Some comments I put on Brad Delong’s web site.
November 24, 2008
November 23, 2008
Pettis: At the same time, Washington desperately needs Beijing to keep buying American bonds, so that the U.S. government can run up a deficit and launch its own fiscal stimulus.
No they don’t. Right now short term Treasuries are near zero interest. The flight to liquidity and from risk means that there is no shortage of buyers for US debt. Everyone in the world wants Treasuries, so there is no need to focus on China as the main buyer of US debt, and one reason that a massive stimulus package is essential is to “push out” the massive purchases of US Treasuries. Without a fiscal stimulus the end state will be everyone having non-productive US Treasuries in their mattresses and no investment in anything that isn’t a US Treasury.
Also, to clarify the main source of disagreement between you and Setser on the one hand, and me and the other:
1) I don’t think that China is or was overproducing
2) I don’t think that the United States is or was overconsuming
The basic problem with the US economy was that the productivity gains of technology and globalization ended up in low interest rates rather than in increasing wages, and that there was massive misinvestment in non-productive goods rather than in productive ones. Less money for houses, more money for universities.
Had the US government spent more on public goods such as infrastructure, health and education this would have provided in increase in wages and interest rates, and would have reduced the amount of leveraging that took place.
The other missing piece here is productivity. If you take out a loan and spend it on inner city education or better subways, you end up boosting productivity which is going to help you pay back those loans.
Pettis: By the way the view that the Chinese authorities will have an easier time in this crisis than the US because “They have options, we don’t” is not, fortunately in my opinion, universally held among Chinese authorities.
Chinese authorities to have an easier time in one respect and that is the issue of “time” and “administrative bandwidth.” In politics, time is critical, and it helps a lot if you have time to argue and think about what is going on. If you aren’t faced with a crisis that has to be resolved in the next few hours, then this gives you time to think and debate about what happens next, and to rollback changes if they turn out to be wrong. If all you are doing to trying to deal with the next explosion, then you don’t have the time or energy to think and argue about long term consequences.
November 22, 2008
November 6, 2008
Victor Shih has written a wonderful book on the political economy of China when he points out that the business cycle in China corresponds to shaping power relationships between two groups of officials. One group consists of local officials that want more spending, and one group consists of central government finance officials that are more concerned about monetary stability. When the economy overheats, the monetary stability people come in and cool things down. When the economy goes into a slump, the local officials come in and start building things left and right. Also, you have to look at incentives, local officials love big infrastructure projects for the same reason Wall Street CEO’s love big complex financial instruments, you make lots of money personally off of them.
We agree that this is going on. He seems to think that this is a bad thing, and if the monetary hawks could stay in permanent control that we could abolish the business cycle. I disagree since I am a fan of Hyman Minsky and I don’t think the business cycle can be abolished and that the shift between these two groups of officials is that Chinese government reacting to the business cycle rather than causing it.
The other thing is that the notion that the financial system ought to be ideally independent of any government supervision is I think dead. It’s hard to fault Wen Jiabao calling up Chinese banks and says “LEND MONEY” when Paulson is basically trying to do the same thing, and the fact that Chinese banks are more willing to listen to Wen than American banks are to Paulson may not be such a bad thing.
China is largely a reprocessing plant, so as exports go down, imports of raw materials are also likely to go down, and that will blunt the impact on growth. The big worry, I’d imagine isn’t growth, but rather 1) employment and 2) local finances.
For 1), the Chinese government was generating massive numbers of jobs. The thing is that it was generating massive numbers of jobs at the same time it was closing down the old state owned enterprises and shedding large numbers of jobs. Looking at net employment numbers gives you a very misleading impression of what is going on, since the companies that are creating and losing jobs are the same ones, and the people who are getting and losing jobs aren’t the same people.
One thing that will help China this time is that there isn’t an overhang of people that need to be laid off from the state owned enterprises.
For 2), local government have been heavily relying on land sales to cover expenses, and I think you are likely to see a lot of defaults on local government owned companies and a general recentralization of Chinese finances.
For 1), China is planning a massive fiscal stimulus package in rural areas. Getting local government officials to spend money on infrastructure is rather easy to do.
There’s likely to be an increase in health and education spending, however, it’s more difficult to use health and education to do fiscal stimulus. One problem is that basic health and education is cheap and really doesn’t have that much of a stimulus effect. The other problem is that what do you do once you’ve stimulated the economy. It’s not as if you can (or should) fire doctors and teachers once the economy gets going.
One final point is that this is not the first time that China has had an economic down turn, and it’s in far better shape now than it was in the previous downturns. The basic reason is that productivity in China is still extremely low, so its still easy through capital spending to find ways of boosting productivity