Subsidies

BIBLIOGRAPHY

Subsidies exist in the shadowland of economics where transactions are decided by government decree rather than by the free choices of buyers and sellers in the market place. Their forms and objectives vary greatly. Some attempt to provide defense or other facilities for emergency use; others to stimulate the domestic economy; others to improve the balance of international payments; and still others to improve the welfare of specific groups.

There is no developed economic theory for subsidies. The values or benefits conferred by subsidies pass in one direction only, since a compensating flow of goods or services is not required. With few exceptions, the subsidies involve transfers of real income from one group to another, most commonly from taxpayers generally or from the consuming public in the form of higher prices to the producers of designated commodities. The transfers are effected through the coercive power of the state. Enactments of subsidy laws often closely resemble, in reverse, the imposition of taxes, so that many subsidies may be described as negative taxes, and the techniques of tax analysis may be used to examine the effects of a subsidy. [See Public Expendituresand the general article under Taxation.] However, subsidies typically arise in emergent situations, to which normative concepts do not necessarily apply.

In terms of a narrow definition, like that used in compiling the national economic accounts, subsidies constitute a limited class of money payments, by government to business enterprises, for which there is no corresponding value of current production. In this context, they are distinguished both from other classes of government payments without recompense, namely transfers and grants-in-aid, and from the basic stream of government expenditures designated “purchases of goods and services.” The distinction between the former and subsidies is in terms of recipient: transfer payments are made to individuals, mostly for social security purposes, and grants-in-aid are paid to other government units for the support of specified programs. However, these definitions are not uniformly applied in all countries. [See National income and product accounts.]

Subsidies reported in this way are a minor item in the national income and product accounts of major industrial countries, usually less than 2 per cent of gross national product. When put in terms of government budget totals, however, they may reach as much as 10 per cent of total government expenditures, as in Italy and the United Kingdom. Budgeted outlays of this magnitude are conspicuous in published government statements and have to be specifically justified, a necessity which many governments prefer to avoid.

The United States accounts show only the item “subsidies less current surplus of government enterprises.” This tends to minimize the total reported by netting out gross subsidies against profit-making operations. For example, the Post Office makes excessive payments to airlines and shipping companies for carrying mail and renders some services below cost, particularly to publishers of magazines and books, but the true amount of subsidies to these groups is minimized in the over-all postal deficit, since some other classes of mail more than pay their way.

In a broader definition, subsidies include all kinds of measures whose effects on production and income distribution are similar to those resulting from direct subsidy payments. This brings into consideration a host of benefits in such forms as tax concessions, price supports, protection against competition, and provision of goods and services below cost. Since exemption from taxes results in a situation where no funds change hands, there is nothing to report in a compilation of actual transactions; but tax remissions are a much more important source of subsidy in some countries than direct payments. Similarly, tariffs, import quotas, and special preferences for domestic producers have important price-increasing impacts which are only partly measurable. In contrast to direct payments, some of these other benefits may come to public attention only rarely, and the issues may not be readily understood when they do. They tend to be hidden in legislation whose ostensible goal is some kind of social good and, being thus cloaked in patriotism or high ideals, may encounter ready public acceptance.

The significance of any such measure, as well as the occasion to use it, inevitably depends upon the circumstances and structure of the community in which it is applied. From this institutional viewpoint, subsidies appear to be phenomena belonging to the mixed economies of the industrial West; for they typically attempt to modify the results experienced in markets whose behavior in other respects remains unrestricted. In the planned economies of the communist countries, an industry may be protected and encouraged, or the reverse, as part of the everyday procedures through which the controlled market operates; so any change in its situation might be a subsidy, or none might be a subsidy, depending on how one appraised its prior position and the planners‘ intent. The underdeveloped countries, too, attempt a high degree of centralized planning and control, partly because they lack a labor force with the training and initiative necessary for independent action. Programs to assist or preserve developing industries are commonly employed, but a different frame of reference must be used in interpreting them.

In the developed countries, the justification for subsidy programs derives mainly from three sources: first, national security considerations, including preparedness for possible future wars; second, government commitments to aid industry or local area groups that cannot cope with difficulties they have encountered; and finally, responses to pressures created by lobbying and other political activities of self-seeking groups. Often, these various bases for support operate in combination. For example, agricultural subsidies may result partly from the desire to be self-sufficient in the production of basic food supplies, partly from the relative decline in farm income, and partly from the influence farm spokesmen wield in government circles. At the outset the emphasis is likely to be placed on temporary aspects, on the need for dealing with an emergency, but in the course of time, as a subsidy becomes semipermanent, the emphasis shifts toward preserving the position of those who would be harmed by its elimination.

Most of the industrial countries now have subsidy programs relating to several important fields, most notably agriculture, housing, transportation, business expansion, regional development, and foreign trade. Within these fields the specific subsidies provided and the methods of application vary widely from country to country.

Sometimes two or more subsidies are applied in a given field, but their effects are not always mutually reinforcing, so that the problem may be perpetuated rather than solved. Here again, agricultural subsidies serve to illustrate the point. Recent programs in some countries have been designed to limit production, keep surpluses off the market, and raise the prices received by farmers. At the same time, subsidies may be provided in the form of research to increase efficiency and teach farmers to use the most advanced methods of production. Frequently the efforts to limit and those to expand output are carried on simultaneously. Growing farm surpluses, based on increasing yields per acre, are then the result of improved technology as well as of high support prices.

Agriculture is almost universally subsidized today by guaranteed prices for domestic production, and the guarantees are supported by tariffs or other import controls, organization of marketing, and in a few countries, state trading (Food and Agriculture Organization 1960). Worthy of special mention is the British system of deficiency payments, which requires that products be sold at world market prices but then pays farmers the difference between market prices and specified higher prices calculated in the process of budget making. The payments are a direct charge on the budget but consumers receive the benefit of low food prices, and this more than compensates for the tax burden because the half of the food supply that must be imported is subject neither to tax nor to the higher prices imposed by tariff-import control systems. In most other countries the public pays the subsidy in higher prices; but in many countries various devices are used to minimize the impact on living costs. Although charges on the government budget are thus avoided, this approach may lead in the end to direct expenditures. In the United States the public not only pays higher prices but also, via the tax route, covers the losses the government incurs by buying high and selling low and the carrying-charges on government-held surpluses. [See Agriculture, article onprice and income policies.]

Housing subsidies go back in a number of European countries to World War i, when war damage and bans on new construction created severe shortages, and in the United States to the collapse of construction in the great depression. The decades since have been devoted to experimentation in improving housing conditions, with subsidies or grants-in-aid being made available in some country, at some time, for every phase of housing activity. The subsidies provided included provision of sites, capital grants to cover part of building costs, annual contributions to rents or debt service, low-cost credit or credit guarantees, and tax incentives. After World War n, clear-cut budget allocations and subsidies were the rule in Great Britain, Sweden, and the Netherlands. In West Germany, building was ostensibly private for the most part, but income tax concessions were so favorable to saving for this purpose that lenders were encouraged to make some loans at no interest cost (Wendt 1962, p. 142). In the United States, the main reliance was placed on mortgage insurance, which through the early 1960s involved no net losses to the federal government, so that the subsidy was only contingent. [See Housing, article on economic aspects.]

Transportation has also been widely subsidized. In nationalized European systems outright subsidies may be provided in some cases to cover operating deficits, and rate differentials often result in subsidies to some commodities, or to passenger travel, at the expense of other traffic. Some governments also make capital grants to railways, shipping lines, and airlines for new equipment or other special purposes. The United States, France, and Italy provide direct subsidies to shipbuilders to cover the difference between domestic and foreign costs of construction. Operating subsidies, tax benefits, and special credit arrangements are also available for shipping lines of some countries. Most of these subsidies represent nationalistic efforts to protect domestic interests against foreign competition, often with the stated objective of having available a national merchant marine for wartime use. Another form of subsidy, hidden but controversial, is the flag preference, which requires that all or part of a country‘s trade be carried by ships of its own registry. [See Transportation, article on economic aspects.]

Direct subsidies for business expansion are now largely of two kinds—research and development expenditures and investment allowances. The former are sometimes open and explicit, at other times packaged into military, other national, or local government programs. The competitive building of supersonic air transports by France and England and by the United States provides one of the better publicized illustrations. The investment stimulants, mainly tax concessions, are much more important in cost and in value to recipients. Most countries have provided some kind of allowances or accelerated depreciation in order to spur business investment and over-all economic growth. Sweden alone exercises a degree of control to ensure the use of investment funds for stabilization purposes.

Mineral industries in particular have been frequent beneficiaries of subsidies. In the United States, percentage depletion and permission to charge off the bulk of new exploration costs as current expense enable oil producers to avoid income taxes and accumulate great fortunes. The original subsidies increased greatly in value as tax rates were raised, and later, when prices were threatened by foreign competition in the late 1950s, producer pressures induced the government to establish import quotas—a secondary subsidy to protect the values already established.

The use of tariffs to protect against foreign competition in effect combines an all-inclusive excise tax and a subsidy that returns the tax to domestic producers. The effects of import quotas are more difficult to assess, but they may have an even more severe price-increasing effect because they exclude competition that tariffs might still leave open.

Reaction to the fallacies of protectionism, clearly revealed in the depression of the 1930s, has led to a world-wide drive to reduce trade barriers. GATT (the General Agreement on Tariffs and Trade) stands as a watchdog against restrictive policies, and it has had to be alert to a never-ending series of forays. Despite progress toward economic integration, competition for world markets is keen, and efforts to promote exports prevail all around the globe. Bounties, drawback, special credits, preferential freight rates, information services, and credit or exchange guarantees are among the devices being used for this purpose. [See International trade controls.]

Experience teaches that subsidy programs, once established, long outlast the emergency or other need that was the occasion for their adoption. Vested interests quickly develop and strenuously fight proposals that would adversely affect them. Such interests tend to develop inside the government as well as out, so that a mutually supporting bureaucracy and industrial establishment may command a great deal of political power. Furthermore, the benefits conferred tend to be capitalized. Thus, price supports are readily capitalized into the sales value of farmland, and the allotments for growing tobacco in the United States have been bid up to values per acre that far exceed the price of land suitable for growing tobacco. Finally, the persistent use of protective devices and technological advances in various parts of the world result in excess capacity, making it difficult for an industry group to face unrestricted competition.

It should be noted that not all subsidies are undesirable. Some merely involve a choice between direct government action and providing incentives by which others will be induced to get things done. Constructively applied, they can be helpful in promoting economic development or realizing social improvements. Many subsidies, however, involve heavy costs, not only in use of government resources but in various kinds of economic inefficiencies and inequities, misallocation of resources, lower real incomes, and international friction, heightened by retaliatory policies abroad. There is a definite presumption, therefore, in favor of avoiding subsidies except where their justification is clear.

One approach to preventing abuses is to set up rules for government policy makers. Among proposed rules are the following: subsidies should always be regarded as exceptions to the normal conduct of government or commercial business; they should be open and publicized rather than concealed; they should be temporary and if possible self-eliminating; their costs should be justified in terms of the benefits obtained; they should be discontinued or reduced when the need justifying their adoption disappears or dwindles.

In practice, however, such rules tend to be disregarded, so the actual pattern of subsidies is part of a patchwork of government intervention that gives effect to nationalistic tendencies and political pressures of a provincial character. Perhaps the problem can be partly solved only by international agreement. Relevant articles of the Common Market‘s Rome Treaty permit subsidies with valid internal objectives but rule out those of a self-seeking character and provide for international review of doubtful cases. The application of these principles on a still wider basis would undoubtedly be helpful.

V Lewis Bassie

[See alsoInternational Trade Controls, article on tariffs AND Protectionism

BIBLIOGRAPHY

Food and agriculture organization of the united nations 1960 An Enquiry Into the Problems of Agricultural Price Stabilization and Support Policies. Rome: The Organization.

Myrdal, Gunnar (1960) 1963 Beyond the Welfare State: Economic Planning and Its Implications. Yale University, School of Law, Storrs Lectures on Jurisprudence, 1958. New Haven: Yale Univ. Press.

U.S. Library OF CONGRESS, Legislative Reference Service 1960 Subsidy and Subsidylike Programs of theU.S. Government. Washington: Government Printing Office. → Materials prepared for the Joint Economic Committee of the U.S. Congress.

Wendt, Paul F. 1962 Housing Policy: The Search for Solutions. Berkeley: Univ. of California Press.

SUBSIDIES

SUBSIDIES. The United States has been exceedingly liberal in granting subsidies to various commercial enterprises, despite frequent doubts concerning the constitutionality of such action. The debate over government subsidies had its roots in the conflict between Hamiltonian and Jeffersonian visions of American development. As George Washington's Treasury Secretary, Alexander Hamilton enthusiastically advocated federal aid to manufacturers, believing such aid was crucial to placing the nation on a firm economic foundation. Hamilton's support for subsidies also reflected his belief that anything not explicitly prohibited by the Constitution was a legal and proper power of the federal government.

Thomas Jefferson held the opposite view. According to Jefferson, the federal government should not exercise any power not explicitly granted to it by the Constitution. Federal subsidies flew in the face of a strict constructionist interpretation of the Constitution, and thus received Jefferson's ire. Jefferson also had regional and partisan motivations for opposing federal subsidies. As a southern planter, he deeply distrusted Hamilton's effort to establish a large manufacturing base in the United States. Jefferson believed that such policies would undermine agriculture and transform the nation from an agrarian democracy into an urban, industrial empire.

Jefferson's protégé and presidential successor, James Madison, represented a middle position between the Jeffersonian and Hamiltonian extremes. Although a southern planter like Jefferson, Madison shared Hamilton's belief that federal transportation subsidies were necessary for American economic development. However, Madison also shared Jefferson's narrow interpretation of federal power under the Constitution. Consequently, as president, Madison vetoed a bill that would have allocated federal funds to the construction of highways and canals. At the same time, however, Madison encouraged the bill's supporters to propose an amendment to the Constitution that would explicitly provide for federal subsidies to internal improvements. Madison's ambiguous position on the subsidy issue personified a debate that would continue in the United States for more than half a century.

Despite the fractious debate over the constitutionality of subsidies, throughout U.S. national history state and privately owned transportation improvements have been freely subsidized. Between 1825 and 1829, Congress voted to subscribe $235,000 to the Louisville and Portland Canal, $1 million to the Chesapeake and Ohio Canal, $225,000 to the Chesapeake and Delaware Canal, and $80,000 to the Dismal Swamp Canal. At about the same time, land grants were made to aid in the construction of three canals to connect the Great Lakes with the Ohio and Mississippi rivers; one of these waterways, the Illinois and Michigan Canal, was still receiving assistance from the state of Illinois in the mid-1970s. The Sault Sainte Marie Canal also received a large land donation from Congress. Railroad promoters also sought federal subsidies, and between 1850 and 1871, more than 131 million acres of public lands were given to them. The first transcontinental railroads, the Union Pacific and the Central Pacific, received twenty million acres of public lands and a loan of $53 million.

Debate over subsidies constituted one of the major partisan divides of the nineteenth century. The Whig party advocated federal transportation subsidies, which they usually referred to as "internal improvements," as a vital step in the creation of a national transportation infrastructure. In keeping with the spirit of the Hamiltonian tradition, Whigs such as Sen. Henry Clay of Kentucky contended that without government aid, the nation's transportation system would develop in an inefficient, haphazard manner. This inefficiency, they feared, would slow western expansion and undermine economic development west of the Appalachian Mountains. According to the Whigs, all Americans would suffer as a result.

The Democratic Party took a more ambiguous position on the issue of subsidies. On the whole, Democrats generally supported transportation subsidies at the state level, and some also supported federal subsidies for the construction of a transcontinental railroad. Most southern Democrats, however, adamantly opposed transportation subsidies at the federal level. According to southern Democrats such as Sen. John Calhoun of South Carolina, federal transportation subsidies represented an unconstitutional expansion of government power, just as Jefferson and Madison had argued a generation earlier. The southern Democrats' concern had a deeply pragmatic motivation. They feared that federal expansion into the realm of private economic development would eventually and perhaps inevitably pave the way toward federal intervention in state affairs, particularly in regards to the explosive issue of slavery. With the North's population rapidly surpassing that of the South, southern Democrats feared that a powerful federal government would one day be capable of removing slavery where it already existed in the southern states. In addition, southern Democrats believed that subsidies unfairly benefited northern industry while providing nothing in return for southern farmers.

The Civil War largely resolved the debate over federal subsidies. The defeat of the Confederacy and the rise of the Republican Party as a national force in American politics ensured that federal subsidies would remain a permanent feature of the political landscape. In the decades following the Civil War, Republicans aggressively promoted federal subsidies for producers and manufacturers in virtually every sector of American industry. The proliferation in federal subsidies reflected the close relation-ship between the Republican Party and corporate America. By the late nineteenth century, Great Britain stood as the only economic rival comparable in size to the American economy. Republicans justified subsidies in part on the grounds that they gave American industry a boost in its competition with British manufacturers.

Mail subsidies to the merchant marine were generously granted during the years 1845–1858, 1864–1877, 1891, and after World War I, but in each case they failed to establish a shipping industry comparable to that of Great Britain. The subsidies given to aviation have been more successful. Between 1926 and 1933, $87 million in mail subsidies were given to various air transport companies, and although excessive in amount and accompanied by corruption, they were largely responsible for the present far-flung air service. Airplane manufacturers not only profited from this boon to commercial flying, they also received many lucrative contracts for the sale of their planes to the War and Navy departments.

Newspapers have also enjoyed government subsidies. In the nineteenth century, many newspapers were largely financed by government advertising, and a change in administration meant a goodly number of the old party organs would be forced to suspend because of the loss of patronage. Cheap postage rates on fourth-class matter have also served as a subsidy to newspapers and periodicals.

Under the Newlands Reclamation Act of 1902, the U.S. government has spent billions of dollars on reclamation projects. Farmers benefiting from government supplied water were expected to pay reasonable charges, but poor planning raised costs so high that farmers could not meet the charges and substantial parts of both interest and principal have been written off. Irrigation projects necessitate the construction of dams and reservoirs, many of which provide electric power. This power has been sold at low rates to distributing companies, which have thus been saved from undertaking expensive construction work. Electric power companies further benefited by the government land policy, which, until Theodore Roosevelt's administration, permitted them to preempt power sites at little cost.

The establishment in 1932 of the Reconstruction Finance Corporation and in 1933 of the Public Works Administration with their "pump priming" programs marked a new era in government subsidies to business and local governments. Not only were loans made to banks, railroads, and industrial corporations at low rates, but outright grants were offered to state and local governments for permanent improvements such as sewage-disposal plants, waterworks, parks, public schools, municipal buildings, and settlement houses. Federal subsidies and grants-in-aid have assisted agricultural colleges, vocational training schools, state road construction, state forests, and parks.

Tariffs, although not strictly speaking subsidies, have the effect of subsidies, because they artificially increase the income of producers of protected goods. The very first tariff gave some protection to American manufactures, and that protection was progressively increased until 1833, when the free-trade elements succeeded in forcing a compromise that brought rates down to a lower level. But at no time has the policy of indirectly subsidizing business by tariff protection been abandoned. The farmers who have been more hurt than helped by tariffs obtained their subsidy in 1933 in the Agricultural Adjustment Act, which provided for benefit payments to farmers who cooperated with the government in the adjustment program. Payments to "farmers" to reduce their output of basic crops kept on increasing until in 1970 nine individuals or corporations each received more than a million dollars; the largest payment was $4.4 million. Between $3 billion and $4 billion annually was being paid to larger farmers, to a considerable degree to corporate—conglomerate agribusiness—farmers. These government subsidies tended to eliminate the small farmer and share-cropper and to concentrate the production of basic crops in the hands of the more efficient larger owners.

Most industries, businesses, and major population groups have received generous subsidies, directly or indirectly, since 1933. Mining industries, especially the oil companies, benefited enormously from the generous depletion allowance that reduced their taxes on income. The cattle and sheep industries in the eleven far western states benefit through the privilege of grazing their livestock within Bureau of Land Management districts and national forests at less than commercial rates. Cane and beet sugar producers have profited from a series of protectionist rates alternating with outright subsidies. Middle-and low-income families and the construction industry and the building trades have been subsidized by public housing programs. Federal regulations have at times required government agencies to use only certain American-made or -raised goods.

The extraordinary growth in the number of federal subsidies was no accident. Politicians both at the federal and state levels aggressively used subsidies as a means to appease constituents and to solicit campaign contributions from private industry. Subsidies made it possible for members of Congress to direct federal money to their own congressional districts, which thus allowed the members to present the subsidies as evidence of their commitment to constituent service. Members of Congress, therefore, naturally came to see federal subsidies as a critical feature of their reelection campaigns.

These subsidies, commonly derided as "pork barrel" projects, became an unavoidable feature of the annual federal budget in the twentieth century, and they included every conceivable industry. Indeed, by the end of the twentieth century, federal subsidies included a staggering range of pork barrel projects, ranging from the timber industry to the beekeeping industry, and from Navy base expansions to state highway projects.

By the last quarter of the twentieth century, advocates of government reform focused their attention on "pork barrel" federal subsidies. Common Cause and other good government non-profit organizations began to publish lists of pork barrel projects, which soon received growing coverage in the print and television media. In the view of many observers, Congress's willingness to spend public money on unnecessary subsidies seemed to provide striking evidence that it placed provincial concerns over national interest.

The passage of the North American Free Trade Agreement (NAFTA) in 1993 marked, at least on paper, a watershed in the history of federal subsidies. On an unprecedented scale, the United States government agreed to abandon key subsidies in agriculture and industry in return for concomitant reductions in Canadian and Mexican subsidies. Since NAFTA's passage, however, disputes have arisen because each of the signatory nations has taken advantage of loopholes in the treaty to continue subsidies.

As the federal budget deficit soared to record heights in the 1980s, advocates of a balanced budget joined in the attack on federal subsidies. The Concord Coalition, the Reform Party, and other political organizations identified pork barrel projects as a major obstacle to a federal balanced budget, and called for their elimination. However, the entrenched nature of congressional support for pork barrel subsidies made reform extremely difficult, if not impossible, to achieve.

The most important congressional opposition to wasteful subsidies emerged in 1991 with the inception of the congressional Porkbusters Coalition, a bipartisan organization of House members. The Porkbusters Coalition identifies particularly unnecessary congressional spending and organizes legislative opposition to pork barrel spending. Predictably unpopular with the rest of Congress, the membership of the Porkbusters Coalition membership remains quite small, including only a small fraction of members of Congress.

BIBLIOGRAPHY

Drews, Roberta. Federal Subsidies for Public Housing: Issues and Options. Washington, D.C.: Congress of the United States, Congressional Budget Office, 1983.

Ferris, Sally A. Federal Subsidies to Rail Passenger Service: An Assessment of Amtrak. Washington, D.C.: Congress of the United States, Congressional Budget Office, 1982.

Fitzgerald, Randall, and Gerald Lipson. Porkbarrel: The Unexpurgated Grace Commission Story of Congressional Profligacy. Washington, D.C.: Cato Institute, 1984.

Hufbauer, Gary C., and Joanna Shelton Erb. Subsidies in International Trade. Washington, D.C.: Institute for International Economics, 1984.

Roodman, David Malin. Paying the Piper: Subsidies, Politics, and the Environment. Washington, D.C.: Worldwatch Institute, 1996.

Tuckman, Howard P, and Edward Whalen, eds. Subsidies to Higher Education: The Issues. New York: Praeger, 1980.

Paul W.Gates/a. g.

See alsoCitrus Industry ; Dairy Industry ; Electric Power and Light Industry ; Government Regulation of Business ; Land Grants: Land Grants for Railways ; Sugar Industry ; Trade, Foreign ; Wool Growing and Manufacture .

Subsidies

Subsidies are payments provided to firms to help make firms more competitive. They are sometimes direct payments and sometimes-indirect payments, such as the for-going of taxes or the provision of some good or service without charge. Subsidies that are paid for some purpose other than to address some market failure—for example, to stimulate the production of some good with a positive externality reduce the economic welfare of the domestic economies. When countries pay domestic firms so that they can be economically viable exporters, world markets are affected through reduced world prices and more price volatility, and, generally, importers of the good are helped and other exporters are harmed. Because of these sometimes profound effects the World Trade Organization (WTO) has a special Agreement on Subsidies and Countervailing Measures which details the manner in which subsidies are paid and the reasons for their prohibition.

Subsidies have affected trade in two broad ways. The first is that production subsidies have been used to substitute domestic production for imports. Subsidies provided to domestic producers are broadly equivalent to tariffs in protecting domestic production in that they enable an otherwise noncompetitive industry to provide the goods domestically at or near the world price.

In the early development of European economies protective subsidies were used to stimulate production in the mercantilist systems of the sixteenth and seventeenth centuries. For example, Jean-Baptiste Colbert's system in seventeenth-century France, which was known for its protective tariffs, also paid subsidies to textile and tapestry producers, glass manufacturers, porcelain makers, and other luxury product producers. In contemporary developed countries, subsidies often have been paid in heavy industries, such as steel in the United States and Europe and steel and shipbuilding in Japan. With the growth of the Japanese economy in the early 1960s both the European and U.S. steel industries pressed for protection in the form of subsidies. This was especially complicated in Western Europe. The European Coal and Steel Community was created in 1952 to coordinate Western European steel production but losses in their competitive position sent governments scrambling to protect domestic industry rather than fostering international coordination. In the United States steel received subsidies long after the 1893–1979 Toyko Round of the General Agreement on Tariffs and Trade (GATT) negotiations that set codes for subsidies. In the late 1970s South Korea developed its steel and shipbuilding industries, and the major steel producers in the rest of the world bargained for new rounds of protective subsidies. However, the competitive disadvantage of these heavy industries was too great to sustain, and most of these policies have been moderated.

In less developed countries production subsidies have been one of the features in import-substitution industrialization attempts, such as those in Brazil in the 1960s. Throughout Latin America in the 1960s, countries attempted to reduce their foreign obligations by supporting domestic production of industries. To a large extent, import-substitution policies ended in failure because these industries could not compete and gradually were either privatized or phased out. Production subsidies have been used to stimulate industries in colonial markets for sale to the mother nations, as in the case of British subsidies (known then as "bounties") to U.S. indigo production in the Deep South for use in the British textile industry. Of course, with the end of colonial protection after the American Revolution, indigo production in the South collapsed. From the sixteenth through the nineteenth centuries, this same pattern of colonial support for agricultural products was common throughout Latin America. In fact, the use of subsidies in securing markets and loyalty in satellite regions goes back to antiquity. Romans and Persians secured political and trade stability in their empires by paying subsidies to foreign peoples in the fourth to sixth centuries c.e. Similar subsidy-type payments were also made in the Ottoman Empire.

Other, more sophisticated production subsidies are linked to "strategic-trade models." In these, firms with some market power can cut prices, given the subsidies, and command more market share. In industries with high fixed costs, this can drive out competitors. A prime example of this is the subsidies paid to the European airplane manufacturer Airbus. The strategic-trade motive of subsidies has also been used throughout the "Asian Tiger" economies, fostering infant industries until they can fully compete in world markets.

The other type of subsidy that has affected trade is direct-trade export subsidies. These are payments made to domestic exporters to supplement low world prices and provide higher returns for foreign sales. In this way, subsidies are often linked to "dumping," the practice of selling goods abroad for less than in the domestic economy. Domestic taxpayers fund these schemes, which the government runs to counteract unequal trade balances, as in the case of U.S. exports to China, or to stimulate foreign sales and rid the domestic economy of production surpluses (generated by other payments schemes), as in the case of U.S. and European agricultural goods. Because the subsidies are financed with public taxes, the deadweight loss to the domestic economy is usually greater than the benefit to those receiving the payments. The effect on foreign countries is less clear, though. Clearly, countries with many foreign producers of the good are harmed by the increased sales that reduce prices and reduce market shares, too. However, paying lower prices helps countries that are large importers of the subsidized good.

Perhaps the most notorious contemporary example is the large subsidies provided to agricultural exporters. These subventions are the direct result of payment schemes that provide agricultural producers with guaranteed prices higher than market prices; obviously, this causes overproduction. The surpluses generated by the domestic-payments schemes are sold on the world market at the world price, but domestic exporters receive the world price plus an export subsidy. This has been the practice of the Common Agricultural Policy of the European Union and the United States in many temperate products. It has been shown that these subventions have increased the variability of, and ultimately decreased, world prices. Even many food-importing countries have been harmed by these policies. For example, many African economies are "food-deficit" (i.e., they need to import foodstuffs to feed their population), but the low world prices have reduced the incentives to expand domestic production, keeping these food-importing nations dependent on foreign supplies.

Because of their deep involvement with agricultural supports, neither Europe nor the United States pressed for the elimination of export subsidies in agriculture in the GATT talks before the Uruguay Round in 1986–1994. At the Kennedy Round in the early 1960s antidumping measures were negotiated, and at the Tokyo Round in the 1970s export subsidies were limited, with special provisions made for less-developed countries. In the WTO negotiations of 1999 antidumping and subsidy guidelines were codified under the Subsidies and Countervailing Measures Agreement (the "SCM Agreement"), but they are relatively easily avoided through side agreements and by showing special harms to domestic industries.

Both production and export subsidies have affected the overall distribution and size of world trade. Subsidies have been made both indirectly and directly, either to promote domestic industries over foreign ones or to dump domestic overproduction (often due to other production-subsidy programs) on world markets. All these types of payments reduce economic welfare in a global context, as their costs outweigh their benefits. Even strategic trade uses of subsidies have a beggar-thy-neighbor impact on the rest of the world.

SEE ALSO Agriculture; Balance of Payments; Cargoes, Freight; Cargoes, Passenger; GATT, WTO; Industrialization; Japanese Ministry of International Trade and Industry (METI);Shipbuilding;Shipping, Merchant;Russia;United Kingdom;United States.

BIBLIOGRAPHY

Anderson, Andrew, and Rugman, Alan. "Subsidies in the U.S. Steel Industry: A New Conceptual Framework and Literature Review." Journal of World Trade 23, no. 6 (December 1989): 59–83.

Beladi, Hamid, and Chao, Chi-Chur. "The Role of Export Subsidies in Balance-of-Payment Crises." European Journal of Political Economy 19, NO. 4 (November 20030; 875–884.

Blockley, R. C. "Subsidies and Diplomacy in Rome and Persia in Late Antiquity." Phoenix 39 (1985): 62–74.

Goldstein, Andrea E., and McGuire, Steven M. "The Political Economy of Strategic Trade Policy and the Brazil-Canada Export Subsidies Saga." World Economy 27, no. 4 (April 2004): 541–566.

Panagariya, Arvind. "Evaluating the Case for Export Subsidies." World Bank policy research working paper, series 2276. Washington, DC: World Bank, 2000.

Thompson, Stanley R.; Gohout, Wolfgang; and Herrmann, Roland. "CAP Reforms in the 1990s and Their Price and Welfare Implications: The Case of Wheat." Journal of Agricultural Economics 53, no. 1 (March 2002): 1–13.

Daniel Barbezat

Subsidies

BIBLIOGRAPHY

A subsidy is a benefit, in some form, which one would not otherwise receive, but the concept is more complex than such a simple definition implies. The twin cruxes of the problem are the determination of the basis of comparison by which a subsidy is reckoned and whether the comparison is treated positively or normatively and if the latter negatively or affirmatively. Consider the following examples:

A rich uncle will pay your college tuition and living expenses if you go to college.

Parents arrange for one child to inherit more than the other, where the norm is equal shares.

A polluting firm may be offered a payment if it will stop its polluting activities.

A firm producing multiple outputs allocates costs on paper so that they differ from what they actually are; for example, residential customers pay telephone rates below their cost of service and business subscribers pay more than their cost of service, or, more specifically, poor residential customers benefit from below-cost rates that are financed by the higher rates paid by wealthier customers.

An industry is given payments by government so that it will expand, or not contract, thus providing more employment than it otherwise would.

A shift from one costing procedure to another increases some measured costs and decreases others.

A change from one institution to another changes the distribution of gains and losses.

Whether or not a subsidy exists in each of the examples depends on the choice of basis; in the last two examples, the subsidy depends on the cost procedure or the institution used as the basis of comparison.

Accordingly, a decrease in business telephone rates implies a subsidy to business if one believes the lower residential rates are proper; if one thinks that low residential rates involve an improper subsidy to householders, an increase in those rates (and a decrease in business rates) will end the subsidy. A change in rates based on a shift in costing procedure means gainers are being subsidized if you posit that the initial costing procedure is correct; but if you consider the initial costing procedure to be erroneous, those people are now not being subsidized and others are. A change from one costing procedure to another creates a subsidy to gainers if you assume that the initial costing procedure is proper; they are getting more than they should. If you think the second costing procedure is correct, then the gainers are not being subsidized; they are getting what they should. Non-normatively, changes in costing procedures bring about different net income changes.

The foregoing examples are stated in largely non-normative terms. The concept of subsidy often has a negative normative connotation when it could have an affirmative one—it depends on the choice of base as to what people are entitled. The “choice of base” is illustrated in the following examples.

The rich uncle may be spoiling you or he may be contributing to the family’s practice of taking care of its own, depending on what view, or base, one takes.

The parents may be punishing one child or they may be providing for a child so ill that he or she cannot support himself or herself. If one feels that children should be treated equally, the ill child is being subsidized. If one feels that distribution of an estate should be a matter of relative need, then no subsidy in a pejorative, i.e., negative, sense is created.

One may feel that polluters should not be rewarded for polluting by paying them not to pollute; indeed, they should be taxed if they pollute. Yet, the tax and payment policies are analytically equivalent. Imposing a tax on pollution lowers the polluters’ profits, thereby inducing them to spend money to install pollution-preventing equipment to avoid paying the tax; similarly, providing a subsidy to install such equipment can induce the firm to enhance its income position by receiving the subsidy. In each case, the firm is led to change its behavior, and the result is less pollution.

An alternate definition of a subsidy is a benefit, in some form, that is not received through the market. This definition posits market distribution as the base. Several problems arise with this definition. Firstly, the market is not the only decisional arrangement in society; government and nonprofit organizations are other modes of distributing gains and losses, and positing market distribution negates these other modes. Secondly, there is no such thing as “the market”; there can be different markets, all of which are the result of the actions, plans, and strategies of firms and of governments to influence the structure and performance of markets. Distribution through one market is a subsidy if an individual considers another market to be proper. Different structures of power lead to different structures of rights and of markets; whether a subsidy exists will depend on the structure posited as proper.

For the rich uncle, one may substitute one’s church or the government or other nonprofit educational and charitable institutions. These may receive voluntary donations and transfer the money to people who qualify on the basis of perceived capabilities, needs, or redistributive goals, to create and give effect to a sense of community—payments giving effect to people’s social preferences. Programs to encourage the integration of immigrants into the community may involve short-run subsidies, but they avoid the costs of unemployment dislocation and enhance productivity in the long run by improving working and other skills. The benefit so transferred may qualify as a subsidy under the definition of subsidy as a benefit which one would not receive through the market. That privileges market determination, or, more properly, the power structure that produces certain actual markets and not others, and debases other, nonmarket decisional processes.

The negative connotation of a subsidy may be warranted in the case of “pork” politics and the “Christmas tree” collection of payments and other benefits to interest groups having influence in the legislature. This view is only partly in conflict with those that see the role of government as helping to solve problems in the social interest and enabling people to receive their just due. It may be that a distinction has to be made between transfers/subsidies that represent returns to political fund contributors and those that represent putative solutions to social problems; however, the language of political symbolism is elastic enough to blur the distinction.

SEE ALSO Unemployment

BIBLIOGRAPHY

Boulding, Kenneth E. 1972. Redistribution to the Rich and the Poor . Belmont, CA: Wadsworth.

Buchanan, James M. 1987. Public Finance in Democratic Process .Chapel Hill: University of North Carolina Press.

Lasswell, Harold D. 1936. Politics: Who Gets What, When, How . New York: McGraw-Hill.

Musgrave, Richard A. 1986. Public Finance in a Democratic Society . New York: New York University Press.

Page, Benjamin I. 1983. Who Gets What from Government .Berkeley: University of California Press.

Sen, Amartya K. 1999. Commodities and Capabilities . New York: Oxford University Press.

Warren J. Samuels

sub·si·dy / ˈsəbsidē/ • n. (pl. -dies) 1. a sum of money granted by the government or a public body to assist an industry or business so that the price of a commodity or service may remain low or competitive: a farm subsidy | they disdain government subsidy. ∎  a sum of money granted to support an arts organization or other undertaking held to be in the public interest. ∎  a sum of money paid by one government to another for the preservation of neutrality, the promotion of war, or to repay military aid. ∎  a grant or contribution of money.2. hist. a parliamentary grant to the sovereign for state needs. ∎  a tax levied on a particular occasion.