IRANIANS are rioting over the rising cost of petrol, and it’s getting worse. The whole thing began when the Iranian government turned off oil subsidies for consumers, which of course caused oil prices to spike up, which in turn caused widespread pain for Iranian consumers. And that pain has turned into violence.
Just how much pain? According to the International Monetary Fund (IMF), four member Iranian households received ’$4,000 a year in subsidies for oil and natural gas.’ Now, imagine yourself losing that much money? Ouch!
As of the writing of this article, at least a hundred Iranians have been killed in the riots, and this has sparked a lot of international attention. Despite deaths and damages, however, it’s unlikely that the rioters could actually threaten the ruling government. Iran has too many soldiers, many of whom are still relatively loyal to the country’s leaders. I could be wrong but only time will tell.
Politics aside, however, the riots is a good illustration of why consumption subsidies are a bad idea. Now, I’m not a free-marketer, but subsidies distort the cost of goods, services and capital. They can also shape (or even distort) public opinion by making people think that subsidies are supposed to be free or, worse, a right.
When the riots in Iran began, part of their rage came from the feeling that they were being deprived of something that belonged to them. And of course, subsidies are not a right. They’re government programs that should only be used in certain circumstances, such as promoting infant industries, protecting existing industries from unfair foreign trade and stimulating production of certain commodities. They can also be used as temporary fixes for serious economic problems.
In such situations (and assuming that the industries being subsidized are not inefficient), the subsidies are good because they are being used as to protect productive capital and economic activity. They also help produce value by stimulating commerce and industry (either from a slump or from stagnation).
On the other hand, when subsidies are used to shore up consumption, they can lead to all kinds of potential risks and dangers. And because capital is being invested into things which do not produce jobs or economic activity, they effectively become government handouts.
But wait a minute. You might argue that subsidizing consumption is no different from social welfare programs, and yes, there’s some truth to that. Welfare services do subsidize certain forms of consumption, but they are also connected to certain rights, whereas subsidies are not. There is, for example, a person’s right to life and health, and there are welfare services which are designed to ensure that he or she gets it.
In contrast, most consumption-based subsidies are designed to make specific commodities cheaper. And of course, let’s not forget that they aren’t free either. They only divert capital from one area of the economy and redistribute them to another. This process can be justified in serious situations – such as during intense droughts or famines, for example (subsidies for food) – but as far as consumption goes, it’s best to just let the free market take its course. When you subsidize the consumption of certain commodities, and one day you say, ‘Sorry folks. That’s it. No more.’ You get riots like those in Iran right now./PN
