What is a subsidy?

In talking about affordable housing, transportation, development and other issues related to urban growth, the term “subsidy” often pops up. It’s generally used pejoratively and seems to refer to such a large variety of situations that the meaning can start to get a little murky. So I thought that before I write about any of these other topics, I would first tackle the meaning of this word. I had no idea what I was getting into.

Generally when you don’t know what a word means, you look it up in the dictionary and that’s that. But I’ve looked through several sources, from a Youtube lesson on subsidies by an economics professor to business dictionaries, and no two definitions seem to agree. In fact, a 2006 report by the World Trade Organization takes eight pages to attempt to define the word. As the report points out, “Although the term ‘subsidy’ is widely used in economics, it is rarely defined.”

“My own starting point was also an attempt to define subsidies. But in the course of doing so, I came to the conclusion that the concept of a subsidy is just too elusive.” — Hendrik S. Houthakker, a Harvard University Economics professor, in 1972.

Origins of the word “Subsidy”

According to Dictionary.com, as well as the Harper Collins English Dictionary, the word “subsidy” comes from the Middle English “subsidie” which came from the Latin “subsidium” meaning an auxiliary force, reserve troops, aid or support. It’s from the root word, subsidēre, to remain.

So in some sense a subsidy is something that gives assistance, enabling a person or entity to remain. But that can take on a lot of different forms and achieve a variety of outcomes, not all of which are intended. The purpose of a subsidy is to assist. But who is it assisting? And by assisting one entity, is there harm caused to another? If subsidies were always a help without any negative consequences, then I suspect there’d be little debate about their use and perhaps even little arguing over the meaning of the term. But nothing is ever that easy.

Definition(s) of “Subsidy”

The easiest way to think of a subsidy is that it’s the opposite of a tax. When you’re taxed by the government, you’re paying them money. When you receive a subsidy, then the government is paying you. Unfortunately, this doesn’t include the times when you’re receiving a benefit from the government that’s not in the form of a direct payment.

So another way to think of a subsidy is that it’s any government program that provides a benefit to a private sector. But… that doesn’t take into account the times when it’s not a program providing the benefit, but a government regulation. Nor does it include times when the government isn’t the one providing the benefit, but they’re the reason behind why someone else is transferring a benefit to you.

The World Trade Organization looked at both of these commonly used definitions and determined that they don’t capture the full scope of subsidies. So they provided the following three types of subsidies that a government can effect.

1. A subsidy can result when the government transfers funds to producers, or consumers, resulting in direct or potential budgetary expenditure, or when it uses its power to instruct private entities to make a transfer. 

Note that it “can” result in a subsidy. But the government gives money directly to people all the time in the form of payment for services, wages, etc. So just because the government is writing a check doesn’t mean that it’s subsidizing someone.

Examples of this kind of subsidy: Re-training grants, child allowances, agricultural subsidies. Even a loan guarantee from the government can lead another entity to provide a loan that it otherwise wouldn’t. This is considered a subsidy because it artificially lowers the default risk and stimulates consumption that otherwise wouldn’t take place.

Tax concessions would also fall under this type of subsidy. Any tax exemption, credit, deferral or other form of preferential tax treatment affects the government’s budget in the same way as if it were spending money. So the Earned Income Tax Credit is a subsidy, as is the mortgage interest deduction that home owners can take.

2. A subsidy results when the government provides goods or services at no cost or below market price.

Examples: University education, public transport, subsidized housing or food stamps. Beneficiaries receive in-kind contributions as opposed to funds they can freely dispose of.

Some might say that highways and ports should be considered as an in-kind benefit that some users receive from the government. Others see these as being a benefit to the general public and therefore consider these to be government expenditures, but not subsidies.

If the government provides a service and charges market rate, then that is considered a commercial transaction. But if the government provides a service and charges a below market rate, then the difference is considered a subsidy. So if the government owns land that it is leasing out at a below market rate, that constitutes a subsidy to the users.

3. A subsidy results when government regulatory policies create transfers (positive or negative) from one group to another. They generally result in no direct cost to the government. 

Examples: When an industry pollutes the air, they’re putting the cost of that pollution on others (either because other entities are cleaning it or others have been affected by the pollution and have to pay for the consequences, perhaps in the form of medical expenses). The government can regulate the industry in order to force them to pay for the cost of production in terms of air pollution. Or it can ignore it. This affects the company’s bottom line, or it affects the bottom line of those that end up dealing with the problem. Someone is going to pay one way or the other, but government regulation determines who gets the subsidy and who gets stuck footing the bill. The government itself pays nothing one way or the other.

Another example is when industries are allowed to use public land without paying royalties. They get the benefit of extracting the natural resources without having to pay the public a royalty for the right to mine those minerals. They’re receiving a benefit and though it doesn’t necessarily cost the government anything, we the public lose out because we fail to receive royalties on a good that we own.

Yeah, but….

Of course, all of this gets murky when you start thinking about the fact that governments spend money all the time. What is a government expenditure for the benefit of the general public? and what is a subsidy supporting a specific industry or people group?

Is road infrastructure a government service paid for by users through taxes or is it a subsidy that supports the private entities (both businesses and individuals) who rely heavily upon it at the expense of those who also pay in but perhaps use the roads less or not at all? Most people would assume it’s a government service, and yet some individuals are starting to challenge that notion. The World Trade Organization weighed in on this issue by saying, “The provision of road infrastructure should thus not be seen as a subsidy in its entirety, but it may contain an element of subsidization that is in most cases difficult to measure.”

After spending several hours reading through various viewpoints on subsidies, all I can safely conclude is that we hate when other people get subsidies. However, any subsidies we receive we don’t tend see as a subsidy at all but as a right or expected benefit (because we’re tax payers, after all!). Determining what is and what isn’t a subsidy sometimes has more to do with who is talking than what they’re talking about.

If we’re going to have open, honest, and helpful discussions on topics that include subsidies, it will probably behoove us to admit that we ourselves do indeed receive subsidies. There is no “us” vs. “them” when it comes to who receives subsidies and who doesn’t. We may receive different subsidies, but at some point each of us has been a beneficiary of a government program that has provided us with assistance — whether it was getting a write-off on our taxes or a SNAP card that enabled us to feed our family.


Source for Houthakker quote: JEC (Joint Economic Committee of the Congress of the United States) (1972), The Economics of Federal Subsidy Programs: A Compendium of Papers, Part 1 — General Study Papers, U.S. Government Printing Office, Washington, DC.