Wednesday, 18 June 2014

Small Business Subsidy Medicine is Poison

My teenage neighbour knows that good GCSE grades are better than bad ones. She has an idea that will help all students at exam time. Introduce a minimum grade level of C, so that no student, however bad, can be sullied with D, E and F grades as they enter the job market.

Only joking. My teenage neighbour is not that foolish. Apparently, though, if you replace GCSE grades with business protocols then some party leaders are that foolish. Green Party leader Natalie Bennett is particularly big on small business subsidies, as I've often heard her mention on TV. Ed Miliband feels the same – he’s all for propping up small businesses with tax breaks and surreptitious subsidies. In fact, a good rule of thumb is that if an idea is foolishly inimical to personal freedom and the success of market forces, Ed Miliband is pretty sure to support it.

Most teenagers could work out that misleading students, parents, exam boards and prospective employers about pupils' scholastic abilities won't help anyone in the long run, because artificially altering GCSE grades to Cs and above gives a distorted picture of academic ability and employability.

Why can't party leaders on the left do the same when the case is small business subsidies? The answer, I suspect, is simple: competing parties are not primarily interested in logic, they are interested in securing votes - in this case, the votes of people that think too lazily to realise that small business subsidies are no better than GCSE grade subsidies - as both distort the market in which they operate.

Here's some advice for such politicians. Small business subsidies amount to the government taking taxpayers money and giving it to businesses that may or may not be viable enough to survive in a competitive market dictated by supply and demand. If taxpayers wouldn't voluntarily spend their money in these businesses then they are being artificially propped up against the majority of people's will. If taxpayers would voluntarily spend their money in these businesses then no subsidies are needed. The success of a business is not measured by the State's ability to prop it up, it is measured by whether it generates enough profit in a supply and demand market.

If demand for Jean's Knitwear falls, then prices may fall to increase demand. If Jean’s Knitwear can no longer generate a profit to live, the signals are there that her business is inefficient or that her products are low in demand. Prices in a free market are the signals that make what is being supplied adjust to the demand of those supplies. Alas, prices no longer provide this signal when politicians interfere with subsidies or controls - they stop prices exhibiting changes in the supply or demand for goods and services.

It's easy to see why small business subsidies are popular with voters. They make any party that endorses them seem caring, and mindful of struggling companies, as well as giving the impression of being supporters of the underdog against the often maligned multi-national corporations. In fact, I'd wager that most of the public like the sound of small business subsidies - so public support for them is a bit like pushing on an open electoral door. But like most things that sound too good to be true, the medicine is poison, because nothing comes for free.

The visible benefits are obvious - the beneficiaries are small businesses. But the losers are taxpayers who are having their money spent in places in which they wouldn't do so voluntarily. But more than that, the other losers - the invisible losers - are those missing out on opportunities to enter the market. Thanks to subsidies, Jean's Knitwear may now be staying afloat - but as well as taxpayer costs, the cost of such subsidies is the forgone opportunities for other suppliers of goods and services trying to enter the market or stay afloat on their own merit. It's a shame when small businesses go under. But you cannot fix the problem by distorting price signals and forcing taxpayers to support them as if they were successful businesses. Only an idiot would do that; well...that is, an idiot, or someone who saw a popularity-winning policy and flaunted it to secure votes.

Regretfully, this isn’t just a problem of the left anymore: there aren't currently any serious mainstream parties that endorse the sentiments of personal freedom and the full qualities of free market capitalism. Even Lord Saatchi, who is pro-market freedom, and is certainly no idiot, proffered a proposal this week to abolish corporation tax only to small businesses - which, as I argue in this Blog doesn't take it far enough. Be warned; expect competing parties to try to secure votes in the run up to next year's election by seducing would-be voters with all kinds of attractive offers for small businesses - offers that would be paid for by your money. Don't be fooled by any of it, though - the medicine is poison.     

* Photos courtesy of