!” are not only pointless, they are demonstrably HARMFUL to our country as a whole.
I’ve updated an example Bastiat uses in his book since most of my readers aren’t using French francs to buy Iron from Flanders. However, just like science and math the basics don’t change in economics.
Say you want solar panels built in America.
They cost $2,000 to make here.
The Chinese can make them for $1,000, but the companies making them here want people to buy them from us.
So, they lobby Congress to ban foreign solar panels. Everyone has to buy only American made solar panels.
After all it’ll protect American jobs, etc.
However, there is a cost to those new jobs.
It’s a direct transfer of that extra $1,000 from the homeowner who wants to install solar panels on his house to the American maker of solar panels. Now the homeowner gets ONE solar panel for $2,000 when he used to get one for $1,000.
There are three points to consider here:
At best it’s a zero-sum game. The homeowners are poorer and the workers at the factory are $1,000 richer (or at least the owner of the solar panel company is anyway.)
Yes more people are working, but there is still only a net creation of ONE solar panel for TWICE the price.
The number of solar panels in the country went up by one.
Now, consider what did NOT happen.
The homeowner was planning on buying a solar panel for $1,000 AND A NEW DECK on the house for another $1,000.
So, before the import ban he would have had a solar panel AND a deck for his house with that same $2,000. Now that deck will not get built. That means that the contractors building that deck do NOT have jobs. The law didn’t create jobs. It simply MOVED jobs.
Instead of spending that second $1,000 on paying contractors to build a deck, the homeowner is now shelling it out to factory workers to make a solar panel he would already have had for the first $1,000.
The country now contains one less deck than it would have before the law passed.
In effect, the country has LOST $1,000 of productivity because of the import ban on Chinese solar panels.
Who gets to decide what jobs are more important? Why is it Congress’s job to decide that the solar panel makers get more jobs and the contractors get laid off? That’s what they are doing by passing this law.
What is more important? Who gets to decide what is more important?
Every time we fund the arts, we are deciding that artists are more valuable than taxpayers since they need the money more than taxpayers do. So, whatever YOU do as a taxpayer is by inference LESS IMPORTANT than artists since they “need the government funding.”
Do you feel less important than an artist you never met?
That is why the government handouts cannot work and do not in fact work.
Even assuming no corruption (hahahaha) the policies themselves are both economically inefficient and less democractic than the free market.
After all if artists are good, people will buy their work. This will feed the artists. If the artists are bad, they will have to find other productive jobs and do art on the side as a hobby.
Or, as in the previous example YOU are “voting” with your money every time you spend it. In the first example the homeowner WANTED to purchase both a solar panel and a deck for $2,000. The government stopped him from doing so, deciding that he should donate $1,000 to subsidize less productive workers in a factory and suffer a lack of a new deck.
Meanwhile the whole country is poorer. If this were extrapolated through the entire economy, where things are purchased for twice their normal price, then we would have HALF as much produced each year for the same labor.
How can losing half of your work (or having to work twice as many hours) be a positive outcome?
This failure take into account the “road not taken” and see negative consequences is the type of short-sighted thinking that politicians are famous for the world over.
Their being wrong doesn’t stop them from getting elected though! Heck, Marx and Keynes were well documented for it but they were quite popular! Unfortunately, you can’t eat popularity. Economic growth and jobs are what feed people.
Unless you’re in a “Survivor” situation where cannibalism is setting in. Then I suppose being popular would stop the others from eating you first. On the other hand I’ve met very few skinny politicians so they’d be the ones to go first logically.
You should really pick up something by Bastiat. I found “The Economics of Freedom” very cheap on Amazon. The translations are VERY readable and cheap on kindle.