posted on June 02, 2009 01:04
With our Secretaries of State and Treasury both off in Beijing kissing all the ChiCom butt they can manage, Mr. Smith tipped me off to a piece by Jason Steck over at The Compass on the interconnected nature of the U.S. and Chinese economies. Smith himself had a thing or two to say, concluding with this:
The situation cannot continue indefinitely, with the US debt skyrocketing.
Okay, I'll bite...
You have to look at both sides of the equation!
There are only three ways Government can acquire a dollar to spend: it can take it away from the people (direct taxation), borrow it from somebody (debt), or print it (inflation).
Consider our economy as a pool of capital. Left to its own devices in a free society, this pool of capital will grow. This is a fundamental tenet of capitalism, and the mechanism of this growth is production, which is effectively the expenditure of energy to decrease the level of entropy--or, if you prefer, to INCREASE the level of organization--within the economy.
Any form of tax--whether direct taxation, debt service, or inflation--introduces friction into the equation. Taxes siphon off capital and reduce the pace of growth. Without getting into the details of how many dollars the government spends and for what, it's fair to point out that--ideally--a given dollar spent by Government should introduce as little friction as possible into the system.
So here's some hand-wavy math.
The highest-friction kind of taxation is inflation, because its entire effect is instantaneous: print a dollar, and you have instantly increased the cost of EVERY transaction and reduced the value of EVERY asset, globally and at once.
Direct taxes remove value from the economy on a quarterly basis, meaning that a given dollar can keep on generating production for up to three months before it is removed from circulation. Plus, it's never completely gone, since most dollars taxed are ultimately returned to some other place in the economy. The main problen with direct taxation is that the dollars usually start in a place where they generate LOTS of production and wind up in a place where they generate almost none at all. So, while the effect of inflation is to destroy the value that FEEDS production, the effect of direct taxation is to reduce the productive IMPACT of the average dollar.
Debt is interesting.
When Government borrows a dollar--all other things being equal--that dollar is NOT taxed, not directly. It is thus left in the economy to drive production. Whether or not this is an advantage depends on the difference between the long-term value produced by that dollar and all its children, and the long-term cost of servicing the debt. If the difference is a positive number, then the overall economy has benefited from the decision to borrow instead of tax. When you consider that the typical Treasury security takes decades to mature, even a small advantage can compound hugely.
So, if you work the numbers, it turns out that--even in the current economic slump--debt is manifestly our friend. Something really fundamental would have to change in our economy before direct taxation would become a better option than borrowing. The caveat, of course, is that the economy HAS to keep growing, or the debt WILL eat us alive. That's the bad news.
Now, technology is a production multiplier. It is, in fact, the ONLY production multiplier! Asserting that economic growth will come to an end is fundamentally equivalent to asserting that technological growth will come to an end... that we will reach the end of innovation.
Now, I'm not saying that there are no physical limits to innovation. What I AM saying, though--and this is the good news--is that there are so many orders of magnitude between our current technology and those theoretical limits that it really doesn't even make much sense to talk about them within our current context. Within our current economic context, the only REAL limits to the growth of production are not technological, but POLITICAL.
So what's the moral of the story? Worrying about our debt to China is completely putting the cart before the ox, because creating new debt is actually by far the most cost-effective way to fund Government, SO LONG AS OUR ECONOMY CONTINUES TO GROW.
Policies that damage economic growth don't just hurt us in the short term... by closing the gap between the cost of taxation and the cost of debt, they invalidate the most efficient mechanism we know of for producing that growth in the first place!