Maybe someone with more economic insight can clarify the issue, but my understanding of subsidies is that they're ultimately harmful to the economy of the country providing them. Obviously the recipient industry and its owners will benefit immediately from subsidies they receive, but the economy as a whole -- and the taxpayers who pay the subsidies -- will be harmed in the aggregate more than anyone will be helped. Ultimately, economies based on subsidies (i.e., Communism) cannot compete with free markets, but if subsidies are kept small as a proportion of the economy as a whole then specific industries can be built up without seriously threatening the survival of the rest of the system.
So, European Airbus subsidies hurt Europe more than they hurt America -- in total -- but they can do significant damage to the American commercial airline industry, and Boeing specifically. America doesn't want to hurt itself by subsidizing Boeing, but we also don't want Boeing to be put out of business by an opponent that doesn't mind hurting itself to hurt us. Aside from larger economic concerns, we have a national security interest in maintaining a domestic commercial airplane manufacturer, so we can't just sit idle while Boeing is put out of business.
There doesn't really appear to be any way to fight subsidies without using subsidies. The only comfort is that whichever side uses fewer will end up stronger economically in the long run.
The problem I see with subsidies like Airbus has is it takes the concept of risk assesment out of the buisness plan. Rather than evaluating the risk/reward of a program they can go forward with out risking their money, just everyone else's money. It just leads to bad buisness.
i don't think subsidies are always harmful. The market's concerns are short term and medium-term concerns such as the environment (see the energy industry and agriculture) and national security (see the arms industry) are given unrealistically low priorities. The market wouldn't pay eg. farmers today for maintaining the environment for decades from now, even though that maintainance work would save money in the decade-long view. The least coercive way to encourage this to happen is subsidy, carefully applied. (I wouldn't grant the EU's CAP that status, btw.) As it's the least coercive, it's the first choice for a govt, the arms industry for example needs to be controlled in other ways.
The argument for subsidising air-planes is not clear-cut. I suppose it is an important infrastructural apparatus, and there would be national security issues if everyone relied on one country's airline. Plus the subsidies might merely counterbalance such costs as tax in the different countries (esp on fuel, though british airlines don't pay high tax on fuel like the rest of us at the moment).
Airlines received numerous handouts following 9/11, how do you feel about them?
It's not just the subsidies, which are bad. Airbus routinely uses bribes to win contracts as well. It wouldn't surprise me if Boeing did too, but it is my understanding (and no, I don't have insider knowledge) that Airbus really takes the cake on this one.
Jez,
"Plus the subsidies might merely counterbalance such costs as tax in the different countries (esp on fuel, though british airlines don't pay high tax on fuel like the rest of us at the moment)."
If tax is the issue, wouldn't the right solution be lower the taxes? I'm not sure how fuel enters into it since we are taking about plane makers not airlines.
"Airlines received numerous handouts following 9/11, how do you feel about them?"
There is a vast difference between temporary subsidies to get companies over an extraordinary "bump" like 9/11 and permanent subsidies.
jez: I agree that markets don't always value long-term benefits, but doesn't that merely reflect the desires of the people in the markets? Who are you to say someone should be punished now for their own good later? It sounds nice in theory, but I don't really trust the government to do it wisely or impartially.
I wrote about the post-9/11 airline bailouts a while ago, and I'm still not sure, but I think they were a bad idea.
Suppose the European market is looking to buy a plane. It costs Airbus $10 to make it, while it costs Boeing $8. The market will pay $8. The $8 will either go to America or stay in Europe, and either way the European market will get the plane it wants. How much is it worth to Europe to keep the $8 in Europe, to reinvest it in its own interests and distribute the benefits to its own citizens? Is it worth at least $2? Then we have a subsidy that helps Europe. Same reason America subsidizes its farmers.
As Jez said, it is also worth something to Europe to have a local producer, since they probably have a national (continental?) security interest in that as well. I think this factors significantly into the calculations, and in the end, the US will subsidize Boeing before it will watch it sink.
michelle: I think your economics is faulty. Paying $8 for an $8 plane is an even trade, and even though the money goes to America, the asset would go to Europe -- no net change. Paying $10 for an $8 plane is a net loss to the taxpayers, and the other $2 is redistributed according to the interests of the company (salaries, bonuses, costs, whatever).
The subsidy doesn't keep any value in Europe that would otherwise leave, and it doesn't create value. All it does is redistribute wealth among Europeans.
Okay I am going to edit my theory.
The value is in the sustenance of a competitive supply. If Airbus gets pushed out, then Boeing, the dominant supplier effectively has a monopoly and will produce at a quantity lower than and at a price higher than optimal - optimal being that which you get with the competitive supply. Maybe the difference between the monopoly price and competitive price is $2.
Subsidies work like tariffs, in that they are tools to regulate trade. Under the section "Arguments for Tariffs" in an onhand economics book, listed are self-sufficiency and military preparedness, with the stipulation, "Any of these goals, if desirable, is far cheaper to achieve by subsidies." Another argument, bettering the terms-of-trade - artificially lowering the international price of certain goods, such as planes (although this isn't exactly the case here) - is one of the few valid reasons for tariffs (or subsidies) (there are admittedly many arguments which are more expensive to the economy than not having the tariff/subsidy).
michelle: Yes, I agree that some countries value self-sufficiency and military preparedness, and I think those do justify subsidies. However, those are usually the reasons given, usually subsidies are created to protect jobs and for other nonsensical purposes. No matter what the reason, subsidies are expensive beyond their dollar value. They may still be worth it, but they should be sold to the public honestly.
I wouldn't specify tariffs and subidies as tools to reglulate trade, they are tools to make your industry competive with one that can produce the same thing cheaper, when on a even field they have no chance to.
It also really doesn't fit wit the Boeing-Airbus fued in that the countries that fork over the subsidies also buy the planes they subsidize for their national airlines, the subizies are with the goal of allowing them to compete with Boeing on the open market and to allow Airbus to take more risks (ie the A380) than Boeing with the hope that it will be sucessful and change the nature of the market, while Boeing has as a priority making a profit and that governs the risk they can take.
MW: "Who are you to say someone should be punished now for their own good later?"
Me? I'm no-one in particular, but I didn't suggest that I make those decisions unilaterally, but that an elected government should.
Given your enthusiastic pro-life opinions, I'd have thought that you'd have more consideration for the next generations' economic and environmental conditions than to play purist capitalist games with them.