Consumption Rules

One Response to “A thought question: Chinese interest-rate subsidies”

1. doug Says:
   May 30th, 2007 at 11:22 am

   Interesting comments over on his blog.

   One that seemed particularly good:

   Steve Waldman said…

   In the wide and wonderful field of economics, is there no room at all for the commonplace observation that a subsidy often does harm to its recipient?

   It is indisputable that there is now a large mismatch between what Americans are accustomed to producing and what Americans consume, both in quantity and in kind. Subsidies from China and elsewhere fill the gap.

   An optimistic observer can certainly argue that America is great and strong, and when it is required to produce what it consumes, or to exchange goods and services rather than debt for present (and past) consumption, it will effortlessly step up to the plate and do so.

   But a more cautious observer might suggest that growing accustomed to a subsidy by devoting it to current consumption is a poor strategy, and likely to lead to very unhappy times when the subsidy is withdrawn.

   Of course the problem is not the subsidy itself, but how the recipient responds to it. The first-best approach to dealing with China and nations’ desire to subsidize US credit and tradables markets would be to invest that subsidy in future tradables capacity, increasing our permanent sustainable wealth. But if we find ourselves unable to do that, if we find instead that we allow a current windfall substitute for the maintenance of existing capacity, then we would be better of rejecting the subsidy. We are allowed to do that, right?

   Waldman elaborates in a comment farther down, also.

   But my favorite:

   Anonymous said…
   Greg,

   The logic of your initial argument is weak. ‘If you would object to A, then surely objecting to the opposite of A is absurd’. I object to my neighbor’s wife taking a dump in my living room, yet somehow I also object to my wife doing the same to them.

   Heh.

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