Thursday, August 23, 2012


OK, I'm back from my week long vacation. I probably should have posted a note for my regular readers but I got busy during the last day ... Once I got inspired upon my return I went looking for information on subsidies (to follow up on my "You Didn't Build That on Your Own" post) and found the piece I'm posting below stashed in my "draft" stack. It was supposed to have been posted almost a year ago. For some reason I clicked the "save" button when I meant to click "publish" after I found typos. Such is life. Anyways, I'm posting it now.

About this time last year a friend of mine got into a text exchange with an elected official here in Bakersfield over the topic of subsidies. He wanted me to explain subsidies to him so that he could have a stronger argument with the local official (who I also know). Below is a cleaned up text exchange between my friend and the local politician (after I sent my explanation of subsidies).

At the request of my friend I’m paraphrasing, but the exchange begins with the politician telling my friend to do some anatomically impossible acts, followed by this:

“ … Do you even know what a depreciation allowance is? It’s something businesses get to write-off on their taxes over time because running a business is expensive. DO YOU  %&*$? UNDERSTAND? Some expenses are even written off in the year they occur. This is a God given right, granted by God to every business through human history. Business people are entitled to tax off-sets because running a business is hard, and God wants it that way.”

I know, kind of fun, huh? The original response was funner, but I promised my friend I wouldn’t post it.

Still, the key here is that Mr. Prominent Politician doesn’t understand what a subsidy is in our modern market system (which also explains much about modern conservatism). Nor does he understand how subsidies have morphed into corporate welfare, on many levels.

I’ll elaborate (with more quotes) below. But first we need to understand the subsidy concept ...

One of the stories I like tell in class is about a acquaintance-friend I had at Chico State who liked to brag how he was making it on his own. It was the mid-80s, and the height of the Reagan era. He let everyone know that he got good grades, worked hard, and that he was on his way to a killer job in the financial sector after graduation. He was a rugged individualist making it in the world, on his own.

I always thought, “Good for him.”

Later I learned from others that while my friend got good grades, that he only had to work during the summer because his parents picked up all of his bills during the school year. Rent, tuition, books … the works. He was also fortunate enough to have parents who worked in the financial sector who not only paid for his interview suits and prepped him but set up his job interviews. Nice.

The point is that my friend’s life was subsidized in many ways that he neither understood nor acknowledged.  In his mind he was a tough self-made man making his way in a dog-eat-dog Darwinian market world.

I bring this story up because, in real simple terms, it helps us understand how clueless our local conservative politician here in Bakersfield is when it comes to subsidies. In fact, after Mr. Prominent Politico was presented with several subsidy examples (that I had sent to my friend) our conservative politician explained that there’s no such thing as an oil subsidy. He was adamant about it.

Here’s what Mr. Prominent Politico had to say about oil subsidies (again, I’m paraphrasing):
You use the term “oil subsidy” just like your less than intelligent hero, President Obama … as if there is such a thing … SUBSIDIES DON’T EXIST IN THE OIL INDUSTRY YOU DUMB BUNNY … why don’t you understand this stuff? Too many carrots?

Of course our subsidy denying friend didn’t use the words “less than intelligent” or  “dumb bunny.”

According to Mr. Prominent Politico the oil industry (which is big here in Kern County) doesn’t benefit from legislation, tax favors, or other factors that help their bottom line. The oil industry is full of Darwinian supermen who - like my Chico State friend - make it on their own without any type of supports.

They are Capitalist Supermen, the epitome of human evolution …

The point is, just like my college friend who seemed to think that he was raised in the jungle by Tarzan-like parents, our subsidy denying conservative politician is convinced that tax breaks and other supports that help the oil industry make money aren’t subsidies. They’re part of Adam Smith’s natural capitalist order of things. Oil industry profits are in no way enhanced or subsidized by write-offs, write-downs, depreciation allowances, or any other legislative gifts from Congress.

Homo Economicus reins supreme. End of story.

Or is it?

If our subsidy-denying friend understood how modern markets actually work he would know that, at the most basic level, subsidies are state-sponsored supports. They can include financial and legal assistance to an individual, a company, or an industry. This assistance can be used to help keep costs down, purchase goods, boost profits, or hire more workers (among other goals).

In technical terms, most of these objectives are encouraged by end of the year tax credits and write-offs. These credits are often associated with something that we call fiscal policy. They reduce the tax bill of firms and individuals and can be used across many years. They amounted to $1.1 trillion last year (yes, we could put a pretty big dent in our annual budget deficits if we eliminated all of our tax credits and write-offs, but that's another story).

Subsidies can be as small as allowing businesses to write-off the lunch hour or as big as treaties and military actions, which support specific industries and market players across the globe. These kind of subsidies were most often associated with the mercantilist (some say imperialistic) actions of empires of the past, but are often viewed as part of a larger democratizing pattern in the 20th and 21st centuries (though many see this as neo-imperialism (another story for another day).

The thing to understand is that subsidies can be a good thing when it helps in the production and consumption of goods that help our nation’s economy, or even the the public good (e.g. tax credits for college expenses, charitable contributions, home loans, health care, certain business expenses, etc.). Even Adam Smith, the patron saint of capitalism, acknowledged the role of the government in steering the economy by a mercantile state.

In America’s case, for example, we’ve determined that helping the oil and gas sector prosper is a good thing, so we provide market subsidies for the industry. A good read on this is Daniel Yergin’s classic, The Prize (1992). The very conservative Heritage Foundation also has papers on specific oil subsidies in America for my subsidy-challenged politician.

Subsidies can take many forms, and cut across all sectors of the economy. The multi-trillion dollar Mother of All Bailouts following the events of 2008 is an example of an industry-wide subsidy. Unfortunately, it also turned Wall Street and the financial sector into wards of the state (though they cluelessly still believe they're rugged individualists). 

Subsidies can also come in either direct forms (like cash payouts) and/or indirect forms (like protective legislation and tariffs). Subsidies are actually more complicated than this, but you get the point. 

To emphasize, subsidies are such a big part of the American economy that they cost the American taxpayer about $1.1 trillion per year.

Unfortunately, battle lines are drawn in the subsidy debate. Individuals, firms, and entire industries like to play make-believe and tell everyone that they’re self-sufficient market warriors who operate in a jungle-like environment. It boosts the ego.

Acknowledging subsidies undermines the Tarzan-like image most market warriors have of themselves. It forces them to admit that they need help, in ways they don't want to acknowledge ... 

So market players like to pretend that tax credits and other write-off supports are God-given entitlements when, in fact, they are market gifts from the American taxpayer state.  

At the end of the day, subsidies undermine the belief system and the image market players have of themselves. This is why they like to pretend subsidies have little to any role in their success. This helps explain why local conservative politicians here in Bakersfield - like my Chico State friend - either live in denial or are simply clueless about the help they get along the way. 

Acknowledging the role of subsidies in our economy would be akin to the emperor learning that he has no clothes.

THE END (finally) …
At the end of the day, if you’re hiring, boosting profits, getting supported, or making purchases because of financial incentives or supports provided by the state (or others), it’s a subsidy.

Simply put, by manipulating the U.S. tax code so that it backstops profits and boosts specific industries market players have been able to draw on taxpayer support for years. Yet, they've gotten the American taxpayer to believe that market players have done it all on their own when, in fact, subsidies - now in the form of Wall Street bailouts - are a big part of America's economic game. 

- Mark

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