Government Subsidies Cause Bigger Problems than the Ones They Were Intended to Solve

When government subsidizes something, demand for it goes up.  When the subsidy expires, demand for that which is no longer subsidized plummets. The latest housing and Cash for Clunkers incentives offered by government illustrate the concept very clearly. What is not illustrated clearly, however, are the just as real economic repercussions below the surface--such as lost jobs and destroyed families.

The Los Angeles Times is reporting that
Sales of newly built U.S. homes collapsed in May, falling to a record low and stirring concerns among some economists that the housing market would stumble again now that a popular federal tax credit for buyers has expired.
Some of you may have just had a feeling of deja vu.  Why?  The same thing happened to the automobile market after the Cash for Clunkers program ended last fall:
The auto industry staggered through September, suffering from a massive cash-for-clunkers hangover that left sales down 41% compared with clunker-fueled August.

"I've been in the auto business for 39 years, and I've never seen a roller-coaster year like this," says Ken Czubay, Ford's vice president of marketing, sales and service.
Neither of these collapsing sales events was a surprise to people who were paying attention.  Who caused the roller coaster problem? Government did--while it was trying to fix another problem.

It is too bad that very few people, including government bureaucrats, seem to understand the relationship between government subsidies and the economic problems that such subsidies cause.

What happens when automobile sales plummet? Automobile dealers need less people in their sales forces.  People lose their jobs. People lose their homes.  People lose their families.  It's just as bad when the government wrenches the housing market to and fro by either its loose monetary policy or its incentives to people to purchase fallow homes, many of whom can't afford the houses in the first place.

I have friend who was successful for years in the construction trades. He is currently flipping pizzas at a local pizza joint.  He is not quite able to make his house payment on a pizza maker's income. It's a good thing he has a savings account.

Why is my former home builder/current pizza maker friend making pizzas? The government cost my friend his construction job by its stupid subsidy policies.  Government subsidies create their own boom and bust cycles. In fact, the federal government has been the primary cause for most booms and busts throughout American history.

Wouldn't it be nice if the federal government stuck simply to what it was authorized to do by the United States Constitution?


  1. You should direct your attention to the monetary system to explain these and other market collapses. Learn the relationship of supply and demand under government subsidies (from supply-side subsidies and demand-side subsidies), (which you state above with much folly). add me as a friend on facebook to discuss this in detail.

  2. Brad: We already are FB friends! Thanks for your comments here and there. Not sure what you mean here by "folly", though...


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