Should the Government Issue Subsidies

In the late seventies, Chrysler Corporation was facing bankruptcy during hard economic times. While Lee Iacocca worked hard to help Ford Motor Company succeed, his ideas and skills were not enough to keep Chrysler afloat. During these hard times, Iacocca knew that he needed help, and the only place to go was to the U.S. Government. While it seemed a long-shot, Iacocca explained to Congress that “if Chrysler collapsed it would cost the country 2.75 billion dollars alone in unemployment benefits” (Cole, 2004, Method section, para 20). In addition, Iacocca decreased management salaries considerably (including his own for $1 year) and went to work. With the government subsidy, Chrysler initiated a new, aggressive campaign and “…paid back the loans a full seven years ahead of their due date” (Cole, 2004, Method section, para 25). Chrysler – and Iacocca’s – success is an example of how government subsidies, when managed properly, are a positive action in the government.

WHAT ARE GOVERNMENT SUBSIDIES

Subsidies are, in its most basic terms, funds provided by the government or other party to businesses to supplement construction or operating costs. There are several different types of subsidies issued by the Government. Among them:

• Loans and Loan Guarantees: These can be short- or long-term and must be paid back. The interest rates are dependent on the borrower’s creditworthiness.

• Debt Forgiveness: The money owed by the borrower is forgiven or deemed a non-recurring subsidy.

• Tax Forgiveness or Deferral: Tax payments are either less than owed or deferred.

• Provision of Goods and Services: The government provides goods and services to a company for less compensation than valued.

These and other types of subsidies can be used for health care, education, and businesses, as well as other industries in times of hardship.

CASE STUDY: AGRICULTURAL SUBSIDIES

The focus on the need for agricultural subsidies was never more evident than in 2004 when 4 successive hurricanes hit Florida. The hurricanes brought widespread devastation to Florida’s second most profitable industry behind tourism. Before the hurricanes hit, “farm businesses’ net cash income [was] forecast to rise another 9 percent from 2003 to 2004” (Agricultural Income and Finance Outlook, 2004).

However, the natural disasters severely hurt this projection.

Government funding for the hurricane impacted agriculture industry is critical because “some of these industries will suffer the economic impacts for years to come” (Compton, 2004, Method section, para 5). For example, new trees need to be planted and nurseries and structures need to be rebuilt before operations can resume. As Florida Agriculture Commissioner Charles H. Bronson noted, “These funds will enable our growers to get back on their feet, replant their crops, and get back to the business of feeding Americans and consumers around the world.”

To demonstrate the necessity of subsidies, we will look at the impact on Dade County, an area devastated by the hurricanes, and what will happen if the subsidies are not provided. Based on data from the 1997-98 season, “agriculture's total economic impact on Miami-Dade County was estimated to be approximately $1.08 billion” (Degner & Moss, 2004, Method section, para 3). In addition, “agriculture created an estimated 14,795 jobs in Miami-Dade County for 1998” (Degner & Moss, 2004, Method section, para 5). If we assume that these figures are comparable to figures today, it is evident that Dade County’s economic performance depends on the success of its agriculture industry. When the industry is not returning profitable results, its effects are far-reaching. To illustrate, we can analyze what will happen if Dade County farmers lose their businesses or their profits decrease. The first result will be a loss of jobs; employees on the farms will not have sufficient work and employers will not have the income to pay them. If even half of the jobs based on the 1998 figures are lost, the county is looking at over 7,000 unemployed workers. Not only does this mean an increase in unemployment benefits, but we can also assume that these workers do not have the necessary skills to change careers, causing the structural unemployment rate to rise.

In addition, lost jobs or decreases in salaries will result in less goods and services being purchased inside and outside the farming industry. For example, farmers who can no longer operate at normal levels will not be able