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“Damn! My Neighbor Swallowed Cyanide. I Guess I Gotta Swallow Cyanide, Too.”

Here’s a letter to the Financial Times:

Larry Summers insists that, unless other governments end their own crony subsidies and similar privileges for favored industries, killing the U.S. Export-Import Bank “would be the economic equivalent of unilateral disarmament” (“Put American foreign policy back on the pitch,” July 7).  This tired analogy to military preparedness fails.

Subsidies and other economic privileges weaken the domestic economy.  They do so because, in order to artificially bolster industries that excel at satisfying politicians, such privileges necessarily transfer resources away from industries that excel at satisfying consumers.  Because Mr Summers (like nearly all economists) apparently accepts this sound argument, he especially should see that subsidies are not the economic equivalent of armaments: an armaments build-up does indeed strengthen the country militarily; subsidies, in contrast, weaken the country economically.

So when foreign governments subsidize industries (for example, through export credits of the sort doled out by the Ex-Im Bank), they themselves weaken their own countries’ economies relative to economies whose governments dispense no subsidies or other special privileges.

In short, foreign subsidies create no threats to retaliate or to guard against.  Quite the opposite.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030​

My brilliant and intrepid Mercatus Center colleague Veronique de Rugy has more.