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The biggest Subsidy of US Government: Consumption

Here is an interesting article in NY Times by Paul Krugman, well known economist and Nobel Laureate. In the article he compares the policies of USA and germany and their respective effects on job outlook in the recession.

He makes one interesting point. That the USA policy has no concrete measures for job protection. In a way that makes sense. In an ideal capitalist world, there would be no extra pressures from anyone for anything. It would just be free markets at work.

While the USA policymakers take pride in ‘not subsidizing’ anything, and cringe at even mention of socialism. It also makes sense. Socialism has been proven to be a failed model.

But does that mean there are no subsidies in USA?

As Paul K. argues in his article, the USA policy is directed towards GDP growth. And this has been tweaked so much over the years in this direction, by making lending and spending easy, that it looks like US government is subsidizing consumption.

If you subsidize production, directly or indirectly, then it helps keep people employed. If you subsidize consumption, then it increases demand. But does that really help in creating jobs? Certainly not as many. Because things can be imported.

Thus we have this big flow in the world economy right now from China to USA. One country subsidizes production by creating massive government owned companies, another subsidizes consumption by making lending easy and keeping interest rates artificially low.

And this might work to some extent when the inflation is in check. If inflation starts spiralling out of control, which in the nearĀ  future it likely could, you have lesser and lesser effect of your consumption subsidy.

Where will this end? Only time will tell. But most likely the picture at the end will not be pretty.

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