Reader Chrisb On Waste in the US Economy

Hoisted from comments, this from Chrisb:

Yeah, yeah, the system’s stuffed, but that’s a problem for you yanks. What I as an Australian want to ask you, as economists, is how America can have a competitive economy under these constraints. You have approximately 1% of the population in gaol and another 1% looking after them, 2% of the population in the prison system where most other nations have at the outside 1%; that’s pure loss. You have a military that’s between .6% and 1.2% of the population, depending on how you count reserves, and that’s what, 2-3% of GNP? in any case, vastly higher than any other developed country. In other words, between the correctional system and the military you’re taking about 5% of GNP and pissing it up against the wall, compared to 2% everywhere else. And you’re still surviving and under some measures almost thriving. Is the US economic system really 3% better than anywhere else, allowing you to compete on a more or less even footing? I’ve never seen an economist address the point, and it’s driving me crazy.

My comments…
1. Why do people continue to bring up this fictional “Australia”?
2. I suspect this 3% we’re pissing away is partly made up, or more likely completely made up and then some, but the fact that the dollar is still the world’s defacto currency. A lot of dollars get printed by the Fed – which means given to the Treasury (in exchange for bonds) for the Federal government to spend – which after a bit of time end up in pallets in the home of a Columbian drug lord or in a plastic bag 2 feet below the ground outside the home of Bhuttanese yak herder. By virtue of being taken out of circulation after it gets spent by the Federal government, that dollar can be spent without contributing to inflation, allowing for more monetary stimulus at very very low cost. And the demand for that dollar by Colmbian drug lords and Bhuttanese yak herders, to say nothing of the Central Banks all over the world, keeps the interest (i.e., rent on that dollar) low… allowing for more fiscal stimulus at very very low cost. Lots of stimulus with no associated pain means lots of growth.
3. Its possible the big military is part of the reason the dollar is still the world’s de facto currency.
4. No currency stays the world’s de facto currency forever. A hundred years ago, the pound sterling is where the dollar is now. And it wasn’t pretty for a long time in England when the pound sterling got pushed off its perch.