19 Jul 2012

Lies, damned lies and subsidies

In response (and agreement with) Jeff Michael's useful discussion of the costs and benefits of the "Delta conveyance" [PDF] I clarified the different ways that government can deliver a subsidy that benefits special interests at a cost to the rest of the population, namely:
  1. Financing a project with a government guarantee to get a lower interest rate
  2. Financing a project with cheap money FROM the government
  3. Allowing a beneficiary to pay a share of costs that's less than their benefits, e.g, farmers paying 25% of the cost of the conveyance but taking 75% of the water.
  4. Lowering project costs, via "loans" of personnel or equipment, access to "surplus" inputs, acquisition of land via eminent domain, etc.
  5. More?
Bottom Line: Special interests LOVE government project not because government is good at building dams, roads, etc., but because they do not have to pay the cost of what they get.*
* The same is true about international aid. The "needy" participate not because donors are really good at delivering what they need, but because donors are giving them stuff for free.

H/T to RM


The Pasadena Pundit said...

he California Central Valley Water Project was built by the Bureau of Reclamation and farmers have to repay the original $1.3 billion cost. Small family farmers with only 960-acres or 1.2 square miles of farmland do not have to pay interest on their payments for the CVP. This forgone interest is the only subsidy they receive. Large corporate farms must pay principal and interest. It is diversions of water to the environment that has delayed the payback of the cost of the CVP. Farmers can fish, but fish can't farm. Cities do get CVP water but they pay full cost for it.

David Zetland said...

@PP -- So, yes, farmers are subsidized, and the "foregone interest" is pretty huge, since it's been accruing since the 1930s. Oh, and then there's the "opportunity cost subsidy" of special access for farmers to that water, which not only defies any idea of market allocation, but establishes them as welfare recipients.

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