The Subsidy Battle

What is the truth about subsidies?

The U.S. Senate sent a $6.3 billion Lend-Lease appropriation to the White House last week. In it was a clause saying that none of the funds could be used to pay subsidies on domestic agricultural products. Not even the wildest-eyed proponent of subsidies had thought of using Lend-Lease funds for such a purpose, but the Congress took no chances: the farm bloc, in cahoots with both big & little business for once, is lined up in a solid phalanx against subsidies. The Administration and Labor are solidly for them. This week Franklin Roosevelt indicated he wanted $1 1/2 to $2 billions in subsidies for price rollbacks.

The Pros. The pro-subsidy argument is short & sweet. When there is plenty of money but a scarcity of goods, prices will go through the roof unless controls are applied. The controls must not cut down production or squeeze too many people out of business. But when selling prices are rigid, while costs rise, businessmen are squeezed hard. Then, argue the subsidizers, the only way to prevent price inflation, without interfering with production, is for the Government to pay the difference between cost (plus a reasonable profit) and selling price.

The Government is already paying out some $700 millions a year in subsidies to meet special situations. Examples: to encourage copper production; to pay the excess cost of moving oil east by rail instead of by sea. The present big squeeze results from the pressure that skyrocketing wages and farm prices have put on the cost of domestic goods at the manufacturing and distributing level.

The Cons. The anti-subsidizers' position is a complex mixture of selfishness ("a higher price for me would only add .0001% to the cost of living"); of sound economics; and of the ancient fear of free men who see the bogey of Federal controls now expanded in new areas. The bogeyman argument has some basis: when Government uses the taxpayers' money to subsidize private industry, it has a moral obligation to check on whether the money is squandered. Sample problem that then arises: if the Government subsidizes General Foods, would the taxpayers' money be wasted if General Foods advertises Post Toasties? Would the Government then have the right to interfere in the management of General Foods?

The economic arguments against widespread subsidies are more cogent:

> Subsidies are themselves inflationary. They keep prices down artificially at a time when the average consumer already has more money than he can spend, as he buys up what goods there are. As ex-President Herbert Hoover said last week: so long as excess money is not drained off, subsidies "are like cleaning a room by sweeping the dirt under the bed."

> Subsidies discourage initiative because they remove the powerful incentive that any businessman (or farmer) has to keep going somehow. )-- Subsidies breed more' subsidies. Said Albert S. Goss, getting his potent National Grange on the anti-subsidy record: "Having once established subsidies how are we ever going to get rid of them?" Others extended this point: as subsidies are applied to more & more products, consumers will save money by paying fixed prices, but this saving will be canceled by the higher taxes they must then pay.

> The argument that widespread U.S. subsidies will work because Britain and Canada have used them to good advantage* overlooks the fact that the U.S. situation differs widely from the other two: 1) Britain and Canada have both concentrated on a few strategic cost-of-living items; the U.S. is trying to maintain a blanket ceiling on all prices; 2) in England, most cost-of-living items are imported, which makes Government control much simpler and cheaper; 3) in both Canada and Britain wage control has been facturers will make no more than the prewar number of cotton and rayon blends.

There is plenty of cotton--though supplies of cotton textiles are declining because demands have been greater and manpower less. Rayon should be scarcer next year; military demands for superduty rayon cord for synthetic tires will take an increasing proportion of the supply.

*Last week the Wall Street Journal estimated that the U.S. cost of living had finally caught up with the British, which stopped rising two years ago. Both indexes now stand 28% above the August 1939 level.

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