Chapter 10: Government and Pig Farmers
A recent newspaper article talked about a Midwestern state’s pig farmer’s problem. The problem was that the cost to raise, feed, and bring pigs to market left little or nothing for the farmer. This offered that state’s U.S. Congressional representatives an opportunity to serve their constituency by finding a way to get a subsidy that would sustain the farmers through the crisis.
This particular action may or may not have been the right thing to do, as all the background information was not presented. The point is that there are many such subsidies in place and the Congressional people who promote them get credit and votes. It is likely that there are varied opinions on their legitimacy and their urgency, but you can bet that we will all pay for these subsidies one way or the other in higher taxes, reduced government services, or increased prices. We will also pay for it in the loss of the benefits of competition for overall value - price and quality. There is not much need for Yankee ingenuity to find better ways to improve the product or its cost through genetic engineering or other imaginative approaches when they are subsidized.
It is well-known that family farms and more recently, the larger corporate farms as well, historically have received a great deal of sympathy and ongoing subsidy aid from state and federal governments. The natural question that arises is, what establishes the priority for farmers in modern America in comparison, for example, to the family- owned or otherwise small special machine tool companies or any other business, especially the small entrepreneurial businesses? Are they of greater strategic importance to Americans? Is it possible that farm ownership could involve foreign investors or owners and could involve U.S. government subsidies as well?
The subsidy actions parallel welfare and organized labor examples where ongoing aid or protection can be a strong incentive to not fix a problem. They also blur John Quincy Adams’s view of individual liberty, and they encourage dependency. In most such cases, the market is sending a very strong message and needs to be heard. The message is typically that someone else is doing a better job of providing value and deserves to get the business.
A story told to children about the eagle with a broken wing says that it needs to be put back into the wild as soon after recuperating as possible, or it will soon lose its ability to hunt and to sustain itself and will have to be supported for the rest of its life. Subsidies can have that same kind of effect.
It also seems that in the modern global free market environment, subsidies can interfere and be a source of friction between trading partners. No matter how you look at it, the free market is being manipulated by the use of subsidies except to fix a short term tilted playing field problem.
Loan Guarantee Subsidies
The Chrysler Corporation received help in the form of a government loan guarantee that likely saved it from the scrap heap. The company was saved and to its credit, it paid off its debts well ahead of schedule and became a model of efficiency. It was prolific in its well-received new model introductions and set records for profitability. It was so successful that it ultimately became a part of the premier German Auto Company through acquisition.
At about the same time, another American manufacturing company of significant size also received a U.S. financial bailout, also through loan guarantees. One of its problems was that its manufacturing capability was out of date and inefficient. It used its bailout leverage to buy new standard machine tools to fix that problem. Foreign built machine tools were selected. We cannot second-guess that choice, as it could easily have been the right thing to do, even courageous under the circumstances, as it hopefully was a value based decision.
That company, like Chrysler at the time, succeeded mightily, and today, it is sitting on top of the world. It has been saved from the scrap heap and is successful probably beyond its management’s wildest dreams.
The first point is that if you had to guess, what kind of machines do you suppose would have been purchased had this been a German company or a Japanese company that needed help? Is this a level playing field problem?
The second point is that in retrospect, it seems that these were the right things to do as the employees, the owners, and the customers all benefited. There were however, negative points involved as well. The bailed-out companies were failing, likely by their own shortcomings, over a period of time. How do you suppose the competing companies viewed these actions? They may have been the finest, most upright and competitive companies that you can imagine, foreign and domestic. Did they deserve to be handed a major handicap for doing everything right? What about their employees, owners, and local communities? All the successes of the bailed out companies came at their expense.
These are difficult questions to answer, but the free market was artificially manipulated, as in the case of other subsidies. The point is that intervention is a very complicated and sensitive thing, and it can have an impact far beyond what may be a noble cause or in some cases, a political agenda. Some jobs may be saved or created, but many more may have been negatively affected. Worst of all, the system that causes advances (progress) for all suffers a setback with each such tampering. In addition, do all the competing companies now feel that if they get into serious trouble that they will be bailed out by the government also?