Iran's president on Saturday announced the start of a plan to slash energy and food subsidies as part of government efforts to boost the nation's ailing economy.
In an interview with state television, Mahmoud Ahmadinejad said the deep cuts to the subsidies "will start beginning Sunday" and vowed to fully cut all subsidies by the end of his term in 2013.
Economists say the unpopular plan could stoke inflation unofficially estimated to top 20 percent. The cuts also are widely seen as placing added burdens on Iranians, whose country is weighed down by international sanctions imposed on Tehran over its nuclear program.
Analysts say Iran pays about $30 billion in subsidies annually.
First, the suggestion that cuts in subsidies will lead to an increase in inflation is wrong. Inflation happens when the stock of money grows faster than the economy. Period. Food and energy prices are likely to go up, of course, but that will likely be offset by lower prices elsewhere in the economy.
Second, this was the right decision. It's painful to have life's necessities become more expensive, but subsidies and taxes obscure the true cost of the products, leading to resource misallocation and reducing economic efficiency. Although the article didn't address this, hopefully Tehran is pairing these measures with policies to increase economic freedom. An unambiguous lesson of history is that economic freedom leads to higher living standards, which makes adjusting to policy changes much easier.
Finally, America needs to cut subsidies too. The federal government spends about $30 billion a year in farm subsidies, $98 billion in food subsidies, $17 billion in various energy subsidies (as of 2007), among regulations that effectively subsidize various producers and consumers. Many would balk at eliminating these $145 billion in subsidies immediately, but phasing them out over a few years as the economy recovers is not unrealistic.
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