In free-market capitalism, just say no to subsidies

OPINION:

Free-market capitalism is the most democratic way to organize an economy.

In a free market, consumers vote every day with every dollar they spend on what they want the economy to produce, who will produce it and what they’re willing to pay for it. The daily prices in this never-ending plebiscite also convey vast information regarding every product, including the scarcity or abundance of the resources in it, the labor conditions that produced it and the systems that distributed it.

It is a perfect system that requires only that government protect the freedom of a willing seller and a willing buyer to make an exchange according to their own best judgment. No force is required because both act in their own interest. The price signals of that simple exchange, multiplied infinitely every day, guide the labor and resources of an economy to their highest and best use, according to every person’s interests, needs and judgment.

Despite this, politicians love to interfere with this perfect mechanism through various tools designed to “direct” the economy — that is, to replace the judgment of individual consumers and producers with the judgment of politicians.

One of the most insidious and self-destructive ways they do this is by subsidizing the things they think consumers should buy to make those things more attractive. This stuffs the economy’s ballot box, diverting resources from their highest and best economic use for consumers to the highest and best political use for politicians. Worse, it corrupts the accurate price signals essential for consumers to make rational decisions over allocating their own resources and thus directing overall economic output.

Insurance, electric cars, mass transit, sugar, milk, solar panels, airline tickets, housing, tuition, health care, film production, green energy — it is hard to find a sector of the economy that isn’t rife with subsidies. Let’s not forget the infinite subsidies that saturate our tax code.

True, these subsidies make favored products cheaper, and who can begrudge cheaper health care, tuition or housing? But that’s an illusion.

The reality is that sellers will always accept subsidies by raising their prices accordingly. Those receiving the subsidies are somewhat better off, and everyone else is much worse. As subsidies artificially inflate prices, more subsidies are required to ameliorate their effect in a continuing spiral.

It’s no coincidence that prices in heavily subsidized sectors such as health care, housing and tuition are rising faster than the underlying inflation rate. Provide first-time homebuyers with a $25,000 subsidy, and sellers accept that windfall by raising their prices on the housing stock.

Subsidies cost hundreds of billions of dollars and inflate the prices of the things being subsidized. They also misallocate resources and misdirect consumer decisions.

Insurance, for example, is how markets assign a dollar value to risk. Building a house in a flood zone is risky, and high insurance premiums reflect that. Subsidized insurance rates invite people to take risks that high premiums would otherwise warn them against.

Accurate price signals are absolutely essential for consumers to make rational decisions as they vote every day on what the economy should produce and are just as essential for producers to know what consumer demands they most need to fulfill.

Subsidies are so deeply ingrained in the economy that getting rid of them all seems a fool’s errand. Every subsidy has a constituency — and the bigger the subsidy, the more powerful the constituency. But budget writers grappling with the largest federal debt in history and with an economy operating well below its potential should be looking for every way to reduce, eliminate or reform subsidies or substitute for them other mechanisms that can serve the same societal aims without doing so much damage.

So here is a modest proposal to Elon Musk and Vivek Ramaswamy: To balance the budget and improve the economy, just say no to subsidies. Not only will that save hundreds of billions of taxpayer dollars, it will reduce the overall cost of the things being subsidized and reinvigorate the economy by restoring the flow of capital to its most productive use.

• Tom McClintock represents California’s 5th Congressional District.