Economic Lessons From Egypt’s Subsidy Cuts

A common criticism of liberals is that their solution to every problem is to throw money at it.

Why not? Government has a lot of money and can tax the people and businesses to get more of it. It’s a seemingly easy solution to messy and uncomfortable situations.

Here’s why not — there can be an infinite number of problems but only a finite amount of resources. Throwing money at everything inevitably means that money will someday run out, at perhaps the most unlikely and unwanted moment.

For proof, look at what’s going on right now in Egypt.

While the American media focused on basketball players’ dealmaking and World Cup soccer, Egyptians began suffering from skyrocketing prices for fuel, food, and other necessities.

Previously, when prices for such staples rose, the government solved the problem by throwing money at it. Instead of dealing with whatever systemic problems caused higher prices, the government just used tax revenue to subsidize lower prices and thus eased the pain of the people. This worked for a while. The people could afford the life’s necessities and the government kept citizen anger at bay. This was one thing that transcended Egypt’s revolution — until now.

According to a report on National Public Radio, over half of the population of Egypt lives at or below the poverty line. Additionally, the government was spending over a quarter of its budget on subsidies. With political turmoil gripping the country over the last three years, tourism and foreign investment was scared away, reducing the government’s ability to spend on subsidies.

As an example of the pain now being felt by the population, fuel prices have risen a staggering 78 percent this year.

It’s interesting that the primary approach of the Egyptian government was to subsidize the needs of the individual instead of exploring ways to grow the economy. Allowing the free market to work by lowering taxes and reducing the role of government, on the other hand, can increase jobs and encourage entrepreneurship, investment, and innovation.

So what can the United States learn from Egypt? Today, the political focus of American liberals is to guarantee rewards in lieu of ensuring growth. In other words, liberals want to make sure certain groups are guaranteed a share of the economic pie since liberal policy has failed to grow that pie.

When President Obama first took office, he helped hammer through an $840 billion package to spur economic growth. The results of the American Reinvestment and Recovery Act, however, are tepid at best. Few can argue the economy has recovered to its pre-crash strength. In fact, economic growth was negative for the first quarter of 2014 (negative 2.9 percent annualized). With such poor results from liberal economic policies, Obama’s new ideas seek, in part, to force businesses to provide increases in wages that should come naturally from economic growth.