Re: Subsidies ...

From: (Jean-Francois Mezei)
Organization: DECUServe
Date:         21 Mar 96 02:38:04 
References:   1 2 3
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While I understand that in some cultures, the word subsidy is viewed as bad as
"rape" or "incest", the members of such cultures must accept the fact that
"subsidy" is not such a big sin elsewhere.

In the USA, the word SUBSIDY is tagged to many actions. Lets try to break them

-Direct investment with ownership shares.
  -Not any worse than private investment. A corporate entity (a government)
   invests its money in a venture that will bring back money and/or reduce
   the corporation's expenses and/or increase its revenus. For instance,
   for every job which is created as a result of that invesment, it costs
   the corporation (govt) less in unemployment benefits, and gets more revenus
   (taxes) from that employee and from the increased economic activity.
   Such an investment is similar to what parent corporations do when they
   invest in money loosing subsidiaries: tax breaks etc etc.

-Loan garantees
   -No money is exchanged. The government simply provides collateral to
    to private investors/banks and garantees to pay back in case the
    helped firm cannot make its payments.

-Actual loans.
   -The government then acts as a private banker to loan the money. The
    government uses its existing instruments (bonds, tax base etc) to
    get the money on behalf of the company. In the case f a government owned
    company, this is like the parent firm arranging for financing. I beleive
    that this is very common in Japan where conglomerates use their own banks
    to finance their own projects.

    When such a loan is payed pack, no subsidy has occured.
    If the interest payments were much lower than industry rates at the time,
    then you might consider that DIFFERENCE a subsidy, but not the loan itself.
    Furthermore, understand  that a government may be able to afford lower
    interest rates on its loans given to companies if the increased economic
    activity will result in higher revenus for the government.

-Seed money.
    While such money might be considered a subsidy when it comes from
    a government, how do you call it when a parent firm provides such
    a gift to a sibling company to start work on a project which may return
    lots of money later on ?

-Outright subsidy.
    -Is it to provide a bridge until the company can restructure ?
    -Is it to allow the company to hire more people ?
    -Is it because the company's economic activity is too important
     and the nation as a whole cannot afford to loose it ?
    -Or is it to make the company's products unfairly competitive ?

So, before you cry foul over Airbus subsidies, ask yourself if government money
is going to the end user (customer) to allow for unfair pricing, or if such
money is going to the local economy to create jobs etc. If the government money
is going to Airbus to cover inefficiencies resulting from a government mandate,
then you should view this as: Airbus has a contract with various governments to
spread economic activity over a few countries, as a result of this contract,
Airbus gets paid $x. This does not necessarily result in Airbus products being
unfairly priced.

If Boeing gets a tax break to locate its next plant in a certain state, is that
considered a subsidy ? Of course not, you would say that the state government
made a wise business decision of giving Boeing a special rate because of the
economic activity which will result in that state. I do not know if Boeing
itself has benefitted from such deals, but a LOT of american firms
have. Even canadian firms were lured to the USA with such incentives.