The Democrats have a policy that resonates with many. Consider the issues they talk about: poverty, more accessible health care, education, and mortgage crises, among others. Many Americans understand these are big problems, and they want a solution to make it better, or better yet, to solve the problem entirely. If Republicans were honest enough, they would also want those same problems fixed. Libertarians and independents, too, for that matter (including myself). Democrats talk the talk, and generally, seem as principled as Republicans: they will try to follow their campaign promises at least as much as Republicans, despite much complaining to the contrary.
So why am I not a Democrat? That is a great question, and one that should be addressed.
Henry Hazlitt, an old-school free market economist, quoted the French political thinker Frederic Bastiat, who said that a great economist can see both what is seen and what is unseen. A poor economist cannot see what is unseen. Jibberish? Let me see if I can illuminate, for this is the reason why I am not a Democrat.
We see problems with poverty, health care, education, and housing. The problems are seen. Two things are unseen: 1. What caused these problems in the first place, and 2. What effect a proposed solution would have on these problems: would the problems get solved completely, mitigated partially, stay the same, or get worse? Would other problems pop up as a result of such policies? What would their effect be? You can see a complicated tree of cause and effect.
A discussion of what caused these problems is beyond the scope of this essay. Here, we will discuss the second question: what is the effect of the proposed solution? Keep in mind we are only doing a cursory discussion of the effects, as the effects are widespread and complicated.
Well-meaning politicians propose relatively simple solutions to these problems. This is essential. If they were too complex, few could understand their merit and support them. Usually, they involve the government increasing subsidies to some group, like schools, families, or individuals. States, cities, and federal agencies also receive subsidies, according to the plan. The intent is usually to put money right in the hands of those that need it most (those suffering the most, those hardest hit). Again, this seems like a valid plan. The proposed solution and projected outcome are seen.
But what is unseen? One unseen and often undiscussed factor is the effect of subsidies.
Generally, subsidies increase prices. People have more money to spend, and a corresponding price rise occurs. You can see this with farm subsidies: when we subsidize farmers, prices increase. When we subsidize education, prices increase. When housing is subsidized, prices increase. When health care is subsidized, prices increase. Why is this so? One way to think of this is that subsidies inflate demand. As demand increases, prices rise. If this is coupled with a contraction in supply (i.e. farm subsidies) then prices really go up.
Of course, no one really wants high prices. So the politicians propose price ceilings: an upper limit for rent or health care or education or what have you. Those well-meaning but misguided individuals who support price ceilings often say profits are a result of companies’ “greed,” and so the profit must be reduced. They could get by with less profit, right? So let’s give the CEOs and the big management (and the shareholders, too, of course) less profit.
What’s the big deal? Less profit for the big companies, more money for you and me, right? Not exactly. Again, the proposed plan is seen; the true effects are unseen.
Prices fluctuate relatively quickly. Many different factors go into prices for just one item. For instance, higher gas prices mean higher food costs, as the transportation costs must be passed on. So what happens when prices increase (remember, they increase when we subsidize something) and hit a ceiling? Profits go from small to zero to negative. A business becomes unprofitable and unsustainable. The political solution? To keep businesses afloat, especially small businesses, more subsidies are recommended. Of course, larger companies have more resources and therefore usually have an easier time getting more subsidies. Family farms often suffer as a result. Suppose the prices go back down. Would the subsidies be repealed? History suggests that subsidies are extremely difficult to repeal. There is a huge amount of pressure for the revenue from subsidies to keep flowing, and so the subsidies continue. Big companies can fork over a lot of cash to pay a lobby to make sure that subsidies keep on comin’. Small companies have much fewer resources.
There’s another problem with price ceilings. Prices reflect scarcity of a good or service. If prices are artificially low as compared with what people would be willing to pay in a free market (no subsidies), then more people will buy. Vacant housing, for instance, will fill up quickly, leaving others to join a waiting list. This has happened in Sweden, for instance. To solve this problem, the liberal may decide the government needs to create more housing to fill the demand. In the free market, however, if demand increases, then there is a corresponding price increase to reflect the supply and the demand. But with price ceilings, shortages result. This happened in the 1970s when gasoline prices were forced to be artificially low. (I say “artificially” because the market would have had a higher price.) People had to wait in long lines early in the morning to get gas. If the prices were allowed to increase, fewer people would wait in line. We can imagine price increasing to a point where there would be no line at all, and no shortages. This didn’t happen at that time, of course. The simple problem was the price did not reflect the scarcity of the resource, and a shortage resulted. So in any area with a price ceiling, this becomes a real possibility.
There’s another problem with subsidies: there are distribution and enforcement costs. So the consumer must pay not only for the subsidy, but for the bureaucratic infrastructure to determine who gets how much, how one can apply, how one can qualify, etc., and the distribution infrastructure to make sure the money gets where it is supposed to go. Some liberals (like Ralph Nader, for instance) want more government oversight of programs like this, to prevent corruption. Sounds reasonable. But, of course, that costs money, and that money must come from somewhere. These administrative bureaucratic costs are not insignificant. Also consider that there are no competitors for this service driving prices down or quality up, as is the case with private industry. One must deal with the same agency and the same government. It is a monopoly.
Let’s summarize. Prices increase when we subsidize something (say we hand out food stamps). And so we subsidize the producer (say the dairy farmer) to make sure he has enough, too. Shortages can result from price ceilings, which shortages can be avoided by a price increase.
Unseen effects are that those not receiving the subsidies pay higher prices. Those who pay for the subsidies pay not only the higher prices, but pay for the consumer’s and the producer’s subsidies. So they get whacked three times: once for the higher prices, and twice for each subsidy. Of course, we can imagine much more complicated situations, too, where even more subsidies are involved. For instance, in addition to subsidy of production, there are also subsidies related to transportation costs (maybe the trucking industry has fallen on hard times in addition to gas supply issues) and supplies (maybe the feed industry fell on a hard time thirty years ago, and the subsidies have just stuck around). One can question the fairness of this scenario to those who must pay for the subsidies, and for the related price increases.
The complexity of these subsidies and their relationships can make one’s head spin. But these are the unseen effects of this mindset. You can probably understand why I think it is a slippery slope.
We can also imagine, of course, that if these subsidies were never there, prices would have been much lower to begin with, and individuals would have more money to spend. Removing subsidies once they have been put in place has a similar result: lower prices and more money to spend as one would wish. There is some complexity involved when there are so many subsidies involved. But the end result is the same: more money in the hands of the consumer, and lower prices.
Ultimately, what is unseen is what people could have done with their money, if prices and taxes were lower. Imagine the education or retirement savings, the Christmas presents, the charitable donations. All are possible when we choose what to do with our money, but none are possible with subsidies firmly entrenched.