Sunday, September 4, 2011

Government Spending in a Mixed Economy - Subsidies, Grants and the 'Stimulus' (Part 1)

[To understand this properly first read my posts on Opportunity Cost, then Laissez-Fair Capitalism and then Taxation]

A subsidy is the opposite of a tax. You give a subsidy to someone who is facing a loss to help break even, maybe make a little profit for the sake of survival. OR you give a subsidy as an incentive to encourage a certain type of industry to grow (such as a tax break or tax loop hole).

A stimulus is also a form of a subsidy as it pours income into sectors of the economy (or parts of the country) that need income or jobs.

Definition of subsidy:

A benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy is usually given to remove some type of burden and is often considered to be in the interest of the public.

Politics play an important part in subsidization. In general, the left is more in favor of having subsidized industries, while the right feels that industry should stand on its own without public funds.

Investopedia explains Subsidy

There are many forms of subsidies given out by the government, including welfare payments, housing loans, student loans and farm subsidies. For example, if a domestic industry, like farming, is struggling to survive in a highly competitive international industry with low prices, a government may give cash subsidies to farms so that they can sell at the low market price but still achieve financial gain.

If a subsidy is given out, the government is said to subsidize that group/industry.

The following is an example of a type of subsidy that has been called "stimulus" (stimulus and investing in infrastructure - a vital part of an economy - has been given an extremely negative connotation through 'echo chambers'), that allows investment in environmentally friendly energy while creating a few jobs.

FLAGSTAFF, Ariz. (AP) — A major manufacturer of small wind turbines will continue to call Flagstaff home for at least the next five years because of a major federal stimulus grant. The $700,000 grant puts to rest fears that Southwest Windpower would leave higher-cost Flagstaff for another city or even another country. The funds were funneled through the Arizona Commerce Authority and are expected to be approved by the Flagstaff City Council on Tuesday. They will help retain the existing 65 jobs and help expand Southwest Windpower in Flagstaff as the North American headquarters for at least the next five years. The company is expected to use the funds to underwrite the retooling of equipment to begin production on a new turbine.

Government spending to balance an economy is normal in all economies around the world. There is echo chamber rhetoric saying government spending is bad which flies in the face of the evidence of using government money (subsidy/stimulus/grant/handout) to help the economy and individuals. For example; Rick Perry used government money to balance the Texas budget (there would unlikely have been a good job rate in Texas if Rick Perry didn't do that). Rick Perry did the smart thing as a politician in a mixed economy seeking to help the local (Texan) economy. The negative echo chamber rhetoric about using stimulus/subsidies to boost the economy is a political tactic to stall the economy to win an election.


Gov. Rick Perry used federal stimulus money to pay 97 percent of Texas's budget shortfall in fiscal 2010--which is funny, because Perry spent a lot of time talking about just how terrible the stimulus was. In fact, Texas was the state that relied most heavily on stimulus funds, CNN's Tami Luhby reports. "Even as Perry requested the Recovery Act money, he railed against it," Luhby writes. "On the very same day he asked for the funds, he set up a petition titled 'No Government Bailouts.'" It called on Americans to express their anger at irresponsible spending. Thanks to the stimulus funds, Texas didn't have to dip into its $9.4 billion rainy day fund. Still, now that the stimulus is spent, Texas, like many other states, is facing severe cuts--$31 million must be carved from the budget.

Government spending is normal in modern economies. The debate should be over which direction spending should be made in so that it boosts the economy with a minimum amount of inefficiency (basic economics principle). To be against government spending itself is not economics, it's an echo chamber tactic to create negative perceptions around a normal economic policy tool to win elections through increase an in negativity and hate.

[Note September 5th 2011: I don't know how Rick Perry used the money he got from the government. If he just paid off debts without any expenditure for long-term growth then the Texan economy will crash soon. The balancing the budget act will just postpone the inevitable. But that may be all Rick Perry needs for the upcoming election.]

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