Friday, May 30, 2008

Should Governments Subsidise declining Industries?

During the great miner's strike of 1984, the combative leader of the National Union of Mineworkers, Arthur Scargill, claimed the government had a secret plan to let the coal mines close down. The government denied this. They claimed the strike was just a greedy claim by the miners for higher wages. However, 20 years later, Arthur Scargill has in one sense been proved right - the government did allow the coal mines to close down. An industry which once emplyed 500,000 has been allowed to die. But, it also raises the perennial question - Should governments intervene to support declining firms and declining industries?

From a political perspective it is easy to Present a convincing case about the hardship of firms closing down.
  1. If Factories close down, it will cause negative externalities to the rest of society. Firstly, unemployment will rise. This causes the government to spend more on unemployment benefits. It causes lower growth in the areas affected by the factory closure. Higher unemployment can also cause more social problems such as crime, vandalism and feelings of alienation. Unemployment also has a terrible personal cost to those affected.
  2. The effect of an industry closing down will be felt in particular areas much more than others. Whole villages and towns used to rely on an industry for employment and prosperity. If the mine closed down, unemployment would rise dramatically and effect all areas of the community. It is not just the miners who will be made unemployed; but, the shops and pubs who rely on miners purchasing power.
  3. If firms close down, then it reduces the number of firms in the industry. This reduces competition and increases the monopoly power of the existing firms. Therefore, this means in the future consumers could face higher prices and lower quality. However, they may close down because of greater global competition, therefore the markets will remain competitive and it is a mistake for the government to intervene.
In the face of mass unemployment how can the government sit back and allow the firms to close down?

How An Economist Would Respond

  1. If you subsidise declining industries you are merely delaying the inevitable.
  2. There is a very high cost to the taxpayer, which is often not made clear. The problem is that the cost to the taxpayers is a very small % of the tax burden so they will not make a political fuss. But, those threatened with unemployment will
  3. Subsidising declining industries may encourage inefficient firms to remain. A good example, is the UK car industry in the 60s and 70s, the UK car industry lost ground to more efficient firms in Germany and Japan. But, the government couldn't face seeing it's beloved car industry close down, so it felt compelled to support British Leyland. But, this government subsidy did nothing to turn the company around. The government then realised it had committed to supporting a loss making firm and it proved even more difficult to extracate itself from the position.
  4. Change is inevitable in a modern economy. There was a time when the coal mines employed 500,000 people; now it is next to nothing. This doesn't mean all these people are unemployed; new jobs are created in supermarkets, computers. If we didn't embrace change, we would still all be living on a farm.

Do economists have no heart?

It is easy to sit back in your ivory tower and talk about the inevitability of change in a modern capitalist economy; but, that is no comfort for the workers who have to experience the unemployment and poverty. It is this attitude that gives capitalism a bad name. So what can be done?

The answer is that the government can intervene to overcome market failure. The government will not try to prop up a declining industry; but, what it can do is make the change to new industries easier. The government can help to regenerate the areas affected by the closure. The government can give training schemes to help the unemployed back to work. It may not happen straight away; but, if you visit former mining communities in the north east and south Wales there has been a regeneration of these areas. Proof that change can be managed, even if it is painful in the short term.

In theory, the unemployed should be able to move to new expanding industries. However, this may be difficult because of geographical immobilities (difficult for workers to move to new areas) and occupational immobilities. The government could intervene to help workers move areas and also learn new skills. This helps to overcome the market failures without subsidising a declining industry.

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