Governments, competition and subsidies

Is it legitimate for city governments to get involved in the economy as The Economist reports a number of mayors are doing?  Governments have been involved in their economies for millenia.  For us this involvement helps a some people make profits and when the economy is tough it helps a few people get jobs.

There are two ways governments get involved in economics – by passing legislation that restricts competition and by giving subsidies either in cash or tax exemptions.

Most economic legislation at the national level works to restrict competition. Patents, copyright, licensing and tariffs all limit competition and allow the firms protected to charge higher prices and make profits they would not otherwise have had.  It may be the most  valuable business skill is government relations and lobbying.  During the recent golden age of prosperity with constant economic growth the higher prices have hardly been noticeable and for most people not relevant.  As we go into a period of economic decline already lot of people are hurting.

The other way governments influence the economy is with subsidies or tax exemptions.  

There are three concerns about government involvement in the economy.  

The first is that protection from competition and subsidies distort prices and encourage inefficiencies in the economy.  It might be cheaper and more efficient to make wing nuts in one place but subsidies alter that.  It may be that competition is now to determine  which, city or state/province has the deepest pockets for providing subsidies.  When firms can go where they get the largest subsidy, there is an element of blackmail and it is not clear this is a good way to start a relationship.

The second concern is that most of us most of the time make decisions for our own short-term interests rather than the long-term interests of the community.  For most of us a job today is more important than the future health of the planet or even survival of the human race.  Also one has to suspect that in this respect politicians are at the head of the line especially when they want to get reelected.

A third concern is that subsidies are good at providing jobs for a lucky few people but provide no benefit for the rest of the unemployed.  I believe subsides should be given to consumers rather than producers so that they don’t distort prices and can provide assistance to all who need it.

DI_404_SUCKZ_Stephen_HarperOne can make lots of arguments against government involvement in the economy, but one is fighting a lot of short-term interests.  The Canadian prime minister is the chief executive officer of corporate Canada.  This applies to the incumbent and probably to most past and holders of that post.

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