Subsidies and Distortions

by Don Boudreaux on March 16, 2010

Suppose that Bill Gates, Warren Buffett, and Larry Ellison pool their wealth into what they call “The Subsidy Fund.” Out of his fund, the three billionaires will subsidize producers of their choice.

Let’s imagine that Messrs. Gates, Buffett, and Ellison choose to bestow billions upon Blairex Laboratories, Inc., of Columbus, Indiana. The three billionaires subsidize Blairex not out of any profit motive but, rather, simply because they want to do so – it makes them feel good.

Blairex manufactures and distributes over-the-counter medications such as Pertusin cough syrup and Boudreaux’s Butt-Paste. (No connection to the co-proprietor of Cafe Hayek.)

With the windfall of billions of dollars from the three billionaires, Blairex is now better able to expand its operations beyond the size that these operations would obtain without the additional billions. That is, Blairex is able to expand the quantity of output that it exports from its factories to households across America and the world.

In this hypothetical example, do the three billionaires distort the market? Do they make Americans (or consumers, more generally) poorer? Does their non-economically motivated subsidy pose a threat to the health of the economy over the long-run?

It’s very difficult to see how. Each of these gentlemen made lots of money honestly. How they choose to spend that money, as long as they do so peacefully, is their business. They no more distort the market by spending a large chunk of their wealth on subsidies to Blairex than they would distort the market by spending a large chunk of their wealth, say, developing shopping malls or in trying to find a way to turn water into gasoline or on extravagant Tahitian vacations.

The details of market outcomes would certainly be different if the three billionaires chose not to subsidize Blairex, but the details of the economy as they look without a Blairex that enjoys the largese of the three billionaires is no more “correct” or “optimal” or free of distortions than are the details of the economy as they look with a Blairex that enjoys this largese.

….

And, from the perspective of Americans, so it is — or nearly so — with non-American-government subsidies to non-American producers. We Americans cannot control Beijing or of any other national government. Prudence and practicalities dictate that we treat the economic decisions of other governments as data, as states of the world.

If Beijing subsidizes the consumption by non-Chinese of Chinese-produced goods and services, we non-Chinese benefit. And this benefit, from our perspective outside of China, is no more a distortion of the market than is the hypothetical billions poured by the three billionaires upon Blairex.

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vikingvista

It makes a difference if they subsidize the national monopoly mafia to expand its extortion business to confiscate more of my earnings and restrict more of my liberties.

A fitting--and behavior-improving--punishment for purchasers of state debt, is for them to lose all of it in government default.
A.J. Lenze

I have a suggestion for those who oppose Chinese government economic intervention. Until now, their arguments have been that it hurts Americans. However, a better argument would be that it helps rich Americans at the expense of poor Chinese.
A.J. Lenze

C'mon Dr. Boudreaux, fess up. You wrote this article just so you could mention Boudreaux's Butt Paste, didn't you?

Reminds me of the time my cousin suggested using bag balm (look it up) to treat my "saddle sores" from long-distance cycling. (It worked, too!)
Jorge Emilio Emrys Landivar

I disagree, the money from China was gotten by using force on its own citizens. This means that they didn't use that money for other things (including buying american goods, or buying goods from people who would). This is clearly a market distortion
Sisiphus

This is a hanging fast ball and I can see the threads. I agree entirely that it is none of anyones concern how the Chinese--- anyone for that matter--- choses to dispose of their money by way of subsidies; whether through currency manipulation or, more directly, by expansion of un-demanded production capacity. Just as in Don's example, the consumer benefits by the Chinese actions as prices for lower order commodities are artificially reduced from that which the market would otherwise demand. This effectively subsidizes their customers and so frees up capital which, in turn, is directed to other ventures. It has a similar effect to that of industrial collusion where the actors are attempting to eliminate competition by offering goods at less than market price, a bad idea, proven time and again. Were I in a position to advise the Chinese on the matter, I would press for the highest prices my exports could demand without affecting a significant loss in market share.

The subsidies to Blairex do distort the market just as the Chinese actions have distorted worldwide manufacturing. Were Blairex required to raise capital for expansion through normal processes, they would be in competition with every other butt cream manufacturer out there--- not to mention every other business venture in search of additional capital---and so if the demand for their product was sufficient and their management sound, they could seek investment capital in the credit and/or equity markets and grow in a way which does not artificially crowd out competition. In the Chinese example, flooding the world with inexpensive consumer goods has necessitated the dramatic evolution of business plans within the manufactiring sector such that non-subsidized manufacturers, as well as those whose operations lay in higher cost labor markets, have been moved to seek other competitive oportunities. I'm not arguing that any of this is bad, only that it is, in fact, market distorting. I would add that the advent of ethanol subsidies have been a cause of distortions within the gasoline market as well.

The indulgances offered by Mssr.s Gates, Buffet, and Ellison are motivated by something other that gaining market share, a benevolence I doubt is shared by the Chinese, and while the world benefits from a glut of cheap butt cream, actors within that industry suffer the indignity of having to find other occupation. If however, the Chinese choose to repress their currency---as evinced by their unwillingness to allow it to be readily traded---they do more of a disservice to themselves than to the market; analogously, the offerings of the billionaire troika will ultimately be left in the toilet.

There, I couldn't resist.
vidyohs

Ouch! The saying is, "hanging curveball" (meaning one without much break on it), and one can see the seams on a fastball not because it hangs but because one's eyes and reflexes are honed to sharpness.
martinbrock

Well, those Congressional ethanol subsidies are none of my business as a practical matter, since I'm not a Congressman and my vote is practically worthless; however, the subsidies do affect me, and I'm not sure the effects are beneficial just because I seem to pay less for ethanol in my gasoline.

Don seems to think the ethanol subsidies are his business, judging from his posts in this forum. I'm just trying to see a consistent picture here. Even if I'm an Iowa corn farmer seeing higher corn prices from the ethanol subsidies, am I really better off if I overinvest in corn production only to see the subsidy later lifted? If I retool my auto engine factory to build engines burning E85, am I really better off?

If the subsidies persist indefinitely, maybe I am better off in these scenarios, because the market has changed. But we don't want to call this change a "distortion"? Gotta agree with you. We sure do.
vivaquijote

Prof. Boudreaux,

I noticed that you did not use the #1 billionaire in the world in your metaphor of subsidy. Perhaps a slight US bias on your part? But would Sen~or Slim not provide a more tangible example of "subsidy" with a certain newspaper he recently saved?
sandre

Peter Schiff Responds to Paul Krugman
http://www.youtube.com/watch?v=11WlFlO_mDg
martinbrock

I'm not sure the U.S. economy is as hollowed out as Schiff thinks it is, so I'm not sure about his other conclusions either, but I definitely agree with his assessment of Krugman's Nobel Prize. I'd like to see him in the Senate, just for the fun of it.

I'm not sure the U.S. economy is not as hollowed out as Schiff thinks either, but we're obviously still very wealthy by many measures, and we don't simply import all the wealth. We overbuilt residential real estate, given current demand for it, but the houses are real enough. It's not like the overbuilt subdivisions are Potemkin villages.
sandre

I largely agree with all your points, including the ones that you make in your other comments - like the demographics.
Steve_0

While I agree with Don often, I see the same flaw that several others here do. Any malinvestment, no matter the cause, is a problem to some degree.

The problem here is whether we swallow the bill-of-goods. While Don may be making the point that there isn't anything we can do about it, and I would agree, I don't think it's fair to smuggle in the idea that it's not a malinvestment.

The real question, rephrased in my mind is this; It's a malinvestment, but can we or should we do anything about it, if it's done voluntarily by others? I feel safer answering that one.
martinbrock

First, it's not done voluntarily by others. It's done by China's state monetary authority. The gun is held to someone else's head, but that doesn't make it "voluntary". When our statesmen sell their statesmen entitlement to our tax revenue, that ain't "voluntary" either. The way in which some nominal "libertarians" use "voluntary" is positively Orwellian sometimes.

But the voluntariness of it all is not the issue. Malinvestment is the issue, as you say. I'm not defending Krugman's prescription here. I'm not advocating any 25% tariff on Chinese imports, but we must be aware of what's happening and that Chinese authorities can and at some point almost certainly will end the mercantilist trade policy. We'd better be prepared for that, because China has four times our population, and it can create a hell of a lot of malinvestment over here before it's done.

Of course, if China were buying U.S. mortgages (without any bailout protection) or U.S. farmland or building U.S. factories or otherwise really investing in the U.S. with its dollar surplus, rather than buying entitlement to U.S. tax revenue, I'd have less of a problem with the currency manipulation, not least because the Chinese would stop it sooner.

They'd stop it sooner, because their free market investments, without the taxpayer guarantees, would cease to be profitable, so they'd have no use for all the dollars. The very fact that we're converting trillions of dollars worth of mortgages, many held by the Chinese, into taxpayer obligations clearly demonstrates that this mechanism has broken down and that capital markets are severely distorted.

Greenspan makes this point, and he's right, seems to me. He didn't lower long term interest rates, particularly mortgage rates, in the last decade. The Chinese, among others, did. No bank writes a mortgage at the Fed funds rate.
Steve_0

I was talking about Don's metaphor. But either way, the Chinese
government is even less responsive to us than our own poorly
responsive government.

[Sent from my iPhone]
martinbrock

I agree that we have little control over China's monetary policy, and I don't favor compounding it with yet another market distorting regulatory policy; however, I expect the Chinese policy to be counterproductive and not only for the Chinese, because the policy does distort the market. If not, the whole Hayekian program loses its meaning. We just can't have it both ways.
martinbrock

Yes, billionaires subsidizing Butt-Paste without a rational expectation of profit distort markets. They distort capital markets because they act without a rational expectation of profit and for no other reason. Profit measures the value added to productive inputs. Pursuing profit is good. Throwing money at some productive organization without a rational expectation of profit only confuses the signals of value added.

The world doesn't need more Butt-Paste because Bill Gates (or Bill Clinton) has a warm feeling about babies' butts. The world needs more Butt-Paste, because consumers of Butt-Paste prefer Butt-Paste over other butt lubricating options in a market in which all producers of butt lubrication compete for productive resources without the favor of wise central planners picking winners, nominally "private" planners or otherwise. Titling the planners "private" doesn't change this logic one iota.

A Chinese government doing the same thing also distorts markets. The Congress of the U.S. subsidizing ethanol production or pension benefits for unionized auto workers distorts markets. I'm shocked that I need to make this point here.
jpom

I completely agree. Prices are signals to producers and to consumers. If the Atlruistic-gang-of-four decided to subsidize carpenters, then more people would choose to become carpenters distorting the market for carpentry. This is a waste of resources because, as Adam Smith noted, production is for consumption. If something is given money without reason for profit then there is an inefficient allocation of resources. What happens when they stop donating or run out of money? What happens to butt-paste substitutes that are more desired by consumers, but are under-produced due to their competitor's subsidy? This is a market distortion. Period. But I am just a college freshman, what do I know?
martinbrock

You know what a market distortion is.
S_M_V

Billionaires subsidizing Butt-Paste no more distorts capital markets than that same people paying artists to create art or pay a chef to produce extremely expensive food. Even if they are the only ones in the world that like the art or food that is produced.
martinbrock

This statement is economic nonsense. People paying artists certainly affect the art market. Whether the effect is a "distortion" depends on what we mean by "distortion".

"Distortion" occurs in the scenario I describe (and you ignore), because the billionaires organize vast resources without a rational expectation of profit. Capital markets work because investors seek profit, not because the proper proprietors properly exert their will over their property. Writing "proper" in front of some act doesn't make it economically rational.

In other words, capitalism works because rational actors seek profit, not because noble lords of capital are entitled to nominally "natural" (or "divine") rights. The real classically liberal economists reached this conclusion centuries ago, and I mean people like Smith and Ricardo and Hayek, not Karl Marx.

So if some billionaire decides to spend billions on beanie babies, because he likes beanie babies more than anyone else on Earth, then at some point, lots of people producing beanie babies might suddenly lose their jobs, and piles of beanie babies might need disposal, and lots of other stuff that lots of other people might have preferred to consume would never have been produced.

If you think that's all just, right, proper and noble, because the "right man" made the decisions, that's your business. It's also your politics, but it's not mine.
S_M_V

Capitalism works because people can use their private property as they see fit.

If I had a billion $ and decided to invest it in safe bonds with an expected return of 3% vs high risk speculation with an expected return at 10% I am not maximizing profits. This does not cause capitalism to fail to work.

And my deciding to purchase beanie babies would no more hurt the economy than me purchasing a yacht.
martinbrock

No. It works because people are free to seek profit in a vigorously competitive market for capital.

If your "safe bond" is nothing but entitlement to tax revenue raised by the Congress, like every Treasury security, your expenditure of the principal and interest differs little from a welfare queen feeding at the public trough. No reorganization of resources increasing value added occurs, unless you assume that Congressional expenditure and tax collection have this effect.

Purchasing a very large yacht does not organize resources to add value in a productive process for the benefit of free laborers and consumers. I would ban large, personal yachts outright, along with private castles and pyramids. More generally, I would replace the progressive income tax with a progressive consumption tax.

That's my policy preference, because I'm a classical liberal in the tradition of Adam Smith, not a royalist. A progressive consumption tax checks Congressional authority and the authority of lords of propriety at the same time. It balances the powers of each against the other.
SheetWise

"If you think that's all just, right, proper and noble, because the "right man" made the decisions, that's your business. It's also your politics, but it's not mine."

Yes -- a lot of what we call "value" is subjective and it's influenced by people who have conflicts of interest. So what? Who twisted your arm?
martinbrock

Statesmen are twisting my arm every minute of every day, because they hold a monopoly on lawful force.
danphillips

And furthermore I disagree with your notion that capitalism works because rational actors seek profit. Capitalism works when free people can do whatever they want with their property. Rationality has nothing to do with it. Freedom has everything to do with it. A market is like an amorphous fog, an amoeba that stretches here and bends there and some people succeed and some people fail. I interpret your remarks to mean you think a market is some sort of structured organization with logical rules, etc. It is nothing of the sort. It's a big messy crap shoot with about as much logic behind it as an 8 year old little league baseball game. Have I misunderstood you?
jpom

The two aren't mutually exclusive. You can believe that this Butt-Paste altruism distorts prices and is economically inefficient and believe that it should not be outlawed. Because, as you clearly understand, as does Martin, that markets are irrational and unpredictable. So this simplistic metaphor is hard to recognize and measure in real life, and limiting Gates' freedom to be "altruistic" may impose more costs than actual benefits.
martinbrock

No. Capitalism works because rational actors seek profit. It's not that the actors' rational calculations are so precise or accurate, but they do seek profit, so they enter markets where they expect profit and leave markets when they don't find it. The effect on resource organization is as much a matter of "natural selection" as of the calculating machinery of the capitalists. The objects of this selection are organizations of capital.

Capitalists are like ants seeking food. They only need local knowledge of immediate profitability to follow the trail. They don't need knowledge of the larger market organization. No individual needs this knowledge, and no individual ever has it.

The necessary freedom for a capitalist playing this role is the freedom to seek profits by reorganizing resources, on the margin of existing organizations, not the freedom personally to consume the resources. Consuming the resources is not profit seeking. In practice, people both invest and consume, and no bright line separates the two categories of expenditure, but the distinction is not therefore meaningless.

Markets have logical rules, just as a game of crap has logical rules. It's not logic or a big messy crap shoot. It's logic and a big messy crap shoot. Evolution by natural selection is also a big messy crap shoot, but wonderfully useful, complex organization emerges from it regardless.
S_M_V

I have to admit I find your world view very strange. Are you arguing that the point of wealth is to gain more wealth?

To me the point of hard work and investment is to be able to enjoy a better life in the future. To be able to consume the things that I enjoy. Or share my wealth with family, friends or even strangers. And the best part is that my consumption benefits those that provide my the goods and services that I consume.

I do not see a problem with Mr. Gates deciding to give his money away. I do see a problem that society sees the his choice to give it away as noble but undervalues the much greater benefits to society through the process of him earning the money.

Accumulating wealth through honest business should be celebrated on par with charity.
danphillips

OK, I promise this is my last comment. It occurs to me we are talking past each other, much like when I converse with muirgeo. I realize that your comments about *capitalism* are really directed at crony capitalism and fascism. You're calling it the wrong thing. I'm talking about capitalism, laissez faire, which is something that millions of entrepreneurs practice every day, with absolutely no thought of how to get the government to do things for them. I'm off to bed! Peace.
martinbrock

"With absolutely no thought of how to get the government to do things for them" can't possibly be true, because entrepreneurs accumulate and exchange titles to property. A man can't buy a Treasury security with no thought of how to get the government to do something for him. He can't buy a share of Lockheed Martin either. He can't buy a software patent or a credit default swap on a FNMA mortgage. He can't even buy title to a parcel of land. Forcible proprieties and rights to exchange them are certainly necessary for the organization of resources by markets, but ignoring the role that government plays is wearing blinders.
danphillips

Perhaps the three billionaires were not seeking profit, but almost certainly Blairex was. But that's beside the point. I don't understand your distress that free people want to freely practice an enterprise - regardless of their motive. The market is what it is. If the billionaires *distort* it it is still the market. As long as all the actors are acting freely, why do you have a problem with it?
martinbrock

Why wouldn't Blairex management award themselves huge bonuses and fatten their unionized employees' pension fund to keep the union bosses quiet about it? Hell, I would. Blairex is run by priests or something? If the billionaires' cash is a gift, they'd still be profitable, assuming they care more about their shareholders than the guys at Lehman Brothers or Enron.

"Free people" is an Orwellian construct in this context. We aren't discussing "free people". We're discussing people entitled to govern vast resources. You might as well say that Obama and Congressional Democrats are "free people" deciding to impose a massive reorganization of the health care industry on the rest of us. They're entitled to do it, you know. Why tie their hands?

Your understanding of the market and its benefits seems based on a natural rights theory of propriety. Proprietors have a right to govern their property, because they're proprietors, and they're proprietors, because they have a right to govern their property. Capitalism works its magic, because all of these rightful rights exist and the rightful proprietors exercise them.

My understanding of capitalism is very different. It works because capitalists rationally seek profits, not because they do whatever they like with the capital they're entitled to govern.

Wealthy men happen often to invest seeking profit, presumably to satisfy some instinct for territorial dominance, to be richer than the next guy, rather than personally to consume everything they're entitled to consume. That's why capitalism works. That wealthy men may consume a lot is coincidental, and I have no interest in this particular entitlement, since I'm not extraordinarily wealthy myself. I'm also not a Congressmen, so I have no particular interest in their entitlements either.

The wealthiest men are agents of the state exercising statutory authority. If standards of propriety don't permit these men far more consumption than more common men, the merits of market capitalism are unchanged, and as the wealthiest men seek profit instead, more resources are organized to produce goods for more common men. Because very great consumption is wasted on one man, this alternative resource organization has greater utility.

Saddam Hussein didn't need to sit on golden toilet seats in a vast Presidential Palace reserved for his exclusive use. Those resources were wasted on him, and I don't believe he should have been entitled to organize them so. Bill Gates and Warren Buffet are no different, and furthermore, they know it.
danphillips

Your understanding of capitalism is most certainly different from mine! I work for a living - have my own small business - and I deal in my market every day. It is amazing to me how often my market acts in a totally irrational manner. Some people who appear to be complete idiots make unimaginable profits, while others who try to act rationally barely scrape by (I'll leave it to you to decide in which category I belong).

I must say, reading your comment makes me very aware that we live in different universes. It seems to me your view is distorted by some sort of class envy. There are lots of wealthy men who have nothing to do with the state (with the exception of paying taxes). I know them. They have worked extraordinarily hard to earn their wealth. They get to their business establishment hours before any employee, and leave hours after the employees have gone home for the night. They wear all the hats in their business. They sell the product, service it, do the bookkeeping, clean the office - they do it all. They do it because it is their business, it is their identity. They aren't seeking any advantage through government fiat. They work twice as hard as any employee, and they deserve every penny they make. They deserve to spend it in any manner they choose. That's what capitalism is. I regret you don't see it that way.
martinbrock

I hear this "class envy" mantra all the time. I gave you the utilitarian argument, and you simply ignored it while substituting this "class envy" nonsense.

No one actually needs to be buried in a great pyramid. Entitling a pharaoh to organize resources this way is irrational, because the ratio of the value of the pharaoh's utility, created by these resources, to the value of the resources is vanishingly small. If you want to call this rationale for limiting the pharaoh's authority "class envy", so be it. The label means nothing to me. My rationale involves the organization of resources to meet human needs. You can label my disrespect for Saddam Hussein's authority "envy" too. I just don't care.

There are no wealthy men with nothing to do with the state, because wealth (of the sort we're discussing) is a statutory entitlement by definition.

That successful entrepreneurs work hard is irrelevant. Of course, entrepreneurs often work hard. I think that's great. I have great respect for both Gates and Buffet, in case that wasn't clear before. In fact, I'd cut both men's income taxes practically to nothing, by enacting a progressive consumption tax, if the decision were up to me. "They deserve to spend it in any manner they choose" is your politics, not mine. I don't champion the divine right of kings. I favor a system of statutory authority limited by checks and balances.

The idea that any property holder seeks no advantage through government fiat is nonsensical. Property rights are themselves state enactments. I'm not an anarchist. I don't oppose the state absolutely. It's necessary to establish standards of propriety, and property is essential to market organization, and market organization is very useful. I have no problem with entrepreneurs accumulating wealth by seeking profit in free, competitive capital markets. In fact, I want a lot more resources organized this way.
danphillips

"I hear this 'class envy' mantra all the time." Maybe you should stop to examine the mantra. I predict that one of these days a giant light bulb will appear over your head. I'm sorry, I'm sorry, that was insulting and contributed nothing to the conversation. I will say this, however. Your comments sound like everything you know about marketplaces you got from a textbook. You sound like your only participation in a marketplace is as a consumer. Martin, I have actively participated in markets (not as an investor, not as a disinterested academic, but as a "get in the mud and wrestle" entrepreneur) for over 40 years. Please listen to me: your understanding of markets is in error. Markets are nothing like you think they are.
martinbrock

I don't need to see the light to recognize that you're ignoring the argument from utility and defending some inviolable "natural right" of established entitlement. Some of my knowledge of markets comes from books, books like Wealth of Nations and Human Action and The Ultimate Resource, but most of it comes from living in the market throughout my life, just like you. Books are not mistaken only when they disagree with you. You're employing a vaguely anti-intellectual argument here.

I'm hardly talking like a consumer here. I'm an unrepentant supply sider. I advocate a progressive consumption tax. I'd cut Bill Gates' income taxes practically to nothing. I'd shift half or more of the spending authority of the Federal Congress and Executive back toward the people you say I "envy", but this fact doesn't impress you, because to accomplish this shift, I'd attach one string to the authority, no private castle building, no pharaonic monuments. Politicians in the Congress and Executive are actually worse than men like Gates and Buffet about building pharaonic monuments, and I certainly recognize this fact.

The benefits of capital market organization by free investors, laborers and consumers are nothing like you think they are. It's not about the "freedom" of lords to exercise their divine rights unchecked.
pksully

I just read "Lords of Finance" whose subject was basically the international monetary system from WWI until the start of WWII. It seemed to me that England made a mistake after WWI by pegging their currency at too high a level and that the French benefitted from a more competitive currency. I'm not real confident in this conclusion but it sure seemed this was one reason why England had persistently high unemployment and sluggish growth while the French did quite well (the French?). My belief that we only benefit from the cheap yuan was shaken. Any help on that one?
Morgan

"We Americans cannot control Beijing or of any other national government."

Not "control" but maybe "influence". Does the "tit-for-tat" game theoretic finding apply to international relations?
infopractical

While I agree with your initial assessment that the subsidy of butt paste by billionaires with no interests in the business does nothing harmful, I am not sure that I make the same leap to the Chinese government. It is not at all clear that the Chinese government has no interest in controlling means of production to the point that it can manipulate society. Such government control might manifest quasi-monarchical or quasi-fascist outcomes.

I say *might* because it's not at all clear to me the directions that the Chinese government will take. Clearly there are changes to come and some of them are likely to be major. But it's still hard for me to see a perfect analogy between the benevolent dictator and the actual dictator.
LowcountryJoe

If it was the Chinese goal to really control and manipulate society (our American society), they'd buy stocks of publicly traded companies far more proportionally than they do U.S. federal government issued bonds.

You do know that if the U.S. really wanted to avoid Chinese manipulation of their currencies, we'd stop issuing new government debt...of course the manic voting-public would have to actually want spending to decrease and hold their representatives to just that sort of arrangement.
Jon Thompson

I'm in the strange position of disagreeing with the metaphor but not the point.

On the one hand, if Gates et al decide to build a bunch of stores no one wants and no one uses in my town, my town is definitely worse off. Labor is being used unproductively, land is being wasted, etc. I suppose it depends on the size of the subsidies, but I can imagine huge subsidies being a real drag on the economy. I also suppose the alternate use of funds matters.

On the other hand, Chinese subsidies just hurt the Chinese and benefit us (although you could make a long term argument that this inefficient investment hurts the whole world).

On the gripping hand, I'm convinced by the argument that subsidies to Airbus hurt me, because I live in Boeing country.
martinbrock

On the other hand, Chinese subsidies just hurt the Chinese and benefit us (although you could make a long term argument that this inefficient investment hurts the whole world).

The long term argument is precisely the Austrian argument for free credit markets, as opposed to central monetary authorities controlling interest rates or exchange rates or other prices.

Sure, if the Congress of the U.S. subsidizes ethanol enough, we'll all see "cheaper" fuel. We'll start burning more ethanol in our cars. We'll buy cars designed to burn ethanol rich blends or even pure ethanol, but we aren't really buying the most cost effective transportation products, right?

At some point, the Congress may stop subsidizing ethanol. Then we're all driving the wrong cars, and automobile dealers are selling the wrong cars, and automobile producers are making the wrong cars, and fueling stations are selling the wrong fuel, and fuel tankers are shipping the wrong fuel, and on and on.

How long does it take for markets to adjust when the subsidies end? How many people producing and distributing ethanol and ethanol related products lose their jobs while the transition takes place? We all agree that this ethanol subsidy distorts the market. Don't we?

So if the Chinese government arranges for half a billion Chinese subjects to produce ethanol and sell it cheap to the U.S., their subsidy doesn't create the same problem? Why the hell not?
SheetWise

Why in the world should I care about the disposition of anyones funds? Gates, Buffett, Ellison, or any government? Unless they're waging war, engaged in some sort of mass destruction, buying something I can sell them, or making a wager I want to get in on -- I couldn't care less. Why do people care? Seriously. Why?
vikingvista

How about when they buy Federal debt, enabling the PRO triad (Pelosi, Reid, Obama) to buy up and squander more resources and send you the bill?
SheetWise

I see some economic warfare there -- but only as much as we desire. We're the junkies and they're the source. They're simply buying debt -- we're the ones enabling.
vikingvista

Speak for yourself. I don't desire ANY of it. I'm not a junkie. I'm enabling no one.

And it doesn't just apply to foreign governments. Have you looked at what the big US banks are buying these days? I'd crack open the champaign the day the Federal government announced that it would not honor any of its debts. Bankruptcy for the big banks, Federal Reserve, and other purchasers of Treasuries is hardly justice for financing the conquering of a formerly free people, but I'd settle for it.
SheetWise

I wasn't speaking for myself -- the "we" I refer to is the same government you would like to repudiate "our" debt.
vikingvista

I know. I just wanted to take the opportunity to once again drive a stake through the myth of the collective that pollutes our language. The mistake isn't mine. The corruption isn't mine. The desire isn't mine. The crimes aren't mine. The enabling isn't mine. The choice isn't mine. And when they force me to pay for their crimes, that decision will not be mine either. This government is mine only in the same way a natural disaster is mine.

WE live in this country. There is little else that can accurately be attributed to "we".
Pablo Kuri

No distortion if its private, but it is when made by a plubic entity. Please dont argue the coercive line because in this case China is screwing their own people over the currency peg.

I consider my self a libertarian, and as such I dipise any government intervention in the market, regardless if it´s my government (Honduras) or somebody elses (China).
MWG

So as a "libertarian" I assume you're also against foreign governments dictating to other governments how to "manage" their currency.
Pablo Kuri

Ofcourse, but the argument here is that we shouldnt complain because it isn´t our government. How does that work?
LAD

Your argument assumes there is a "correct" amount of Chinese currency. The Chinese should be allowed to set their currency levels as they choose, and the markets will adapt.
chrishads

That's just the point. There is a correct amount - the price that the "market" values the renmibi at. It's highly unlikely that the Chinese government will be able to replicate that figure.
anomdebus

Why can't it be a distortion that does not make us poorer or pose a threat to the health of the economy over the long-run?
ExcessEC

If I'm understanding your thesis, it's that we have to prevent counterfeiters in China from producing fake Boudreaux's Butt-Paste.