Tuesday, July 26, 2005

When is a subsidy not a subsidy?

Now I admit it has been a while since I took an econ course, but I seem to remember the concept of "there is no free lunch" basically stating that any product or expenditure has to come from somewhere. In his latest editorial Krugman has turned this idea on its head. Not only is a benefit without cost, but the lack of a benefit is in fact a subsidy.

Now I must confess he does start off well, pointing out the fact that there are other factors in production besides labor costs. This would explain to the "fair trade" crowd how we managed to survive against low wage competition like Japan in the 70's. Mexico in the 80's, and China now.

But last month Toyota decided to put the new plant, which will produce RAV4 mini-S.U.V.'s, in Ontario. Explaining why it passed up financial incentives to choose a U.S. location, the company cited the quality of Ontario's work force.

What made Toyota so sensitive to labor quality issues? Maybe we should discount remarks from the president of the Toronto-based Automotive Parts Manufacturers' Association, who claimed that the educational level in the Southern United States was so low that trainers for Japanese plants in Alabama had to use "pictorials" to teach some illiterate workers how to use high-tech equipment.

Whether this is true or not, I will leave for others to discuss, but it is at least logical economically. But from here he goes downhill.

But education is only one reason Toyota chose Ontario. Canada's other big selling point is its national health insurance system, which saves auto manufacturers large sums in benefit payments compared with their costs in the United States.

You might be tempted to say that Canadian taxpayers are, in effect, subsidizing Toyota's move by paying for health coverage. But that's not right, even aside from the fact that Canada's health care system has far lower costs per person than the American system, with its huge administrative expenses. In fact, U.S. taxpayers, not Canadians, will be hurt by the northward movement of auto jobs.

To see why, bear in mind that in the long run decisions like Toyota's probably won't affect the overall number of jobs in either the United States or Canada. But the result of international competition will be to give Canada more jobs in industries like autos, which pay health benefits to their U.S. workers, and fewer jobs in industries that don't provide those benefits. In the U.S. the effect will be just the reverse: fewer jobs with benefits, more jobs without.

So what's the impact on taxpayers? In Canada, there's no impact at all: since all Canadians get government-provided health insurance in any case, the additional auto jobs won't increase government spending.

So Krugman insists that the government picking up the tab for health care is not a subsidy. Now this sounds like a subsidy to me, but what do I know? I am sure I could find an award winning economist who would say that the government picking up health care costs for private corporations is a subsidy though. Hmm, where could I find this? How about this May 23rd article by MIT educated award-winning economist Paul Krugman, in which he states that the government is subsidizing WalMart by paying for the health care of some of their uncovered workers.

True, there are limits on what state governments can do: they fear that if they do too much for workers, they'll drive business and jobs away. I'd argue that the fear is often exaggerated. For example, Wal-Mart may avoid states that force it to provide health insurance, but given the hidden subsidies the company receives - one way or another, taxpayers end up paying a lot for uninsured workers - this may not be such a bad thing. Still, any major strengthening of the safety net will have to come at the federal level.

So I guess when the government pays all the expenses it is not a subsidy, but when the government pay some of the expenses it is. Sounds like voodoo economics to me.