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Wednesday, August 10, 2022

Subsidies or lower taxes?

By: Dr Štefan Šumah

In the 1960s, after the declaration of independence, many African countries in a relatively short time adopted a whole bunch of, one might say, reckless, if not stupid, economic measures, which were largely the result of cooperation with Western advisers. Especially in sub-Saharan Africa, they took over economic and political orientations, eventually leading to the “African type of socialism”; one of these directions was to control the prices of agricultural products. This measure was primarily populist in nature, as the governments wanted to cater mainly to the residents of large cities and ensure peace by providing them with low food prices. The prices were set well below the market price, which would still be acceptable for farmers or would be achieved on the free market.

The result of the price regulation in these African countries was clear and predictable to anyone who knows the workings of the free market. In the long term, it happens that if you set a price that is much lower than the market price, you have to deal with the consequences of this, and these are: shortages, the black market, changes in the structure of products, unprofitable products are discontinued, in the case of agriculture, some cultural plants, of which price is regulated are replaced by those of which price is not regulated (as if the cultivation of wheat, the price of which is regulated, is replaced by the cultivation of raspberries, the price of which is not regulated), farming is stopped, or the cultivated plant is grown only to a limited extent (for yourself and family members). In short, price regulation of agricultural products has led to shortages, black markets, and a general decline in agricultural production in many African countries.

Why am I even writing about this? Because similar economic measures are being prepared in Slovenia as well as in many other European countries (regulation of fuel prices, regulation of rents, food products…). The regulation of food prices, as well as fuel and rents, is a dance on the edge of the abyss, especially if it is a long-term measure. In this case, in order to prevent shortages and the resulting black market, where prices are higher than market prices, the state mainly has at its disposal subsidies, subsidies for farmers (otherwise, subsidies in the EU have actually been going on for a long time), subsidies for landlords, subsidies for traders and fuel importers… However, this does not solve anything in the long term, as it completely distorts the market, which is the only real measure of value. Market prices are subject to fluctuations, supply – demand. The supply is higher, the demand is lower, the price is lower. And of course, vice versa. The market works. With subsidies, however, this becomes completely distorted, because no one knows anymore whether the basic price (production price, import price…) is correct and whether the state gives enough, too much, or too little subsidies.

Where does the money for subsidies come from? From taxes, of course. And the more subsidies there are, the higher taxes are needed to feed all appetites (because, of course, it is not only about the appetites of those who expect subsidies, but also others who see an opportunity to get money, thus taxes rise even more than they should). In fact, it would be necessary to act in a completely different way: to lower taxes and let the market work, because that is the only way to arrive at, as classical economists would say, the natural price. The task of the state should only be to control possible speculations that would artificially raise prices, and to prevent them with short-term measures. However, there are two problems in Slovenia (also among economists), the first is ideological blindness, the second is distrust in “spontaneous order” (according to Hayek), and both are remnants of socialist thinking, according to which the state should know what is best for its citizens. And under this government, changes will not even be expected, because it is led or participated in by economically completely ignorant sophists, whose otherwise extremely attractive ideas are, seen from an economic point of view, completely misguided. The market cannot be regulated or cheated in the long run, laws work one way or another.

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