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Monday, March 27, 2006

China Syndrome

There is one tenet of public choice theory akin to Occam's razor: that the actual effect of a policy, even if it is opposite the stated goal, is usually the desired effect. If a policy meant to help the poor instead traps them in a poorly paid underclass for 50 years, what are the odds that it was an accident and that no one noticed the problem? It is more likely that creating an underclass was the real goal.

This is a somewhat flawed tenet, in that the goals of individuals are usually rational, whereas an organisation might not be. Usually, though, the goal of an organisation is simply survival. In that case, ending poverty would end the need for the Welfare Bureau (or whatever). To survive, the bureaucracy can do anything except fix the problem.

I will attempt to apply this tenet to another situation, although I'm not yet sure how well it fits.

We are borrowing vast sums of money and spending it inefficiently. Since this money must be paid back eventually, or rolled into new debt forever, and the interest or principal repayment will be removed from the efficient market economy, it is irrational to borrow money. The national debt would be fine if we were spending the deficit amount on activities that provided a better return than the interest rate on treasury bills. We know that we are not getting that return. In fact, the return on government spending as a whole is almost certainly below 100%. That means we are getting less benefit than we pay for, due to the inefficiencies of central control over allocation of resources.

Yet, most entities are rational. Are we making a positive return on the money, due to our great economic growth? Are we stealing from future generations? I have another possibility, that, if true, would make our massive borrowing rational.

A very large portion of our national debt is owed to China. The military sees war with the Red Menace on the horizon, and presumably an American victory. In that case, what do you want to bet that reparations to America are approximately equal to the T-bills held by Beijing?

We discount the debt to China in our decision to borrow, because we assume that the debt will not be repaid.

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