30 May 2006

Why do I always go on about perverse subsidies?

Here in the UK where the role of government in the economy is ever-rising, and where in regions like Wales it accounts for 66 per cent of economic activity, it's worth asking whether this constitutes a problem. I don't see big government as a problem in itself. But when big government becomes remote government I think that reduces accountability and responsiveness. It also makes for inefficiency. Actually though it's quite difficult to prove how inefficient government is at spending our money. Relying on particular narrow statistics, such as the number of cancer survivors, or exam results, is not enough. Perhaps we are simply getting better at diagnosing cancer? Or perhaps poorer exam results are the result of more people staying on for education and are anyway the best that can be done given the multitude of other variables that are acting to depress aptitude and ability?

More robust indicators of poor government performance would be deteriorating broad poverty or health indicators but these also have difficulties. So perhaps the most compelling evidence that all is not as it should are perverse subsidies: not just their size but also their persistence. Perverse subsidies may be the smoking gun: proof that even the governments in the rich democratic countries can be inefficient and corrupt. Perverse subsidies are subsidies that are economically nonsense and socially inequitable and environmentally disastrous. Europe's Common Agricultural Policy is one such. Because of it, taxpayers and consumers subsidise the richest landowners and corporations and have been doing so for decades after it became widely known just what was going on. Perverse subsidies in just four sectors - agriculture, water, energy and transport - were estimated by the Earth Council in 1997 to amount to between $700-900 billion. This is an enormous sum in itself but also an indicator, in the absence of other indisputable evidence, that the rest of government spending may be similarly mismanaged.

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