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The Subsidy Society The Subsidy Society
by Bouke S. Nagel
2012-11-28 11:40:56
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Over the past years many books, movies and documentaries appeared about the financial crisis and the state of contemporary society in the West. I am thinking of writers and commentators like Nassim Nicholas Taleb, Michael Lewis and Jim Rogers as well as movies and documentaries such as The Company Men, Wall Street II, Margin Call, Inside Job and Quants. In this article I would like to attempt to mix all these sources together into a fictional story with some twists of my own.

A long time ago one particular region in our world housed societies that were considered the wealthiest countries in human history. Good bread costs 50 cents in these societies but most people buy a cheaper one of 25 cents. This situation poses an opportunity for politicians who propose a subsidy on bread so that people are able to buy expensive bread. The proposal is accepted in parliament and politicians assure their reelection with public money. Everybody is happy.

People in the bakery industry however are not. The bakers are witness to the state giving “free” money to their customers (their own tax money). So bakers decide to take some of that money back for themselves by raising the price of bread. Now workers are confronted with the state providing welfare for their bosses and customers. Therefore, they demand a raise as well. Unions threaten with strikes and the situation becomes pretty tense in the bakery industry.

Society is rich beyond imagination and politicians decide to spend even more money to deal with this problem. The state raises the subsidies. Customers are able to buy good quality bread, bakers increase their prices and workers get better salaries. The price of bread is now at 68 cents. It changes something within the industry because bakers and unions realize that politicians are likely to guarantee a substantial percentage of their revenues and salaries.

By providing subsidies politicians effectively take an interest in the bakery industry which means that bakers and their workers shift their focus to the state at the expense of their customers. Bakers can therefore afford to lose high-maintenance customers and the quality of products and services starts to decline in the subsequent years. This opens a window of opportunity for foreign competitors but wealthy societies don’t care about that.

What would you do if the state guarantees you 10 million dollars/euros per annum? The smart thing to do is to take some of that money, let’s say 3 million, to hire the best lobbyists, lawyers, marketers and communication experts there are. These specialists can help you to convince politicians that the state needs to keep on providing subsidies in the years to come. And why not use that money to create even better opportunities for yourself?

And that is what the bakers and their employees do. The bakers influence politicians to keep the subsidies flowing. Bakers and unions both demand trade barriers. Unions furthermore know how to pressure politicians in order to ensure job protection legislation, high-wages for 28-hour work weeks and a retirement age at 56. In several countries bakers and unions even start taking over political parties which holds the risk for a political deadlock someday. But society is rich so who cares?

Then, one day, some super smart consultant comes up with an idea. The risk of operating a bakery in a subsidized market is virtually zero. What you need to do, is to buy each other out and merge the remaining bakeries into bigger units. This enables bakeries to operate with higher efficiency and less employees which coincidentally diminishes the power of unions. The bakers welcome this idea immediately and consultants make tons of money with so-called “mergers and acquisitions”.                                                               

At this point bakeries stop being bakeries but transform into global institutions with tens of thousands of employees working worldwide. This attracts many people who would like to work for a multinational or experience an adventurous life as an expat somewhere in Hong Kong, Zürich or London. Besides, working for a bakery isn’t that hard. The pay is more than excellent and the only thing you have to do is show up at the bakery at impossible hours.

Young people notice that working for a global bakery industry is a pretty safe bet for one’s future. So one day, the best and brightest of a whole generation opt for a career as a baker. A generation that had the talent to find a cure for cancer, break the frontiers of science or develop the products of tomorrow chooses to spend its time, energy and talent on the concept of bread. This changes the industry again beyond anyone’s wildest imagination.

The market is flooded with new kinds of bread based on complex chemical formulas that nobody understands. Even bakers who entered the industry in the old days do not understand what these geek kids are doing. Government officials also have no clue what is happening within bakeries. The quantum science nerds transform the bread market completely with exotic products and lobbyists working for the bakery industry assist in keeping it legal.

Meanwhile society is getting poorer. The bakery industry is still getting subsidized and it practically eaten itself alive during the period of mergers and acquisitions. The revenues in this sector are therefore imaginary. Furthermore, industries with “real” revenues are dealing with pressure from new foreign competitors. GDP, corrected for the imaginary bakery industry revenues, drops and thousands of jobs disappear over several decades. The middle class is under increasing pressure.

People start buying less bread so one of the bakeries gets into trouble. It faces bankruptcy and that sends a shockwave throughout the entire industry. Bakers however decide to send out their lawyers and marketers to threaten politicians. If one of the bakeries falls, all of the bakeries will fall. And that means no bread for no one anymore! Some politicians cave in. Others are offered lucrative jobs after their terms expire. A temporary extra subsidy is granted which creates a precedent.

The next twenty years or so the bakery industry is “flourishing” again. The bakers invent something new. It is called a bonus. If toddlers are rewarded with a sticker for going to the toilet then bakers should receive a bonus for showing up at the office. Society on the other hand is still getting poorer because the products that should have been developed by those smart kids working in the bakery industry are not there. Even more new competitors emerge on world markets but nobody cares.

Several bakeries start selling rotten bread to other bakeries in the world. The trick is to make rotten bread look as if it is wholesome. The quantum geeks in the bakery industry perfected this trick to such an extent that after a few years nobody knows anymore whether bread is actually good or bad. It seems that decades of “free” money resulted in the bakery industry to forget its own principles of making bread! So now the whole market threatens to collapse and the bakers beg the state for help.

This time politicians take drastic action and buy all the bread they can find in the country. It is called a “bailout”. Everyone assumes that the situation will return to normal. So shortly after the bailout, bakers start giving themselves bonuses again. Unfortunately, rotten bread keeps popping up everywhere and even within the industry nobody knows who to trust anymore. The state is forced to run the market itself in order to avoid collapse but in doing so needs to lend huge sums of money.

There is a big problem. Over the past decades foreign competitors slowly but steadily increased their manufacture capability. Subsidy societies facilitated this development by selling their factories to foreign countries. These new or “emerging markets” are becoming increasingly wealthy by selling produced goods. A decrease in creative capability however means less income for subsidy states because government funded industries cannot provide income to the state by taxes.

Subsidy societies are therefore slowly but surely losing their financial- or fiscal footing. This affects investors who start doubting the credibility of these states which results in rising interest rates. Governments are forced to pay even more for already staggering amounts of public debt. The subsidy states are now faced with the unthinkable: bankruptcy. Austerity programs are enacted and governments are changed without elections in order to please investors.

In one country, two presidents, stemming from opposing parties, lend huge sums of money in order to finance multiple bail-outs for several government funded industries, turning that country into the biggest debtor nation in world history. While politicians try to solve this crisis by doing what they do best (spending borrowed money), people in subsidy societies become aware that something is fundamentally wrong. It causes societal unrest and two groups emerge in a heated debate.

Religious moralists gather in Tea Parties and advocate a course based on principle. They demand a cold turkey withdrawal of subsidy money which means that society will suffer from cardiac arrest after which Jesus is supposed to resurrect it. Secular moralists form a group called Troika thinking it is best to starve society to death as a form of penitence. Moralists do not see the difference between should and ought and that is why their solution is likely to lead towards a downward spiral.

There are also hippies who live in tents on the street in front of the offices of bakery institutions. Hippies blame the bakers and think that a small group of 1% is responsible for causing problems in society. But what about the 99% who accept subsidies in their daily lives one way or another? Aren’t they also partly responsible for disrupting the bread market? Hippies think that society should be provided with extra morphine and forget that an addicted patient will suffer from such a treatment.

Sometimes it is hard to decipher which is who but subsidy states in general are faced with the fact that their societal systems were once designed for a world that does not exist anymore. It is like having a computer running on Windows 3.11 when Windows 7 or up is needed. The world today is globalized, dynamic and competition is ever increasing. Perhaps it is time for subsidy societies to put their resources into developing new systems instead of trying to revive the old one.

 

Further references:

   -  Klaus Brinkbäumer e.a., Gorillas Spiel, In: Der Spiegel, 09.03.2009.

   -  David Brooks, What Republicans think, In: The New York Times, June 14, 2012.

   -  George Brugmans, The Riverside Conversations, Part I, A conversation between Jim Rogers, Marc                      Faber and Daniel Yergin, documentary by Dutch television network VPRO, February 9, 2003.

   -  David Cameron, A confident future for Europe, special address World Economic Forum, Davos,                            January 28, 2011.

   -  J.C. Chandor, Margin Call, United States of America, 2011.

   -  Patrick Creadon, I.O.U.S.A., United States of America, 2008.

   -  Charles Ferguson, Inside Job, United States of America, 2010, 0:28, 1:34.

   -  Thomas L. Friedman, Too many hamburgers?, In: The New York Times, September 21, 2010.

   -  Tom Hanks, Larry Crowne, United States of America, 2011.

   -  Lawrence Lessig, Republic Lost, How Money Corrupts Congress - and a Plan to Stop It, Twelve, New                    York, 2011.

   -  Michael Lewis, The big short, Inside the Doomsday Machine, W.W. Norton & Company, 2011.

   -  James Martin, The meaning of the 21st century, A vital blueprint for ensuring our future, Transworld publishers, London, 2010.

   -  Marije Meerman, Quants: the alchemists of Wall Street, documentary by Dutch television network                  VPRO, February 8, 2010.

   -  Cordt Schnibben, Die Gewalt der Zinsen, In: Der Spiegel, Nr. 46, 2012, 12.11.2012, p. 58-64.

   -  Oliver Stone, Wall Street: Money Never Sleeps, United States of America, 2011.

   -  Nassim Nicholas Taleb, The Black Swan, The Impact of the Highly Improbable, 14th edition,                                     Penguin Books, London, 2008.

   -  John Wells, The Company Men, United States of America, 2010.


     
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Emanuel Paparella2012-11-28 14:19:40
The article above is redolent to my ears of one of the current explanations making the rounds as to why the Republican party lost the election. It goes something like this: the tipping point has been reached and surpassed: we thought there were only 47% of “takers,” or the lazy and moochers, the welfare queens, who think they are entitled to the government largess from welfare checks to food stamps, to social security, to health care, to unemployment compensation, to bail-outs, but those takers who want to take from the enterprising wealthy and redistribute their wealth to benefit the poor and lazy are now more like 53% and they have just won an election. Those subversive of a free capitalistic society will soon install a socialistic European style form of government (the subsidy society?) which will forever change the face of America and insure its demise. It is urgent to take our country back from those subversive elements who just won an election, even if we need to secede from the union. The 50s philosophy of Ayn Rand is urgently needed, for in reality there is no common good, there is only individual selfish interest.

Mr. Nagel makes a good case for the idea that many politicians are dealing with a world that is forever changed and to which they cannot adapt, and I sort of go along with that analysis, but I doubt it that his libertarian solutions a la Rand, if that is what he is advocating, will improve the situation much. Yes, the world has changed, it always does, but the change can be not only for the better but for the worse. If truth be told, in the last thirty years the wages of the middle class in the US have stagnated while those of the rich, the so called job creators, have doubled and tripled and their tax rates which used to be 70% or more in the fifties are now some 14% at best, half of that for the middle class.That is plain and simple "greed" as some of the movies mentioned by Mr. Nagel testify to.

We are now being told to trust those “job creators,” for they have our good in mind, and let us elect them presidents and give them more tax cuts and all the wealth they keep amassing and storing in Swiss bank accounts will somehow magically trickle down to the middle class and the poor and everybody will be happy. Good luck!

I would suggest rather that those who do not see this kind of sad scenario which has been unfolding and getting worse over the last 30 years, wherein ruthless capitalists and the bankers are in charge ready to even kill democracy for the almighty sacred buck, are the ones who are living in lala land and do not see the real danger to our country. To play semantic games and simply change social safety programs for the “subsidized society” will not do the trick either. What is needed, but Mr. Nagel is either largely unaware of or simply ignores, is a modicum of distributive justice which by the way is not the caricature so dear to Republicans that it means taking all the wealth and distributing it equally among the population. In that regard I continue to recommend the reading and pondering of some of the Papal social encyclicals of the last 100 years or so. They are quite instructive in analyzing the current sad social unequal and unjust reality.


Bouke S. Nagel2012-11-29 01:11:24
Dear Mr. Paparella, Thank you for reading my article and taking time to write a comment. Here follows my reply:
1:The point of this article is to provide a description of the financial crisis and not my opinion. I used a metaphor to make a complex issue understandable and in doing so I had to cut corners or ignore issues, which you noticed and rightfully mentioned in your comment.
2: A subsidy society as described within this article is a legalized form of corruption which gets worse and worse over time. A socialistic society to some is an ideal and to others a nightmare. This article focusses on the issue of corruption and not the philosophical differences between societies on both sides of the Atlantic.
3: I hope you noticed two particular sentences in this article. One about society getting poorer and another one about the middle class under increasing pressure. These sentences are meant to reflect the following part of your comment: "truth be told, in the last thirty years the wages of the middle class in the US have stagnated while those of the rich, the so called job creators, have doubled and tripled and their tax rates which used to be 70% or more in the fifties are now some 14% at best, half of that for the middle class."
4A: On both sides of the Atlantic people use the same words for completely different things. This happens even within Europe. Such words are government, state, nation, liberty, democracy, nationalism, health care, etc. Example: Europe is a patch work of countries with small populations of 5, 10 or 15 million people. Administrative entities for populations of these sizes are referred to as states in most parts of Europe. In Tokyo, New York, Mumbai, Beijing and Sao Paulo however an administrative entity dealing with similar amounts of people is called a city. This leads to confusion and misunderstanding about basic concepts on both sides of the Atlantic.
4B: What is the role of the state? - 'none whatsoever' libertarians and believers in trickledown economics - "to fulfill a constructive role in society" moderates - "to erase all forms of humanity" dystopian scenarios written down by Aldous Huxley, Ayn Rand and George Orwell based on developments within societies in the first half of the twentieth century.
5: The modicum of distributive justice” that you mention in your comment is commonly referred to as the system. And I agree with you that the world always changes but that means that we need to change the system alongside with it. But a change like that is very difficult to realize. Also because of the interests that are involved. I assume we both agree on the same here.


Leah Sellers2012-11-29 05:25:05
Gentlemen,
I have always preferred making my own Bread. I have a wonderful Family Recipe, I'd really enjoy Sharing with y'all.
The Kneading of Bread is an especially effective Stress Reducer. The more you Work, and Push and Shove the Bread Dough - the better the Bread as a final Product.
Systems, and their Participants, are like that, too. The more you Work 'em, Push and Shove 'em - Mold and Transform them the better your final product.
Then after the Bread is baked (at just the right temperature) in the oven, We can all sit down as Friends and Break Bread Together in Gratitude and as Equals.
A gypsy I once met told me that the more money you can pull out of a man's pockets to do a deal the better.
I asked, "Even if you're asking too much ?"
He answered, "There's no such thing as too much."
I told him, "That's Dis-Honest. That's stealing."
He shrugged his shoulders and smiling sideways answered, "That's just Business."
Anyone care for a slice of homemade Bread, Gentlemen ?
"Shall We Break Bread Together on our knees ? With Our Faces toward the Rising Sun ? Oh, Lord have Mercy upon..." Economic Systems Worldwide that are 'Just Business'.


Emanuel Paparella2012-11-29 10:29:49
Indeed Leah, one of the things I enjoy the most when in Italy is the taste of bread done the way my grandfather did it in his oven. As mentioned, and as you also imply, change is not necessarily progress, sometimes what is considered the latest and the newest to which we are urged to conform is regress. In that case it is better to leave well enough alone and stick with the true and tried and the traditional. Any native American can tell us about pseudo "progress" brought to the prairie by the "hell on wheel" called the train and glorified at the Olympic opening ceremonies last year. Yes, breaking bread together surely beats redistributing greed upward, any time.


Emanuel Paparella2012-11-29 11:54:15
Dear Mr. Nagel, if one reads and ponders carefully some of Ivan Illich’s books such as De-schooling of Society or Medical Nemesis he seems to suggest that there comes a point of diminishing returns. The purpose of a car is transportation, till it becomes faster to take a bike or to walk, at that point the purpose and of the car has to be rethought; same with schools or with modern medicine.

If that is the spirit in which your article was written, I can well understand, but I also seem to detect in it the idea of inevitable progress, that is to say, that what comes at the end is always the best. That is a mistake that Illich never makes; in fact he often suggests that the old traditional conception of certain institutions ought to be revisited and that it is possible that what comes at the end may the worst not the best. And that is where we part ways. I too like Illich don’t believe that what happens at the end is necessarily progress or better than what preceded it. What happened in Germany only sixty years ago was regress pure and simple, not progress.


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