3.3.7.1 Local Interventions to Support an Industry or Region

(This is a current page, from the Patterns of Power Edition 3 book contents.  An archived copy of this page is held at http://www.patternsofpower.org/edition03/3371.htm)

There are several reasons why a government might wish to support a particular industry or region:

  • In a democracy, politicians may offer economic dispensations for chosen regions or industries, in an attempt to win votes at the next election – as described, for example, in an article entitled What are some examples of “pork barrel politics” in the United States?.
  • If an industry or region is experiencing job losses, for whatever reason, governments may wish to reduce suffering by providing support. This may be a temporary expedient, whilst alternative employment is found.
  • A government may decide that a particular sector of the economy is strategically important, for example long-term economic benefit or national security.

There are several techniques that governments can use:

  • Existing companies can be offered subsidies or tax breaks, to protect jobs. Other companies, though, might suffer and the wider population may end up paying a high price without achieving a net gain in employment.[1]
  • Incentives, in the form of grants or tax concessions, can be offered for companies to set up activities in a specific area.
  • A government can support a fledgling industry, or protect an existing one, by placing contracts for products or research.
  • An industry can be protected by imposing tariffs on imports of comparable products or services, though that puts up the prices for everybody and may put other jobs at risk.[2] As will be seen towards the end of this chapter (3.5.4.5) though, new tariffs are subject to World Trade Organisation (WTO) rules and they have other disadvantages.
  • National governments can pay for regional infrastructure projects that might not benefit people in other areas.
  • Governments may introduce regulations which purport to be for the benefit of the public but are drafted in such a way that a specific group of people benefits at the expense of the wider public – as described, for example, by Russell Roberts in an article entitled Pigs Don’t Fly.
  • National governments can choose to locate some of their activities in areas of high unemployment, as was the case when the United Kingdom Passport Office and its Vehicle Licensing Agency were moved to southern Wales where jobs had been lost in coalmining.

These measures offer the politicians an advantage that is localised.   With the exception of the last example, these actions are at the expense of everyone else within the economy of that country – either by increasing consumer prices or by increasing taxes – unless they reduce unemployment, in which case they increase tax revenues and reduce benefit payments.

If one group in a society is protected from global economic fluctuations, the unprotected people in that society experience proportionally greater fluctuations.[3]

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[1] Lawrence Lessig’s book, Republic, Lost, gives a number of examples of subsidies resulting in overall adverse economic effects (but benefited the companies receiving the subsidies).  In chapter 4, for example, he describes how sugar subsidies have put up prices and have had adverse effects on health.

Donald Boudreaux also used the example of sugar subsidies to explain how these hugely benefited producers at the expense of the rest of society, in his essay entitled Why Government Fails and Why Ideas Matter; this was published at the end of 2014 and was available in April 2018 at http://www.cato.org/policy-report/novemberdecember-2014/why-governments-fail-why-ideas-matter.

[2] For example, America has 57 workers in industries which use steel for every one worker employed in steel-making.  The steel-using industries would be rendered less competitive by tariffs on imported steel and might therefore be forced to shed more jobs than had been temporarily saved in the steel-making industry.  This point was made in an article entitled Mercantilism Lives by Charles L.  Hooper, which was published on 4 April 2011 and was available in April 2018 in the Library of Economics and Liberty at http://www.econlib.org/library/Columns/y2011/Hoopermercantilism.html.  The same article makes further points about the disadvantages of protectionism or mercantilism.

[3] Hayek made this point in strong terms in The Road to Serfdom, pp.  153-154.