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ELEMENT 1.9
Production of goods and services people value, not just jobs, provides the source of high
living standards.
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plow under portions of their cotton, corn, wheat, and other crops. Potato farmers were paid to
spray their potatoes with dye so they would be unfit for human consumption. Healthy cattle,
sheep, and pigs were slaughtered and buried in mass graves in order to keep them off the
market. Six million baby pigs were killed under the AAA in 1933 alone. The Supreme Court
declared the act unconstitutional in 1936, but not before it had kept millions of valuable
agricultural products from American consumers. Moreover, under modified forms of the Act,
even today the United States government continues to pay various farmers to limit their
production. While the political demands of those benefiting from the policies are
understandable, such programs destroy valuable resources, making the nation poorer.
The United States is not alone in responding to political pressure to “support” farmers
at an enormous cost to taxpayers and consumers. The European Union’s “Common
Agricultural Policy” is one of the largest and most controversial parts of the E.U.’s budget.
Video:
Fields of Gold: Lifting the Veil on Europe’s Farm Subsidies
Farming is not the only industry targeted, either. In the United States, the 2009 “Cash
for Clunkers” program provides another example of politicians attempting to promote
prosperity by destroying productive assets—used cars in this case. Under the Cash for
Clunkers program, car dealers were paid between $3,500 and $4,500 to destroy the older cars
that were traded in for a new automobile. Dealers were required to ruin the car engines with a
sodium silicate solution, then smash them and send them to the junkyard, assuring that not
even the parts would be available for future use. The proponents of this program argued that it
would stimulate recovery by inducing people to buy new cars. But the new cars cost more than
used ones, and the price of used ones increased because of the decline in supply. As a result,
consumers spent more on automobiles (both new and used) and therefore less was available for
spending on other items. Thus, the Cash for Clunkers program failed to stimulate total demand.
In essence, taxpayers provided $3 billion in subsidies for new car purchases, while destroying
approximately 700,000 used cars valued at about $2 billion. Those who could afford new cars
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were subsidized, while poor people who depend on used cars were punished. And new car
sales plunged when the program expired. Germany introduced its own scrappage program,
which has been estimated to cost taxpayers over $7 billion, more than twice as much as in the
United States.
Similar programs existed in many East European countries, including Russia and
Slovakia. In Romania under the program called “Rabla” (the wreck) over 525,000 cars, eight
years or more in age, were scrapped for vouchers worth up to €1,500. The program operated
between 2005 and 2015, and an individual could turn in up to three older cars for vouchers to
be applied towards new cars.
If destroying automobiles is a good idea, why not require owners to destroy their
automobile every year? Think of all of the new-car sales this would generate. All of this is
unsound economics. You may be able to help specific producers by increasing the scarcity of
their products, but you cannot make the general populace better off by destroying marketable
goods with consumption value.
A more subtle form of destruction involves government actions that increase the
opportunity cost of obtaining various goods. Countries worldwide spend $30 billion a year on
fisheries subsidies, 60% of which directly encourages unsustainable, destructive, or even
illegal practices. The resulting market distortion is a major factor behind the chronic
mismanagement of the world’s fisheries, which the World Bank calculates to have cost the
global economy $83 billion in 2012. Furthermore, rich economies (in particular Japan, the
United States, France, and Spain), along with China and South Korea, account for 70% of
global fisheries subsidies. These transfers leave thousands of fishing-dependent communities
struggling to compete with subsidized rivals and threaten the food security of millions of
people as industrial fleets from distant lands deplete their oceanic stocks. West Africa, where
fishing can be a matter of life and death for the local people, is being particularly hard hit.
Since the 1990s, when foreign vessels, primarily from the E.U. and China, began to fish on an
industrial scale off its shores, it has become impossible for many local fishers to make a living
or feed their families.
Politicians and proponents of government spending projects are fond of boasting about
the jobs created by their spending programs and they exaggerate program benefits. This makes
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economic literacy particularly important. While employment is often used as a means to create
wealth, we must remember that it is not simply more jobs that improve our economic well-
being but rather jobs that produce goods and services people value. When that elementary fact
is forgotten, people are often misled into acceptance of programs that reduce wealth rather than
create it.
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