China, The Pegged Yuan and “Malinvestment”

A Benjamin Cole post

Our own James Alexander and also Lars Christensen of the Market Monetarist blog have both done admirable posts on China’s effectively tight-money policy, since the Sino giant has crudely pegged the yuan to the U.S. dollar, and the Fed is as passively tight as a nun. Blogger David Beckworth led the parade with earlier posts.

Tyler Cowen, the George Masonite with his admirable Marginal Revolution blog, has tipped his hat to Lars, and good for Cowen, but he also pointed to China “malinvestment” as a key in understanding China’s economic malaise.

Probably so. But Cowen gives no sense of scale involved, or what portion or type of China spending is malinvested.

Surely, a free market allocation of investable resources makes more sense than central planning in general, although who should invest in infrastructure, and at what level and form, is probably a muddier prospect.

Malinvestment: Civilian Vs. Military

But anyway, let’s grant that poorly advised China planners overinvested in housing, and famously so in “ghost cities”—what if that housing fills up belatedly, as appears often the case? Then the “malinvestment” is largely so only financially, in the “present value” sense of the word. The Chinese public now has the economic good of housing, which sat empty for a few seasons or maybe even years.

There can be no such second life, however, for military outlays. In a classic economic sense, a malinvestment in military or national security outlays is a malinvestment forever. Military outlays may be of dire necessity (think WWII), but the fact remains, military outlays are pure and permanent malinvestment.

A military outlay, in classic economic terms, is akin to building a bridge in the middle of the Utah desert, and then blowing it up at the end of the year.

U.S. economists rarely (never?) term as a “malinvestment” the $1 trillion a year federal outlays spent on the Department of Defense, the VA, the Department of Homeland Security, the black budget, and debt on military-related outlays. It is not PC to say so, though every classic economist knows that to be the truth.


In the next ten years, the U.S. will spend about $10 trillion on “national security,” all of it indisputably a “malinvestment” in classic economic terms. How does this level of malinvestment, in type or scale, compare to Chinese malinvestment? No one seems to know.

If the U.S. should nosedive in the next 10 years somewhere, will Tyler Cowen point to federal “malinvestment” in national security as one precipitating cause of the recession, or a hurdle to economic recovery?

2 thoughts on “China, The Pegged Yuan and “Malinvestment”

    • Yes…I wonder if we should erase this post. It will be a cold day in hell before Tyler Cowen calls military outlays a malinvestment, anyway.

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