Economics of government grants

Do government economic grants help?

I live in Poland which is a new EU member. There are many EU grants that are available to Poles wanting to start a new business. Further, the government pays people to ‘promote economic growth’ in one region or another. I want to use this example to explain why government grants may give people warm fuzzies about stimulating economic growth, but in reality, is unfair and hurts the economy. This applies to US policy also. The US has many people and organizations involved in trying to promote economic development. Is that good? Let’s look at the example of Europe first and you can draw your conclusions about the USA.

Poland joined the EU in 2004. Since its economy has prospered from open markets, that is the free moment of labor and capital. However, it also receives a lot of EU money for various economic stimulus programs. Everyone here likes the feel of Poland getting large grants. It is basically a cash transfer from Germany.

Money transfers for political reasons

I personally do not have a problem with this money transfer for political reasons. That is Germany never paid a penny of reparations for WWII even though it destroyed the entire country. I think this is the least they can do. And I think the new Germany is generous and is a positive democratic force in Europe. Therefore, if the EU wants to transfer money to Poland for a while, I am not opposed politically, as I live in Poland. There was great political injustice done in Europe.

The economics of a government grant

However, economically speaking a governmental grant is nothing more than taking money from a productive person via the tax system. It is taxing you and then having some bureaucratic on some commission with some title or Ph.D. This government bureaucrat looks at the money and reallocates your productive energies to someone else. It is penalizing a productive person and rewarding a less productive person.

The whole idea of the enlightenment was that people acting on enlightened self-interest has wisdom greater than any government engineering of politics or economics. If you disagree read my free Wealth of Nations in pdf.

I know a guy who is getting EU money as an economic grant. I would not call him a master of capitalism. He is someone who knows how to fill out forms and make nice looking business plans. However, the viability of his ideas is questionable. Some government worker with some title will review his plan to see if he gets my money. Is this fair? It is like a bailout.

I know another guy who is horrible with filling out forms and jumping through bureaucratic hoops. He does not know how to play the political game of handshakes and chicken Kyiv dinners with the right people. He has his own business and it employs people and his enterprise thrives. This guy would never apply for grant money.

In fact, the people who I know who got grant money in the EU are the same profile of people who do well in academia, that is good with making things look good on paper. People good at shaking hands and making connections. While the people who really know how to run a business from the ground up would never get the money or even apply.

This is just my observation. What do you think?

Every entrepreneur I know starts their business from their proverbial basement and did it with their own courage and intellect. Why should some ribbon-cutting handshaking bureaucrat on a board or commission tax him and give it to another person who does not have the creativity to raise capital himself.

I think there are exceptions to this such as people with disabilities for example. In cases like this, it could be understandable. However, I am not talking about that. I am talking about government programs that tax money from one person, have a middleman bureaucrat with self-interest to keep his job and who is getting paid with your tax dollars. Therefore, my conclusion has redistributed the money in the form of a grant is economically less than optimal.  I think the government public sector is the new private sector.

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4 responses to “Economics of government grants”

  1. Greg

    You bring up an interesting point but I would also suggest that grants are not redistribution of wealth which you seem to be suggesting.
    Now just because this other guy with a thriving business can’t fill out forms also might not make him a candidate for better business and community development.
    Human nature is often more about greed than generosity. I know too many people who made nice sums of money in their life only to became stingy selfish hoarders of everything material with pretentious belief’s that they’re morally superior to a society that bears the sweat and tears for which upon their wealth is based.
    Therefore a grant system is often a better way than a trickle down system of private hand outs which often has a whole different set of interest.

    1. Mark Biernat

      I understand your point but I am skeptical if a centrally planned allocation of resources are the best for anyone. Most people I know are not greedy, but rather motivated by a mix of desire to improve their lives, help their family and a little bit society as a whole.

  2. Greg

    I don’ think grants are central planning. And again you alluding to distribution of wealth.
    Hind sight is often 20-20. But you can’t throw in a patchwork of cynical descriptions to describe some bureaucrats who flaunt their own political needs over the potential good coming from grant money. Its an over generalization of the facts.

    1. Mark Biernat

      At their core grants are taking my tax dollars and redistributing it to someone more worthy as deemed by a government worker. How is that not central planning? The central government controls the flow of money instead of free people. There are private grants remember. That is people give money to organizations they choose and distribute the money the way they want. Again I question if the founding fathers of the US envisioned a country where Washington controls the flow of money rather than the people who earn it.

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