Why subsidies don work

Skip to main content. Sparking New Thinking Read Discourse magazine Online journal dedicated to promoting and defending classical liberal values with new and innovative thinking. Grants and fellowships for talented individuals with unique ideas for changing the world.

Online platform providing a world-class economics education to everyone, everywhere for free. Main Close. Advancing Ideas Sparking New Thinking Read Discourse magazine Online journal dedicated to promoting and defending classical liberal values with new and innovative thinking.

Connect With Mercatus Get the latest in research, commentary, and more from Mercatus scholars. Corporate Welfare. Policy Briefs. August 11, Share Tweet Print. Key materials. Download Publication PDF. This can happen for a number of reasons, but is ultimately to the detriment of consumers, businesses, and jobs.

The OECD has a long track record of identifying and estimating the value of government support that benefit particular sectors of the economy. From initial efforts in the s to measure support for agriculture , our work has since grown to now include fisheries , fossil fuels , and more recently industrial subsidies, as in the aluminium value chain.

Although some progress has been made to decrease government support that distorts markets, subsidies still amount to hundreds of billions of dollars spent every year by governments to subsidize selected businesses or sectors. Subsidies, like doping in sports, can also take many shapes and sizes. These include, for example: direct grants, tax breaks, cheap loans, subsidised inputs such as energy , regulatory exemptions and carve-outs, and even equity injections by governments. In many cases governments do not routinely report such measures.

This means that detective-like efforts must be spent in tracking down and estimating the magnitude of subsidies in monetary terms. This is the case, for example, where cheap loans and subsidised energy bills are hidden deep inside companies' financial statements. Solyndra has become emblematic of these issues, even as policies expanding subsidies for alternative energy companies have been pursued enthusiastically over the past several years.

The alleged imperfections of capital markets is a common—and mistaken—claim often used by policymakers to justify government intervention in various areas of the economy. In reality, nearly 90 percent of the loan guarantees went to subsidize projects backed by large, politically connected companies including NRG Energy Inc.

The program is also a good example of the government favoring multiple interest groups at the expense of taxpayers: 1 lenders who are reimbursed by taxpayers in the event of a default and 2 the companies that borrow at beneficial rates and conditions.

But while banks and companies that receive the guarantees get the upside of the program, taxpayers bear the risk and shoulder the burden when companies like Solyndra go under and default on their loans.

While the results of the loan program speak for itself, the true problem is deeper than the numbers. Like most government interventions, this program—and government interventions in general—create serious and systemic distortions in the market. These distortions create the conditions for businesses to maximize profits by pleasing government officials rather than customers. This is called cronyism, and it entails enormous—and, most often, unseen—economic costs.

Indeed, it is likely that most of our long-term economic growth has come not from existing large corporations or governments but from entrepreneurs creating new businesses and pioneering new industries. Such entrepreneurs have often had to overcome barriers put in place by governments and dominant businesses receiving special treatment.

Each week, we will send you the latest in publications, media, and events featuring Mercatus research and scholars. Skip to main content. Sparking New Thinking Read Discourse magazine Online journal dedicated to promoting and defending classical liberal values with new and innovative thinking. Grants and fellowships for talented individuals with unique ideas for changing the world. Online platform providing a world-class economics education to everyone, everywhere for free. Main Close. Advancing Ideas Sparking New Thinking Read Discourse magazine Online journal dedicated to promoting and defending classical liberal values with new and innovative thinking.

Antigua and Barbuda. Bahamas, The. Costa Rica. Dominican Republic. El Salvador. Puerto Rico. Kitts and Nevis. Vincent and the Grenadines. Trinidad and Tobago. United States. Series Archived Series. Balance of Payments Statistics.

Direction of Trade Statistics. Economic Issues. Government Finance Statistics. IMF Special Issues. IMF Staff Papers. IMF Survey. International Financial Statistics.

Occasional Papers. Pamphlet Series. Seminar Volumes. World Economic and Financial Surveys. Books and Analytical Papers. Departmental Papers. IMF Working Papers. Miscellaneous Publications. Per Jacobsson lecture. Policy Papers. External Sector Report. Fiscal Monitor. Global Financial Stability Report.

Regional Economic Outlook. World Economic Outlook. Notes and Manuals. Analytical Notes. FinTech Notes. Gobal Financial Stability Notes. Spillover Notes. Staff Climate Notes. Staff Discussion Notes. Tax Law Technical Note. Technical Notes and Manuals. Official Reports and Documents. Annual Report of the Executive Board. Articles of Agreement. IMF Speeches.

Independent Evaluation Office Reports. Selected Decisions. Selected Legal and Institutional Papers Series. Summary Proceedings. IMF Research Bulletin. IMF Research Perspectives. Advanced search Help. Browse Topics Business and Economics. Archived Series. Previous Article Next Article. Author: Benedict J. Clements and Ian W. Parry 1. Download PDF Abstract Full Text Related Publications. Abstract Some government subsidies make sense, but often there are downsides Some government subsidies make sense, but often there are downsides Benedict J.

Impact on inequality But there are drawbacks. Download Figure Download figure as PowerPoint slide. Reform strategies Subsidy reform can be a tough sell because it often involves raising the prices of goods, such as gasoline or food, which immediately hits consumer pocketbooks. Subsidies that do not address market imperfections can distort prices. Same Series. Other IMF Content.