Friday, July 3, 2015

Is The Free Market a Hoax?

One point often made is that much of the advanced technology that techno-utopians are touting are dependent not only on whether these things are technologically feasible but whether they are economically viable. That is, they not only have to be technologically feasible but they also need to be economically viable enterprises that justify their costs, otherwise they will not outlast the government subsidies that keep them going. The example often used by, for example, the Archdruid—is supersonic air travel. The Concorde was clearly technologically feasible – it flew for over twenty years, but it never paid for itself. It took a lot of money and fuel to push a plane at supersonic speeds across the Atlantic, and not a lot of people could afford to pay the price for that luxury (or even needed to-few people are in that much of a hurry). If a society collectively decides it no longer wants to continue subsidizing white elephant projects or does not even have the resources to subsidize them, they will go away even if we have the technology to do them, they argue. This is something ignored by techno-optimists who say that if something is technologically feasible then it will be done no matter what, and assume anyone who doubts them is somehow not intelligent enough to grasp what is possible or just too pessimistic concerning human inventiveness.

This got me thinking about the issue of subsidies in general. See, I happen to know that it's not only the Concorde--the entire commercial airline industry has been unprofitable. When you average out all the ups-and-downs of the commercial air travel industry and subtract the bailouts and giveaways, air travel itself has never made a profit in the entire history of the industry! It turns out that in the 30 years since the airline industry was deregulated in 1978, it has lost nearly $60 billion on U.S. operations. Domestic passenger airline operations lost $10 billion from 1979 to 1989, made profits of $5 billion in the 1990s and lost $54 billion from 2000 to 2009. A similar case is true for just about any means of commercial passenger transportation (bus, rail, etc.)

This caused me to wonder if this were really true. Will any nonsubsidized entity cease to exist beyond subsidies? If so, we're in a heap of trouble because, try as I might, I could not think of a single major industry that was not subsidized!

In a widely-reported story that came out in May, the International Monetary Fund, hardly an institution hostile to capitalism, looked at the amount of subsidies the fossil fuel industry received globally and concluded they were a whopping 5.3 trillion dollars a year! That’s 10 million dollars a minute every single minute of every day throughout the year, year in and year out for the fossil fuel industry. That is greater than the total health spending of all the world’s governments combined.

People complain a lot about all the subsidies that green energy receives (wind, solar, tidal, etc.), but of course the fossil fuel industry is heavily subsidized as well. Nuclear is famously dependent on government subsidies, and the impossible dream of net-positive-energy fusion is entirely a ward of the state dependent upon the world’s rich governments for donations at this point (ITER, etc.). Thus is seems like all our energy sources are subsidized in some way.

Fuel is fundamental to modern industrial society, but so is food. We all know how much modern agriculture is subsidized. Every year, agricultural subsidies are a huge, complex, and contentious topic.
Nearly every industrialized nation on Earth subsidizes agriculture to some extent. It’s a way to make sure production stays high, and prices stay low. It’s just a matter of figuring out how to make it work — and that’s where things get tricky. Right now in the U.S., we subsidize certain crops pretty heavily. These are things that can be shipped and stored easily, and traded in international commodity markets. 
But because of the way we manage our subsidies, we end up with A LOT of corn. In 2010, U.S. farmers produced 32 percent of the world’s corn supply on 84 million acres of farmland, raking in a cool $63.9 billion. Most of that corn goes to non-“food” sources — either to feed livestock or to feed our cars, in the form of ethanol.
Our Crazy Farm Subsidies Explained (Grist)
Critics say crop insurance has reduced the risk of farming so much that farmers are now incentivized to farm on marginal lands, such as wetlands or lands with less than optimal soil. "When the government is guaranteeing you [a farmer] 85 percent of your income, it suddenly makes a whole lot more sense to farm in places that might flood or have low soil moisture, which might not have been practical to farm if you simply had your own skin in the game," says Scott Faber of the Environmental Working Group. 
He also says the system helps the rich get richer. About a third of the subsidies go to the largest 4 percent of farm operators. In its farm subsidy database, EWG finds the largest recipients of crop insurance support receive more than $1 million a year in subsidies.
Congress Poised to Make Crop Insurance Subsidies More Generous (NPR)

With the current drought in the Southwest, water subsidies are coming under a lot of scrutiny:
…Over the last 20 years, Arizona’s farmers have collected more than $1.1 billion in cotton subsidies, nine times more than the amount paid out for the next highest subsidized crop. In California, where cotton also gets more support than most other crops, farmers received more than $3 billion in cotton aid.
http://marginalrevolution.com/marginalrevolution/2015/06/king-cotton-and-deadweight-loss.html

And it’s not just food, but other commodities like cotton:
Subsidies get complicated, but for the 4,000 acres of cotton that Bowen and his family farm, the operation could be expected to get more than $100,000 in direct payments from the government. But perhaps the bigger benefit that the government provides is protecting farmers like Bowen from risks. 
RIVOLI: There are bad things that can happen: prices can fall, there can be too much rain, it can be too hot, it can be too cold. A lot of those risks are protected against by government programs, particularly insurance subsidies. 
SMITH: So basically they give them cheap insurance. 
RIVOLI: They give them cheap insurance. 
SMITH: And to be fair, other countries also support their agricultural products in various ways. But no one does it as effectively as the United States. U.S. farmers have big farms. They buy big machines. They take big risks. And the government has a big safety net for them.
How Technology And Hefty Subsidies Make U.S. Cotton King (NPR)

What about the automobile industry? I think we all know that that’s been bailed out like clockwork throughout the entire history of the industry.
”Taxpayers own 61 percent of GM as part of an arrangement in which the federal government gave the company about $50 billion in aid during its bankruptcy proceedings last year. GM has repaid $6.7 billion of the money, and the balance was converted to the ownership stake in the automaker.…Chrysler, the other Detroit automaker to get bailed out, spent $1.2 million on lobbying this year, nearly half of the $3.12 million it spent last year. Chrysler has given back $2 billion of the $11 billion it has received from the government.”
Bailed Out Firms Spend Millions on Political Causes, Federal Lobbying (FOX)

And, of course, those weren’t the first or only bailouts of the auto industry, it’s been pretty consistent since at least the 1970’s.

Not to mention that most of the automobile industry’s profits come from financing the loans to buy the cars, not from the cars themselves. It’s been said, and it’s true, that the auto industry’s major product is consumer debt, and the cars they make are just a means to create that debt. Would the automobile industry even be viable if it just made cars?

And of course cars are just hunks of metal without gasoline, and see above for the gas subsidies. And cars are also useless without roads paid for by the taxpayers. Wal-Mart’s “warehouse on wheels” would be impossible without the roads which are paid for by governments – specifically the Interstate Highway System. It’s long been known that most wear and tear on roads is caused by “axle weight” of which trucks cause much more than individual cars. Yet trucking companies do not pay for upkeep of roads equal to the damage they cause. See this post for the numbers: The Hidden Trucking Industry Subsidy (True Costs Blog): "Freight trucks cause 99% of wear-and-tear on US roads, but only pay for 35% of the maintenance. This $60B subsidy causes extra congestion and pollution, and taxpayers pay the bill." So the trucking industry is subsidized. What’s scary is that truck driving, and hence the roads, provide the largest source of employment in the U.S.

And it’s often pointed out how much taxpayers foot the bill for the low wages paid by Wal-Mart (and others). Most “poor” people in America actually have jobs. According to the Washington Post, taxpayers spend 153 billion dollars a year subsidizing the low wages of employers like Wal-Mart and McDonald’s. And we’re not even counting the actual prison labor used by American corporations to produce goods. Cleary the entire incarceration industry is dependent upon govermment - one of the few "growth" areas in America today.

Surely the computer industry stands on its own two feet! It’s often touted how many “free” services are provided by Google, Facebook, etc. But if they are “free”, where do the profits come from? Much of the profitablity seems to rely on expansion - the very definition of a Ponzi scheme. As one article put it, "Facebook is a large, inefficient engine for transforming electricity and programmers into a down-market place to sell low-value advertising." These Internet companies read all our personal data, aggregate it via "data mining" and sell it to advertisers - advertisers who we do everything in our power to avoid. It just doesn't sound like a viable business model to me. we also know that Google has received lavish support from the national security/defense industry since day one.

Not to mention the computer industry isn’t viable without lots and lots of access to cheap electricity. In fact, Internet companies use more electricity that does the automobile industry. Are they truly paying for the costs of that, or are we? In addition, Apple’s enormous profits come in part from being able to draw on extremely cheap labor in China and ship the products back, which is an implicit subsidy (ports, railways, trade agreements, etc.). After oil and cars, smartphones are the US’ biggest import. Almost $100B of phones was imported in 2014. Half of them were Apple iPhones. As a thank-you to the government, Apple holds its profits offshore and blackmails the U.S. government to do it the “favor” of bringing profits back to the U.S. The same is true for most U.S. manufacturing companies and retail companies like the aforementioned Wal-Mart and others.

Another story that came out at about the same time as the IMF study said: Elon Musk's growing empire is fueled by $4.9 billion in government subsidies (LA Times). This belies his heroic image promoted by Silicon Valley libertarians as John Galt come to life. Just about every piece of the computer industry, from the transistor to the Internet was paid for via government. Maria Mazzucato points out that every device in the iPod originated with government patents. The pharmaceutical industry has long free-ridden on the back of government research (e.g. the National Institute for Health and public universities), and spends more money on advertising and defending its patents than it does on researching new drugs. the industry prefers to invent "me-too" drugs, while dumping the hard research on the government.

How long would the defense contractors last without the steady stream of money from the defense department? (which routinely misplaces billions of dollars) And we all know the health care industry – which has been the only industry that has seen any job growth over the last decade-- is reliant upon government subsidies. This includes everything from Medicare and Medicaid to the tax credits for employers. “In 2009, the public share of health care spending is likely at 53%.. If health care subsidies (primarily tax exemptions) are included as government financing of health care, they add another $200 Billion to the total, raising the government’s share of health care spending to 62%.” (True Costs Blog). Obamacare lavishes even more subsidies upon this “private” industry.

There is much, much more, and I'm sure I could probably write a book-length post digging into subsidies, but I’ll stop there. And that confirms what I set out to investigate – it seems like literally everything is subsidized! Theoretically, we take money from profitable enterprises and use them to prop up unprofitable ones that we think are necessary for some reason. That is, there are things which cannot make it in the market, but are nonetheless necessary. So how is possible that everything is subsidized? What profitable industries are subsidizing the unprofitable ones? If every industry is subsidized, where is the money coming from? Are industries subsidizing themselves? What’s going on?

The only businesses I could think of that weren’t subsidized were things like the small neighborhood businesses in my area like salons and cafes (besides the implicit subsidies we all share of secure property rights, a functioning legal system, police and fire protection, electric, water and sewer service, roads, streetlights, a common currency and measurement system, etc.). Maybe certain types of manufacturing also fall into this category. But that’s about it. And when you go to the farmers' markets like I do and pay to buy stuff from farmers who are actually paying their own way, what is the complaint you often hear? This stuff is all so expensive! that is, Americans love their "free" market, but do not want to pay the true "free" market costs of $15.00 grass-fed ground beef or $5.00 kale, not to mention $10.00 gasoline.

Another point must be made. Not only do industries like food and fossil fuel get direct subsidies, but the get very indirect subsidies in the form of externalities. For example, the coal industry is allowed to "dump" its toxic waste products into the air in essentially unlimited qualities. This causes everything from asthma, to smog, to inedible mercury-poisoned fish. We all pay the costs of those results; the fossil fuel industry does not. Even the solar industry dumps its toxic waste products - one reason why so much of it is located in China. The massive subsidies to corn contributes to the obesity crisis which the rest of society has to pay for. Would these industries be viable without recourse to all these "free" services, which amount to a massive hidden subsidy?

In fact, much of our economic enterprises are specifically dealing with the fallout from these toxic industries! How much "growth" is due to that - everything from pediatricians treating childhood asthma, to weight-loss and fitness centers dealing with the obesity crisis from the lousy food we consume? A lot industries (and hence jobs) are actually dependent upon negative externalities!

If there is no such thing as a free lunch, then where is all the money coming from? If food, energy, water, transportation, computers, defense, manufacturing, health care and retail are all dependent upon subsidies of some sort, which it appears they are, then what else is there? What industry is truly paying its own way? Is there even one?

And that leads you to some disturbing conclusions. Chief among them, that the "free" market modeled by economists is in fact a fiction - it doesn't exist anywhere. All of our conceptions of supply and demand and so forth is just an elaborate hoax.

Now the standard response is that this is exactly why the market doesn't work! That these are all the government interventions and distortions that cause the market to fail, and once all the distortions are removed, the free market will allocate resources effectively. Unproductive enterprises will go under, viable enterprises will remain, unproductive capital will be free to go where it is needed, etc. The market is self-correcting if given enough time.

But this is more an argument of faith than of fact. Where is the proof? If the free market actually worked better and delivered food and goods cheaper without any intervention of any sort, why would we not have done that? To believe the libertarians is to engage in a massive conspiracy from some indeterminate time to subvert the “free” market by a massive conspiracy of insider capitalists and government. When was the market ever “pure?”

In fact, the closest thing to such an experiment is our own past. But most government interventions were due to massive market failures from almost the start of capitalism - bubbles like the South Sea Bubble, panics like the panic of 1857, crashes like the Great Depression. Thus, couldn't you make an opposite case - that without massive government intervention, the so-called fee market based on industrialism is not viable at all - that it would in fact crash and fall to pieces without being constantly propped up by the wider society? It seems like the only economies where the true costs are internalized are the "poor" nations in need of IMF loans for "development."

Free-marketeers want to have it both ways. They always want to tout the prosperity delivered by the Market - the cheap food, the abundant energy, the technological inventions, the plentiful jobs, etc. the but they don't want to acknowledge the role that government subsidies play in that prosperity. They may grouse about those subsidies, but they have no concrete example to point to as a market that would exist without those subsidies, so they can forever appeal to some imaginary "free" market that exists only in theory as being ideal without ever having to test it in the real world. Almost nothing you can buy today, and almost no jobs, come to you from the completely free and unsubsidized market. My guess is we wouldn't be so enamored of the "free" market proposed by libertarians when it takes away our cheap food, our cheap fuel, our cheap goods, and our access to health care.

And the conclusion you draw from that is that we already live in a socialist economy! It's just a socialist economy controlled by a few people at the top that masquerades as a free market. It's already a massive redistribution scheme--from bottom to top. Maybe the technological stagnation so fretted about by economists is just because we’ve run out of subsidy money.

In any case, going down the rabbit hole, I came to the conclusion that the above is wrong - maybe it is possible to keep subsidies going forever. This, of course, will not cause resources to appear where there are not any, and that, it seems, is increasingly the real limitation.

4 comments:

  1. "We all know how much modern agriculture is subsidized. Every year, agricultural subsidies are a huge, complex, and contentious topic."

    I just finished showing "Food, Inc." to my students and tackled the question of corn subsidies, which I illustrated in Corn questions from 'Food, Inc.' worksheet. It's amazing how much subsidies and productivity feed into each other to make corn the number one crop in the U.S. As for corn for fuel, that's another story I tell my students. I hope they are sufficiently impressed.

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  2. You keep cranking out these massive amounts of really excellent writing, have you considered writing a book? The first one will be the hardest, but once you do one they might be like potato chips... Look at the careers of The. Archdruid Greer and the rather more modestly titled Dmitry Orlov.

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    Replies
    1. I have, but it seems it’s a lot easier just to write a post. When I sit down and start to contemplate an entire book, for some reason I can’t really get going compared to the small stuff. To some extent, everything on here is part of a theoretical book that I have yet to write. It’s also a lot easier to write short pieces with a full-time job. I wish I could write full time. I’ve got some ideas and may put them here in the near future.

      Delete
    2. I have, but it seems it’s a lot easier just to write a post. When I sit down and start to contemplate an entire book, for some reason I can’t really get going compared to the small stuff. To some extent, everything on here is part of a theoretical book that I have yet to write. It’s also a lot easier to write short pieces with a full-time job. I wish I could write full time. I’ve got some ideas and may put them here in the near future.

      Delete

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