Why Not Subsidized Loans For Domestic Businesses?

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I am frequently humbled as I work my way through my reading list.  One of the ways I am humbled is when I am reading some work and I think to myself– “Well, why don’t they just change this/ do it this way instead?”  And then, as it turns out, greater minds than me have already suggested that very idea and found it lacking.

That scenario repeated itself yet again recently while I was reading about interest rates in The Gold Standard In Theory And History.  I was inspired to begin thinking of ways that a government could protect its home industries other than tariffs and money-supply manipulation… and I thought… why doesn’t the government just subsidize interest payments on loans for home industries?  (I have a feeling that this sometimes occurs in a de facto way through complicated tax mechanisms already).

As it turns out, someone has already thought of this basic same idea.  As far back as 1918, the Cunliffe Committee On Currency And Foreign Exchanges After The War was discussing the possibility of offering TWO different interest rates– a lower one for domestic loans (to spur home industry) and a higher one for foreign money (in order to lure-in foreign investment).

The problem, says the Cunliffe Committee, is that people would game the system.  Inevitably, hucksters would begin “borrowing at the low home rate and contriving in one way or another to re-lend at the high foreign rate.”   The committee felt that any regulations imposed in an effort to combat this problem would only result in the “maintenance of such stringent restrictions upon the freedom of investment” that it would hurt the economy more than help.

Personally, I’m not so sure about this.  It costs us a lot to feed, house, and otherwise take care of violent offenders in jail… but it doesn’t meant that we throw up our hands and say that the cost of laws and their enforcement are just too much to justify the maintenance of a criminal justice system.

But the committee also has a more directly economic argument against the two-interest-rates idea…  “By fostering large loans and so keeping up prices” [the two-rate system] “would continue to encourage imports and discourage exports” since imports would be relatively cheap in the inflationary environment induced by an economy awash in funds, whereas our exports would appear to world as a bit pricey.

The end result, the committee maintains, is that the country would end up in debt to foreigners.

But I have to wonder… is this truly all the story… the BIG picture?  Let us pretend that we are offering higher interest rates to foreign money.  We wouldn’t need to be offering exorbitant rates… just more or less matching the world rate.  And yet, if we are subsidizing home industry with low-priced loans in a world where other businesses are having to pay higher interest payments… would our export costs really be relatively high?– or might they not be relatively low, since our businesses would not have to cover such high interest payment costs on their loans?

And then there’s this idea that we would be “indebted” to foreigners…  I think the implied connotations are a bit misleading.  Unless there’s something terribly wrong with your country (as in, you’re too weak to defend yourself against foreign repo-men if worst came to worst)—then it really doesn’t matter who’s lending you money, as long as it’s the amount YOU want on the terms YOU agree-to.  In fact, drawing in resources from abroad to leverage for home use is generally quite a GOOD thing.

So I guess, humbled as I am, I’m still cocky enough to say… “Yes, you were ahead of me in thinking about this… But now why don’t you revisit the idea, and think about it RIGHT?”

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