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Bad Incentives

Here’s a letter to a relatively new patron of Cafe Hayek:

Mr. James Neweton

Dear Mr. Neweton:

Thanks for your e-mail.  You write that you “suspend [your] free trade principles when [you] observe the Chinese stockpiling large amounts of bonds from our spendthrift government” – bonds bought with dollars the Chinese earn from their exports to America.

With respect, principles ought not be jettisoned so quickly.

I agree that Uncle Sam borrows excessively.  But the problem with excessive government borrowing is excessive government borrowing.  The problem isn’t the creditors, for it isn’t the creditors – be they from Beijing or Boston – who cause Uncle Sam’s current expenditures to exceed its current revenues.

It’s possible – although I believe it to be ridiculously unlikely – that using trade restrictions to reduce the flow of dollars to China would so shrink the availability of credit on international markets that Uncle Sam would thereby be prompted to be more fiscally prudent.  And such prudence would, indeed, be a real benefit.  But it’s far from clear that this benefit would outweigh the costs to American consumers of higher-priced and reduced-quality products at home, and of less access for American producers to foreign markets.

More fundamentally, it would be both a grotesque injustice, as well as a source of calamitously bad incentives, to use a government’s fiscal misbehavior as an excuse to grant that same government greater power to restrict its citizens’ freedom to spend their money as they choose.  Such a move would be akin to asking a playground brute to stop bullying his classmates, while simultaneously promising the brute that the more bullying he does, the greater will be the number of rocks, sticks, and knives that you’ll make available to him.

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


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