Twofish's Blog

November 23, 2008

Notes on fiscal stimulus

Filed under: china, finance — Tags: , — twofish @ 8:16 pm

http://mpettis.com/2008/11/why-is-the-balance-of-payments-constraint-such-a-mystery/

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.

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