All Commentary
Monday, January 1, 1962

Subsidies Work!

Opponents of federal aid and other forms of subsidy often base their objections on “the fact that subsidies won’t work.” Unfortu­nately for their argument, subsi­dies do work, and that is a major reason why they are objectionable.

Maybe the best way to get at this matter is to consider our com­mon experiences as buyers and sellers in the market place. If we happen to offer an item for sale and it “goes like hot cakes,” we are likely to conclude that the cus­tomers want more and that we ought to produce and offer more of the item. Or, as buyers of an item especially to our liking, we do our best to make sure the seller keeps it in good supply. The function of pricing in a free market is to see that “the price is right” to keep the supply of anything in reason­able balance with the demand for it. A “high” price encourages pro­duction and discourages consump­tion; a “low” price encourages consumption and discourages pro­duction. Most anyone can under­stand, after a moment’s reflection, how and why this works in the market place.

And if a person will carry on that thought, he’ll see that sub­sidies work in somewhat the same way. For instance, it is fairly ob­vious, after years of experience in the United States, that a subsidy for wheat will encourage the pro­duction of wheat until it overflows the granaries and “Liberty Ships” and figuratively “runs out of our ears.” Subsidized surpluses of corn, cotton, tobacco, peanuts, but­ter, cheese, eggs—anything at all—accumulate in the same way.

Surpluses of coal miners, auto workers, steel workers, or spe­cialists at any service are practi­cally guaranteed if the price of the service is held high enough and a subsidy is offered to the un­employed. There is no surer way to have a high level of unemploy­ment in an economy than to pay people for not working.

At first blush, one might suspect that subsidized housing would lead to a surplus of dwellings, but ac­tually it is the dwellers who are subsidized, not the dwellings. Thus, the inevitable consequence of sub­sidized housing is an increase in the number of families seeking to occupy subsidized space.

Likewise, food subsidies in­crease the numbers of those quali­fying for free food; transporta­tion subsidies increase the num­bers of free riders; education sub­sidies increase the numbers of those who need education; cloth­ing subsidies increase the numbers of the ill-clad; medical-care sub­sidies increase the numbers of those who seem to be sick; old-age subsidies increase the numbers of the aged indigent; subsidies to the poor assure endless and growing poverty.

Opponents of Welfare State im­plementation of the gospel of Karl Marx—to each according to need—are wrong in declaring that sub­sidies won’t work! Subsidies al­ways work to increase the supply—create a surplus—of the thing or the group that is being subsi­dized. Now, it well may be that those who advocated the subsidies in the first place did not under­stand what the inevitable conse­quences would be; perhaps they ac­tually believed that subsidies would work backwards and that it is pos­sible to diminish poverty by sub­sidizing it. Whatever their inten­tions, subsidies do work, and ought not to be trifled with.

Since subsidies are so decep­tively dangerous—taking from some without their consent or knowledge and giving to others in a way that seems to aggravate rather than cure what ails them—it behooves us to seek other solu­tions to our problems.

We mentioned earlier that buy­ers and sellers, voluntarily offering and risking in a free market only what is their own, seem to gain phenomenal results if the “Ameri­can Common Market” (the United States without welfarism) may be taken as an example. Competitive enterprise, regulated by consumer choice as reflected in the ups and downs of price in a free market, tends to reward according to merit—as our peers judge merit. And what is the measure of a man’s success in a free market? The ex­tent to which he effectively serves others as these others want to be served! Wealth accumulates in the hands of those who most econom­ically and abundantly produce the things which alleviate poverty, and thus people are stimulated to emerge and climb and help them­selves. Multiplying wealth is by far the fastest way to help the poor. Dividing wealth and subsi­dizing poverty is the fastest way to starve everyone.

Let’s be careful what we subsi­dize, because subsidies work!



Measures are too often decided, not according to the rules of justice and the rights of the minor party, but by the superior force of an interested and overbearing majority.

  • Paul L. Poirot was a long-time member of the staff of the Foundation for Economic Education and editor of its journal, The Freeman, from 1956 to 1987.