Friday, 23 March 2012

Picking Winners

When we talk about wasteful spending by government, the discussion often focuses on explicit discretionary measures - think school halls and pink batts.  We also talk about the growth of the public sector.  You may recall that even Kevin Rudd, back when he was pretending to be John Howard lite, promised to 'take a meat axe' to the public service:

Kevin Rudd will take "a meat axe" to the bloated public service and end what he calls the Government's culture of secrecy and ministerial unaccountability.

There is another category of wasteful spending, however, which often manages to pass under the radar.  The costs and benefits of government subsidies are difficult to catalogue effectively because, quite simply, there are so very many of them.  In general, each individual subsidy uses a relatively small amount of money, so in the wider scheme of the $350 billion plus federal budget these expenditures get lost.

Government subsidies distort the market, which in itself damages economic performance.  But from a purely fiscal perspective, it is important for governments to ensure that for any given subsidy, the benefits outweigh the costs.

Consider the recent news that Holden will receive $275 million in taxpayer subsidies (combining federal and state initiatives) to keep the company's operations here for another ten years.  The car industry has benefited from subsidies for many years, with the support of both political parties.

There are certainly sentimental arguments in favour of such policies:

Holden is an Australian icon.  It's Adelaide plant produces two of the four biggest-selling cars in the nation.  It would be a very brave Prime Minister who pulled the plug on Holden.

There are perfectly valid economic arguments as well - most of our first world competitors also subsidise their car industries, so withdrawing funds for a company such as Holden would place us at a competitive disadvantage.

Then there is the more classically liberal economic worldview:

They argue that if there is no prospect of Australia's car makers being able to survive without government subsidies, we should cut them off now.  In effect, the government will pay almost 20 percent of the cost of Holden's new models: what other industry receives such support?

Both sides, it must be said, have perfectly valid points to make, and thus this is an example of the sort of government subsidy that needs to be aired extensively in open debate.

But what should be made of this next example?

A year on, The Conversation is attracting 20,000 individual readers a day, reading on average 38,000 articles, putting it just in the top 100 most read websites and on par with Crikey.

Now, The Conversation is a website of reasonably high quality.  While it is notoriously slanted towards one end of the political spectrum, the articles are of a generally high standard and the site is well organised.

The site's founder Andrew Jaspan, who has also been chief editor of The Age, argues that there is clearly a market for The Conversation:

There is an appetite for the unexpurgated views of academia.  He argues that as the fortunes and reputations of the traditional media decline more readers will turn to academics for trusted information.

For the record, I think Mr. Jaspan is quite correct, at least up to a point.  There is an online market for the views of academia, and The Conversation does a good job of appealing to that market.

So do tell me - why is The Conversation, a site which employs 26 people, being funded by $6 million in mostly taxpayers' money?  If the market for this product does so clearly exist, why must the government effectively act as a venture capitalist and subsidise the site's early existence?

When Mr. Jaspan wanted to start up The Conversation a year ago, he had every right and every incentive to do so.  Nobody would have stood in his way.  He could have done exactly what other new businesses do - he could have procured capital, from either his own pocket or through private lending, and invested it in his idea.

But he instead held out his hand to government, and our esteemed public representatives happily obliged.  Why?  Because they liked his idea.  It really was that simple.  Some politicians thought that Mr. Jasper's idea of an academic-centric opinion website was just fantastic, so they decided to give him millions of hard earned tax dollars to give it a go.

This, in my view, is both wasteful and downright improper.  Government is not a venture capitalist firm.  Politicians have no right to invest dollars that they have procured from hard working citizens to fund their own pet projects.

I am not picking on The Conversation - you cannot blame Mr. Jaspan for seeking public funds if they were available.  Most of us would do exactly the same, given similar circumstances.  This is but one example within a widespread culture of subsidy which often goes completely unexamined.

Make no mistake.  There is an argument to be made for subsidies, but no such argument is convincing unless it carries economic (rather than purely sentimental) weight.  Too many governments, of all denominations, use subsidies to pick winners.

Taxes should be used to fund essential services, not to hold up irrationally favoured industries or provide money for politicians' pet projects.

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