Subsidies are part of the long continuum between perfectly free and totally regulated markets.
Even the most vocal free marketers can be shown to want government interference in the marketplace. They want consumers and producers free to make and buy, to get materials, set up plants, create stores, ship products, etc. They want courts to settle disputes and police to stop criminal activities. They want copyright, trademark, and patent protections. As the current example of Russia shows, you can’t take all this for granted.
In American history, the most laissez-faire period of industrialized government, the late 19th century, has been shown to be not government neutral, but highly government protective - of manufacturers and against workers. The government also threw up large trade barriers - tariffs - that European governments complained vociferously about, because the U.S. industrial economy has grown larger than theirs and hardly needed protection.
Tariffs are another bit of government interference with a free market that are eagerly sought by those in the market. Tariffs are similar to subsidies in their effect. They change the free flow of goods to favor a local product. Americans made a deliberate trade-off in that period. In order to protect American jobs in a period of enormous population growth and the massive internal shift of farm laborers to the city, they accepted the raised prices for goods that resulted.
That also meant they had to accept monopolies, the more than 300 industries that organized into trusts. This was a market distortion of titanic proportion.
Eventually, both monopolies and tariffs passed out of favor, although the damage that tariffs did took the crash of 1929 and lengthened it into the Great Depression. (Smoot-Hawley was a 1930 tariff act meant to protect American manufacturers but that and the refusal to go off the gold standard sunk any possibility of recovery because other countries adopted better policies and the U.S. couldn’t compete.)
Yes, government regulation of a free market produces distortions. Some distortions are considered highly favorable by some. Some distortions may even work to the total economy’s benefit. Many safety and environmental regulations may increase product costs but benefit the society as a whole.
So what about subsidies? Subsidies are like tariffs. They are governmental responses to particular conditions in selected industries that are deemed essential to overall societal benefit. The problem comes in the words particular, selected, and essential. Who decides these? How? And what happens when conditions change?
Many agricultural subsidies in the U.S. grew out of decisions to protect farmers. Farmers entered a depression state in 1920. It was called a depression by contemporaries. The entire decade was a poor one overall. However, by the time the rest of the country went into depression they had recovered enough to overproduce for what was now greatly lowered demand. Farmers dumped milk and burned crops because that cost less than trying to harvest them.
The government started a series of programs to pay farmers to not grow crops. Amazingly, many of these programs are still in place.
Other crops, like the aforementioned sugar and cotton, started demanding subsidies after world market conditions changed. The sugar trust owned governments as well as mere plantations in the Caribbean and Latin America. Once they were forced away from essentially being slavers they fought to marginalize the cheaper foreign sugars by American subsidies. Cotton and a host of other goods have similar stories, though the particulars change.
So when you ask what affect subsidies have on a market, you have to look at the entire market, from producer to consumer, local and worldwide, specialized and general. That incredible range of effects is much harder to calculate and honest economists, if there are such a thing, could easily disagree with the answers.
As citizens, you have to ask what subsidies are designed to accomplish, whether that is a worthwhile government policy for the entire economy rather than just the receivers, and if the conditions that forced the subsidy even still exist.
Most people now agree that almost all tariffs are bad for the total economy, which is why they have basically disappeared. I’d argue that for most agricultural subsidies, any conditions that might have been favorable to their institution have changed so drastically that they can’t be justified.
The problem with removing subsidies is that those who get hurt are easy to identify and easy to accumulate into a pressure group. Those who benefit are numerous and diffuse and probably wouldn’t notice much change over the full course of a year. If sugar subsidies cost U.S. consumers $2 billion, that saves each person $6 a year. Who goes to war against entrenched power over six bucks?
But as Everett Dirkson said, a billion here and a billion there and pretty soon you’re talking about real money. Subsidies as a whole cost the U.S. government around $10 billion in direct tax dollars. They probably cost the economy several times that in increased consumer costs. It’s hard to argue that’s an advantage except to agribusinesses.
