Reasons for Abolishing Second Pillar Payments that are not Targeted at Public Goods

High costs of public and private administration

Governments need to set detailed rules, verify entitlements and compliance, decide on individual claims, and process payments. Beneficiaries need to inform themselves about subsidy programs, engage consultants, file applications, and cooperate in official controls.

Payments used for inefficient expenses

If, for instance, governments subsidize the renovation of farm buildings, so that these can be used for non-farm purposes, owners are inclined to engage in such investments even if their personal (and the collective) benefits fall short of the costs. Similarly, many of the most absurd investments into public infrastructure and tourist facilities can be explained by local authorities taking advantage of EU and national subsidies.

Payments distort economic activity

The German rural development program, for instance, offers farmers the choice on a list of subsidized diversification investments. Farmers may get money for providing tourist accommodation, boarding pet animals, and producing alcohol. So some farmers who would be better qualified to become web designers will distill schnapps instead. Another distortion arises because competition between farmers, who have the exclusive right to subsidies, and non-farmers is no longer even.

Windfall profits

It is also possible that payments have no effect. Recipients may go exactly in the kind of business which they would have preferred without subsidies and they may undertake exactly the same investments they would have undertaken if they had to pay the full price themselves. Then, public money is handed out without any benefit to society.

The CAP gives a bad example

More broadly, Western societies have made a wise choice to leave the economy to the market within the limits of generally applicable rules that maintain fair competition, address externalities, and regulate the provision of public goods. Public subsidies to enhance economic efficiency and innovation are to be limited to those cases where the benefits clearly outweigh the costs, that is, primarily to research and development.

The CAP, by contrast, abounds with subsidy programs that have explicitly economic objectives but where a solid analysis demonstrating the net benefit is missing – although they require heavy administrative involvement and should thus be subject to a special burden of proof. This deviation from the free-market principle can be used to justify other transgressions and undermine a societal choice that has promoted economic growth and individual freedom.