Updated: 1/13/20
Christian Economics: Teacher's Edition
So Joseph bought all the land of Egypt for Pharaoh, for all the Egyptians sold their fields, because the famine was severe on them. The land became Pharaoh's. As for the people, he made servants of them from one end of Egypt to the other. Only the land of the priests he did not buy, for the priests had a fixed allowance from Pharaoh and lived on the allowance that Pharaoh gave them; therefore they did not sell their land (Genesis 47:20–22).
The case of this subsidy to the priests provides insight into the nature of government subsidies in general. Subsidies buy the cooperation of the recipients. Pharaoh had begun subsidizing the priests in year one of the famine. He was no fool. He wanted the priesthood on his side. We know from secular Egyptian history that the priests taught that the Pharaoh was a semi-divine figure: the link between heaven and earth. He therefore possessed sovereignty. This theology was advantageous to Pharaoh, especially during a famine, when Egyptians might have been receptive to a revision of priestly theology. But with the priests on the dole, he could be confident that there would be no revision of priestly theology. As the saying goes, “don’t bite the hand that feeds you.”
This example is from the history of Egypt, not the history of Mosaic Israel. Those theologians who seek to derive a theory of state subsidies from the Bible cannot find examples in the Mosaic law or the history of the mosaic Israel. Whenever they cite the example of Joseph’s central planning in Egypt, they neglect to mention that Joseph was bringing the people of Egypt under the rule of a state that taxed them at 20%, which is twice the rate that is identified by God as tyrannical (I Samuel 8:10–14). Joseph brought the Egyptians under the bondage that was implicit in Egypt’s theology of the divine Pharaoh. This was God’s judgment on the nation.
The economic principle here is simple: “He who pays the piper calls the tune.” If the state pays any group on a permanent basis, it calls the tune. The recipients become dependent on the flow of funds from the state. This subsidy buys political cooperation.
There is no case in Mosaic Israel’s history in which the state subsidized the Levitical priests directly. Levites did receive a tithe from farmers. These tithes went to the tribe of Levi because the tribe had no inheritance in the land (Numbers 18). The tithing laws were not enforced by the state. They were enforced by the church, which was run by the Levites. There is no example in Mosaic Israel’s history in which the state directly subsidized any group. This is why those theologians who try to make a case for the welfare state in the name of the Bible do not cite Mosaic case laws or the history of Mosaic Israel.
Such payments are a violation of the rule of law. The welfare state treats at least one group differently from others. It extracts wealth from taxpayers, and then it transfers this wealth to political special-interest groups. This is a violation of biblical justice: “You shall do no injustice in court. You shall not be partial to the poor or defer to the great, but in righteousness shall you judge your neighbor” (Leviticus 19:5).
Any coercive transfer of money transfers economic authority from one group of consumers to another. These recipient consumers now gain influence in whatever markets they spend this money. Producers shift production away from pre-transfer consumers to post-transfer consumers. The state funds one group’s tastes, and these tastes will henceforth be satisfied by producers. The state establishes a new structure of production through the spending habits of the recipients of state funding.
The state’s subsidy is different from a bailout. A subsidy is permanent. A bailout is temporary. A bailout allows some company or industry to evade the negative effects of unexpected conditions. It thwarts customers only until conditions change. The state justifies a bailout by claiming that loss-producing economic conditions were inherently unforeseen and unforeseeable. Why should jobs be lost because of unexpected conditions that will soon change? The public accepts this justification. A subsidy needs a different justification. The economic conditions are permanent, yet politicians grant immunity from market competition to some beneficiary. Customers refuse to pay for services rendered by the company. Nevertheless, the politicians continue to keep it in business. How can this be justified? Politicians never discuss the economic logic of the subsidy, namely, that it is a deliberate intervention that overrules the decisions of customers. They argue that there is some national interest in maintaining income for the investors, managers, and employees of a firm whose output is not in demand by customers at prices that customers are willing to pay.
One argument that is common is this one: the subsidy is necessary in order to sustain an industry that would be vital for national defense in a time of war. This argument is easily tested. Politicians should instruct the military department that is supposedly dependent on this industry to subsidize this industry out of the department’s budget. If a department’s senior officers are so completely convinced that a company will be vital in a future war that they are willing to reduce their present budget’s expenditures on troops, new weapons, and replacement parts, that is their decision. This test is never conducted, of course. The reason why is clear: senior officers would skip the opportunity to subsidize the company. They would decide that the company is not so vital in a future war that subsidizing it out of the present budget is necessary. But, of course, senior officers are quite willing for politicians to subsidize some defense company out of the general fund. After they retire, some of them may be able to get high paying jobs at this company. Defense companies like to have several senior managers who are retired senior officers. These retired officers have former colleagues who still have senior positions in the military. These colleagues recommend purchases.
What is true of the military is true of senior decision-makers in most government positions. They find high-level jobs in the industries associated with these government agencies. This is especially true industries regulated by the government. This is one of the ways that regulatory agencies are captured by the largest firms regulated by the government. It is a widespread phenomenon.
Subsidies can come in the form of protection, such as tariffs or import quotas. They can come in the form of regulations that apply to an entire industry, but which have the economic effect of increasing the cost of entry into the industry. Established firms can more readily meet the regulations because they have teams of lawyers who are skilled in dealing with regulators. Newer, undercapitalized firms do not. The economic effect is the same as a direct subsidy to established firms, but it is less visible to the public. The voters do not understand the nature of regulation. They support the regulatory system because they believe it protects them from unscrupulous businessmen. In fact, it protects them from innovation.
Because subsidies are permanent, recipients become dependent on them. Their production costs go up. Why? Because firms maximize their income by expanding production to meet demand. They do not want any sale to get away. But when they do this, they have no economic reserves. If the subsidy is cut off by the government, they must reduce production. They will have to fire people. They will have to cut costs across the board. They will lobby the government to restore the spending. They will mobilize whatever support they have in the community to pressure politicians to restore the spending. The classic example is the closing of a factory involved in the defense industry. Voters in communities where threatened factories are located send their political representatives letters asking for a restoration of spending. This is why defense contractors set up factories all over the nation. They get political support in many political districts.
A buyer needs money to buy anything. The state taxes him in order to get the money necessary to subsidize a business. This leaves him with less money to spend on whatever he thinks is important. It transfers money to politicians, who will spend it on what they think is most important: getting re-elected.
Market competition is based on the auction structure: buyers vs. buyers, sellers vs. sellers. After the state extracts money from taxpayers, it becomes a buyer. It now competes against buyers who have less money than before taxes were collected. Or maybe the government borrows money, either from private investors or the central bank. The point is this: the government is able to make its bids felt in the marketplace. It bids scarce resources away from the companies favored by private buyers to those favored by the government. This weakens the buyers’ influence in the structure of production. It favors politics.
Subsidies from the state strengthen those companies that cannot compete efficiently in a free market. This is why they seek permanent subsidies from the government. Their use of scarce resources did not satisfy customers, who refused to buy at the prices asked by the sellers. So, the sellers go to politicians and ask for help. When they get help, this shifts income away from efficient companies that did persuade customers to buy. These companies were the most efficient consumers of capital, raw materials, and labor, as determined by customers. The shift of resources to state-subsidized firms therefore reduces efficiency as determined by customers. Put differently, it increases waste.
Any subsidy sets a precedent. If one firm or industry is legally entitled to a subsidy, why not some other firm or industry? Is there some philosophical objection against allowing one subsidy but not another? If so, it is not intuitively obvious. So, the difference must have something to do with perceived need. At this point, corporate managers see an opportunity. They can hire an economist to make a plausible case for a subsidy to the company. Economists are always available for hire at some price. To spend money to hire an economist to argue in favor of a specific subsidy to a specific company may gain the company a great deal of money.
A typical buyer does not perceive that innumerable state subsidies to businesses reduce the customer’s economic authority. He will have less money to make purchases. The state will have his money and the money of a vast army of taxpayers. The system of subsidies favors those firms that can make plausible cases for specific subsidies. This works against isolated taxpayers who are not well-organized politically. Businesses are highly motivated to concentrate their political efforts to get their specific subsidies. They are well organized. The political system moves in the direction of ever-greater subsidies.
There are two sellers here: the seller who was successful before the subsidy and the seller who was not.
The seller who was successful before the subsidy to a rival firm in his industry now faces new conditions. Customers who had bought his output before now switch to his competitor, who has a new source of funding: the government. Maybe his competitor will lower prices. He can afford to do this now; before, he could not. His competitor remains in the market as a buyer of production goods: raw materials, capital, and the labor. He bids up the prices of production goods. This cuts profit margins for others in the industry. Yet the efficiency of the successful seller has not declined. He is as competitive as before. The price signals are not what they were before the subsidy.
The seller who receives the subsidy also faces new conditions. Before, he could not persuade enough customers to buy his output at prices that provided a profit. Now he does not have to persuade all of them. He has a source of income that is independent of those marginal customers who refused to buy. He has not become more efficient. He is no more productive than he was before, but he is more profitable. He may be even less consumer-driven than he was before. He must now keep politicians happy. He must pay attention to what they expect from his firm, not what marginal customers want.
The non-subsidized producer may find it more difficult to obtain low-interest loans. After all, he is not receiving a subsidy. His rival is. If he cannot obtain loans, he will not be able to buy as much capital. He will find it more difficult to compete with his subsidized rival.
This new situation may tempt him to go to the government for a business loan or some other form of subsidy. To restore his competitive position, he may think he now needs a subsidy. So, the subsidy process spreads within the industry. Instead of pressuring politicians to revoke a rival subsidy, a firm that has no subsidy may seek to obtain subsidies for itself. Sellers compete against sellers for the customer’s money. But the subsidy to one competitor has changed the nature of the competition. What had been a competitive struggle to obtain customers’ money now has a new element: competition to obtain the government’s money.
It is highly unlikely that any pencil manufacturer would be successful in gaining a government subsidy. The industry is not considered vital. No community is dependent on income generated from the manufacture of pencils. The companies are old, well-established firms. The products are price competitive. The market is narrow: children, artists, and people who take notes on pads of paper. More and more, this latter group is switching to digital note-taking. Nobody will write to his political representative to save a pencil manufacturer that has fallen on hard times. There is not sufficient customer brand loyalty in the industry. If a company goes bankrupt, its facility will be bought by a rival firm at a steep discount. The new owner may choose to sell the old brand, or it may switch the imprint to its own brand. Buyers will not notice a meaningful difference in the quality or marketing of the pencils.
In terms of effects on consumers, it matters little whether a pencil firm goes bankrupt. Why is this fundamentally different from any other firm? The difference hinges on politics, not economics. Some large firm may have considerable political influence. It can mobilize politicians to enter the market and supply funds for a faltering company. But customers do not care, one way or the other. If they cared, they would have bought the output of the faltering firm. The fact that they did not indicates a lack of commitment to the firm by customers. A few hard-core customers may care, but most will not. The brand will be forgotten in a year or two except by a few customers who were loyal to the brand.
Subsidies thwart customers. Customers have economic authority in the free market because they own money, the most marketable commodity. Sellers must satisfy customers in order to stay profitable. Customers who vote against a product by refusing to buy send a message to faltering firms: “Change what you are doing.” Customers of profitable firm also send a message: “Keep doing what you’re doing, unless you think you can do better.”
Subsidies from civil government upset this hierarchical relationship between customers and sellers. Subsidies substitute a new source of funds: the state. They insert a new agency in this hierarchical system: the state. The new agency owns money. It can therefore gain the attention of sellers. Sellers must pay attention to the recipient of the subsidies. The recipient now has the ability to compete for production goods as well as for customers. The free market's level playing field is no longer level. It is now tilted toward government. Money talks. Government money talks as loudly as consumers’ money does.
The ability of faltering companies to hire economists to justify state subsidies is very great. The economists provide justifications that politicians can use to persuade voters in their districts. Voters are not equally skilled in recognizing the weak points in these arguments. So, voters should rely on this basic approach to analyzing such arguments: “He who pays the piper calls the tune.” Voters should identify who will be calling the tune: customers or government bureaucrats. If the state takes money away from taxpayers in general in order to subsidize favored businesses, this transfers economic authority from customers to bureaucrats. Why should this be a benefit to the general public? It isn't. It is an unnecessary burden.
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