Friday, March 18, 2011

The Dangerous Downsides of Government Subsidies

From today's WSJ, a quote from law professor Glenn Reynolds that originally appeared on his InstaPundit blog:

"The government decides to try to increase the middle class by subsidizing things that middle class people have: If middle-class people go to college and own homes, then surely if more people go to college and own homes, we'll have more middle-class people. But homeownership and college aren't causes of middle-class status, they're markers for possessing the kinds of traits—self-discipline, the ability to defer gratification, etc.—that let you enter, and stay, in the middle class. Subsidizing the markers doesn't produce the traits; if anything, it undermines them."

MP: Another downside of government subsidies for middle class markers like homeownership and higher education is that those subsidies have distorted those markets and help fuel housing and college tuition bubbles, see chart above.     

Posted at 30,000 feet on a Delta flight to Minneapolis-St. Paul.  

20 Comments:

At 3/18/2011 12:40 PM, Blogger Benjamin said...

The rise in college costs is really annoying.

It seems every large organization, not subject to market forces, just becomes coprolitic. Whether the department of Defense, the USDA, many colleges, the Los Angeles Police department or HUD.

I think you have to sunset institutions, and start over every 10 years. And no pensions ever.

 
At 3/18/2011 12:43 PM, Blogger Buddy R Pacifico said...

Three stunning components of this post:

The chart showing College Tuition CPI soaring over the housing bubble.

A very thought provoking quote.

The professor posting from the stratosphere.

 
At 3/18/2011 1:20 PM, Blogger Sean said...

I absolutely agree the subsidies are making bad things happen.

 
At 3/18/2011 1:31 PM, Blogger juandos said...

Well the government decided to subsidize the auto industry (and buy union votes?) and look at what one of the results is...

 
At 3/18/2011 3:09 PM, Blogger Buddy R Pacifico said...

"Well the government decided to subsidize the auto industry (and buy union votes?) and look at what one of the results is..."

The results that are referred to are about the Chevy Volt. Here is a quote about the Chevy Volt via Edmunds.com:

"All told, the Volt is the most advanced hybrid to date and quite possibly the most fuel-efficient car you will be able to buy."

 
At 3/18/2011 3:10 PM, Blogger PeakTrader said...

However, legal immigrants are also subsidizing the economy and government (for positive upsides):

Why the Economy Is a Lot Stronger Than You Think
FEBRUARY 13, 2006

Most of the workers who immigrate to the U.S. each year have at least a high school diploma, while about a third have a college education or better.

Since it costs, on average, roughly $100,000 to provide 12 years of elementary and secondary education, and another $100,000 to pay for a college degree, immigrants are providing a subsidy of at least $50 billion annually to the U.S. economy in free human capital.

Alternatively, valuing their contribution to the economy by the total wages they expect to earn during their lifetime would put the value of the human capital of new immigrants closer to $200 billion per year.

 
At 3/18/2011 3:16 PM, Blogger juandos said...

Is it any wonder Edmonds lost its credibility?

 
At 3/18/2011 3:50 PM, Blogger Benjamin said...

The Chevy Volt is an amazing vehicle. Only 10 years ago everyone would have been talking about the "wonder car."

It offers us a chance to eliminate our addiction to oil, and stand down our exceedingly expensive Mideast military posture.

Let's see: We save a couple hundred billion every year on oil imports, and a couple hundred billion more on cut military outlays.

Oh, why would we want to do that?

Indeed, we can make methanol from natural gas, and run our PHEVs on that.

 
At 3/18/2011 4:53 PM, Blogger PeakTrader said...

The chart reflects:

1. More skilled labor is needed in the U.S.. So, more college is needed.

2. U.S. jobs increasingly require more skills. So, more college is needed.

Without government subsidies, the quantity and quality of skilled workers would be much less.

 
At 3/18/2011 5:32 PM, Blogger AIG said...

Well first of all, if indeed it is the case that college tuition is increasing at such rates because of "government subsidies", the case needs to be proved much better than this. What is the component of government subsidy for college, and how is this subsidy delivered?

Second, I have little doubt that the increase in college tuitions is primarily due to market forces. There is a much greater need for educated workers that in the past, and the value generated by more educated workers is much higher than in the past. As a result, there is no reason why college shouldn't be even MORE expensive.

I think its too cheap, in fact. State schools are way too cheap. Isn't this an example of government keeping the price...down? Private schools reflect the value they deliver much closer.

Not to say that the pricing system for university can't be incentivized better. It can and should. But its not far fetched to assume that an engineer or computer science undergrad major, that will be starting off at least at 55k by the time they're 22-23, shouldn't pay at least 2-3 years of their lifetime earnings to getting this education.

The problem, is that if we differentiate between different majors and career paths, we get a divergence of value created by higher education. For an engineer, it is under-priced. For a sociology major...its overpriced.

 
At 3/19/2011 12:10 AM, Blogger Ron H. said...

juandos

"Well the government decided to subsidize the auto industry (and buy union votes?) and look at what one of the results is..."

Thanks for the link. Interesting article. I just wish the author hadn't beat around the bush so much, and had come right out & said what he thought of the car. :-)

 
At 3/19/2011 7:26 AM, Blogger juandos said...

"It offers us a chance to eliminate our addiction to oil, and stand down our exceedingly expensive Mideast military posture"...

Hmmm, pseudo benny you need to quit listening to the 'lamestream media' pundits since your wording parrots their words...

The fact of the matter is that we have to do a lot more materials technology research before electric vehicles become even remotely practical...

Unless one is living in the flatlands of a year round warm area there NO upsides right now to owning an electric vehicle unless you consider stealing from your fellow citizen a good thing...

You might want to peruse the writings of Robert Bryce, one time 'greenie' who educated himself back to reality...

 
At 3/19/2011 12:03 PM, Blogger Ron H. said...

Benji

"It offers us a chance to eliminate our addiction to oil..."

I'm amazed you would use this emotionally charged, but meaningless phrase, especially on an economics blog. Don't you care if you're not taken seriously?

 
At 3/19/2011 2:52 PM, Blogger Ron H. said...

Benji

"The Chevy Volt is an amazing vehicle. Only 10 years ago everyone would have been talking about the "wonder car."

Here's another opinion on The Car From Atlas Shrugged.

 
At 3/19/2011 5:32 PM, Blogger Buddy R Pacifico said...

Ron H, the article about the Volt, from Forbes, states the Volt is not in demand. In fact, the first year production is sold-out with of a waiting list of over 50,000 customers. The Volt is the most fuel efficient hybrid on the road. Atlas Shrugged may be more related to the Yugo.

 
At 3/20/2011 2:59 AM, Blogger Ron H. said...

Buddy,

the term 'in demand' appears to be relative. I understand the total number of Volts planned for 2011 was originally 10,000, and that number may be doubled by the end of the year. Nor really a high number, compared to more 400k Prii sold worldwide, and 140k sold in the US in 2010.

The gas mileage numbers are tricky, as they depend on how much of the time the gas engine runs. Consumer reports indicates their test car gets 37-53mpg in a variety of test drives, with gas only driving providing only 30mpg. This is comparable to a Prius, and several small gas only cars, all of which cost less than 1/2 as much as a Volt. Their reported range of 25 miles on battery and 300 total with gas isn't very impressive.

Overall, at $43k (less the $7500 the government will remove from your wallet, and hand to me, if I buy one of these cars), this car isn't really very impressive. I don't see what all the excitement is about. If I were interested in a hybrid - and I'm not - my inclination would be to wait. This technology is being heavily promoted, and several automakers are doing things with hybrids. Something really good may come in the future, but I don't think it's here yet.

 
At 3/20/2011 9:47 AM, Blogger juandos said...

"In fact, the first year production is sold-out with of a waiting list of over 50,000 customers"...

Well buddy r pacifico I see the problem now: Californians snatch up over 40% of total Chevy Volts sold...

Any state who has citizens who would vote themselves into this financial condition would not suprise me that they would fall for a scam like the Chevy Volt...

 
At 3/20/2011 12:36 PM, Blogger Buddy R Pacifico said...

Paul H, I will wait and let the early adopters spend the big bucks for hybrid.

Juandos, the Volt is not a scam but it is the beneficiary of big tax incentives, which are very debatable.

 
At 3/20/2011 3:45 PM, Blogger Ron H. said...

juandos

"Californians snatch up over 40% of total Chevy Volts sold...

It makes even less sense when you consider that California has some of the highest electricity prices in the US.

But, none of that matters, because Californians are leading the way to save the planet.

 
At 3/20/2011 7:10 PM, Blogger juandos said...

"the Volt is not a scam but it is the beneficiary of big tax incentives"...

I beg to differ with you regarding the Volt being a scam, buddy r...

All government 'greenie' programs are...

This is especially true since there's nothing in the Constitution that allows the federal government to get into the private enterprise sector...

 

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