17 March 1997
Subsidies corrupt our political system
Baffling. That is the only way to describe public reaction to the Nova Scotia government’s recent announcement that it is pouring tens of millions of dollars more aid into Sydney Steel.
It’s not baffling that the government has made the decision, of course. That was perfectly, if depressingly, predictable. What is baffling is why people are mystified that the government would stump up more cash.

Those who are disgusted at what probably appears to them as throwing good money after bad haven’t understood. They haven’t understood the fuel that has powered the growth of government spending since the Second World War. Nor have they understood how this has transferred political power into the hands of politically well-organised interest groups and communities, at the expense of the electorate as a whole.

Basically, there are two ways one can make a living. There is making, and there is taking. Making involves making goods and services that people actually want to buy at prices they are willing to pay. Taking involves using government to take wealth created by other people and transferring it to yourself. Making leaves everyone better off—it involves the creation of new wealth that wasn’t there before. Taking, on the other hand, creates no new value. You simply use political power to make yourself better off at someone else’s expense.

In a perfect world, taking wouldn’t be an option. We’d all expect, and be expected, to make our own way, to produce value for ourselves and our fellow citizens. So why do we allow this to happen? This is where a little sleight of hand made possible by our political system comes in very handy.

There is nothing unique about Sydney Steel. It is, however, a perfect illustration of the principle that underlies the massive growth in government spending everywhere over the past thirty years. On the one hand, you have approximately one million taxpayers who have no interest in subsidizing steel that nobody wants to buy. On the other hand, you have about 700 actual or potential employees at the plant. They have families, and the plant has suppliers. Let’s be generous and say that 5,000 people benefit directly from provincial subsidies to the steel plant. Roughly 200 times as many people don’t want to pay compared to those who do. So the government shouldn’t pay, right?

Well, consider this. Suppose that the subsidy works out to about $30 million a year. That’s $30 per Nova Scotian. Now I don’t know about you, but we spend several times that each week on groceries. That same $30 would pay my phone bill for a week. In other words, it’s an annoyance, nothing more, especially when it’s buried in a big tax bill. While I may grumble about it, it is only one of a hundred things I grumble about, like potholes and having to wait to see the doctor. Am I likely to organize and march and petition and all the rest to defeat this subsidy?

The situation is dramatically different for the 5,000 people that benefit from the subsidy. Assume that they each get an equal share of the money, through wages, purchasing contracts, etc., or $6000 a year. Propose abolishing the subsidy, and which group is going to get out there and work hardest, the 1,000,000 or the 5000? The subsidized are going to be out there in full force, because their livelihood depends on it.

And most importantly from the point of view of the politicians, the subsidized are going to vote for their subsidy. If you get a $6000 annual subsidy, you will vote for those who promise to keep the money flowing. The ordinary taxpayer, by contrast, wouldn’t know and wouldn’t care if the government shed political blood to abolish the subsidy. The costs are too thinly spread among many people, but the benefits are highly concentrated on a lucky few.

The result is pretty easy to understand. The electoral benefits for politicians of supporting the subsidy are much more tangible, immediate and dependable than the benefits of trying to get rid of it. Apply this simple principle to hundreds of programs created over the years, and you will understand how government spending got so badly out of control. Here endeth the lesson.