Subsidies Corrupt Economies, China, A Cautionary Tale

Authored by Bruce Wilds via the Advancing Time blog,

China’s economy is in trouble. After seeing a video claiming much of China’s Electric Vehicle industry was built on subsidies that are now gone, I’m forced to ponder the legacy of these policies. It showed a factory in Chongqing, China, where a huge number of clean energy vans sit abandoned, covered in a thick layer of dust. This rendered their original appearances unrecognizable. Recently, aerial footage has also surfaced of vast grassy fields in Hangzhou littered with thousands of clean energy vehicles. This brings into question how this occurred.

Subsidies are more direct and worse than creating incentives or giving encouragement. Subsidies are a transfer of wealth. Without a doubt, many “false booms” are the result of scams created through subsidies. While it could be argued subsidies have moved the production and innovation in the EV industry forward, it brings up other issues.  A huge question is whether this has created a situation where other governments have strayed down the same wrong path in an effort to spur growth. This possibility should not be discounted. Consider for a moment that maybe EVs are not the answer to a more sustainable world.

The immense waste and the environmental problems and pollution resulting from improperly placed subsidies and regulations should be addressed. The big problem China now faces is that advanced economies are complex. When they start to shut down reversing the trend becomes difficult due to contagion. It is hard to build a machine when even a few parts are unavailable. This means the trend in China will not be easy to reverse.

China is now seeing the result of subsidies backfiring and the toll of reverse leverage is devastating both investors and its economy. After looking at the mess China has made out of building ghost cities, we must turn our attention to population control and demographics. China’s poorly thought-out policies on these subjects feed into its current problems. The ramifications we are seeing play out are often referred to as unintended consequences. This is something we see far too much of.

China can no longer hide its growing problem of misallocating capital. This is coming back to haunt them. This is why many economists tout capitalism as the best economic system, it has proven to be more responsive to demand than planned economies which tend to go off track. The magnitude of China’s problems is seen when viewing an ABC News In-depth piece covering the demolition of a huge number of large unfinished residential buildings in China.  This has revealed two issues, first, China was building residential buildings for “expanding future generations” that simply do not exist. The second was this resulted in rampant speculation driving prices through the roof. Now those prices are plummeting.

So, let’s circle back to the question of whether this has created a situation where other governments have strayed down the same wrong path. Just because another government does something does not mean it would be good for us. Big governments are stupid and big companies are predatory. The thing they have in common is both want more control and power. In truth, we are the underdog in this ongoing struggle for control of our lives. This results in subsidies that tend to corrupt the direction capitalism takes if left alone. Unfortunately, the government is influenced by big company lobbyists that bend regulations strongly in their favor often at the expense of society at large. 

The energy sector and important decisions about our future have been hijacked by this trend. An example of how twisted things have become can be seen on America’s roadways. Today millions of drivers zip down the road, the only occupant in oversized four-door trucks that get poor gas mileage. This is the answer lobbyists for the big auto companies and politicians arrived at to sidestep America’s fuel efficiency standards enacted to save gas. Still, considering the political climate, China is crazy if it thinks the EU or America will throw open their borders to import Chinese-made cars. Both have their own auto industries to protect. 

Subsidies have led to many preposterous decisions, these include replacing all our current vehicles with EVs. It has resulted in America dropping tariffs on solar panels from China and spending billions of taxpayer dollars on them with the goal of rapidly reaching clean energy goals. even the rise of Amazon and its negative impact on the environment with its delivery to your door and high rate of returns or simply throw-away mentality falls into this category. Without subsidies such as the USPS delivering at a discount, even on Sundays and holidays, Amazon would not have become the giant force and destroyer of businesses it is today.

The energy sector and important decisions about our future have been hijacked by subsidies and regulations that have little basis. This trend does not bode well for creating a more productive future. China is growing proof that once a deep-seated fear of the future becomes ingrained in society people lose faith in the government’s ability to turn things around. this is a lesson America learned during the Great Depression. One of the answers to forming better policies that benefit society is not to subsidize the projects of big businesses and politicians at the expense of organically grown solutions to our problems.