Page 1 of
2 A tale of two (China
vs US) stimuli By Peter Lee
It was the best of times, it was the
worst of times, it was the age of wisdom, it was
the age of foolishness ... we had everything
before us, we had nothing before us, we were all
going direct to Heaven, we were all going direct
the other way. - Charles Dickens, A
Tale of Two Cities
Economists, like
Dickens, can't figure out if the world is headed
for economic renewal or if the global economy is
"going directly the other way" in a hand-basket.
Exhibit A is the great Chinese stimulus of
2008-09, a US$586 billion shot of infrastructure
spending that, as a percentage of gross domestic
product, dwarfed the US effort by a factor of
four. The example of China has acquired heightened
relevance as the
global economy falters
once again and a fierce, and fiercely ideological,
battle has broken out over the need for further
stimulus in the Western economies and inside
China.
The Chinese stimulus is credited
with saving the world from a global recession. The
US stimulus for the same period is unanimously
dismissed as a damp squib. To the American right,
stimulus doesn't work; to the left, the reason for
America's prolonged woes is not enough stimulus,
thanks to President Barack Obama's excessively
cautious and conciliatory approach to governing
during his first months in office. Its cure: more
stimulus. (On Thursday this week, Federal Reserve
chairman Ben Bernanke did his bit, announcing that
the Fed will make open-ended purchases of $40
billion of mortgage debt a month and hold the
federal funds rate near zero "at least through
mid-2015".)
Even so, the Chinese stimulus
gets little love from Western economists, many of
whom deride it as little more than a wasteful,
inflationary, bubble-fueling misallocation of
resources on a heroic scale. Doubts about the
stimulus cast a grim shadow over the world and the
Chinese economy. Economic growth is faltering and
the only nostrum with a near-term prospect of
success, both in China and in the West, "more
stimulus", is viewed with suspicion.
For
anti-Keynesian economists in the West,
bad-mouthing the 2008 Chinese stimulus is a matter
of faith, ideology, and politics. Western
governments are locked in a debate as to whether
they should increase taxes or sell more debt now
to fund further stimulus of their economies, or
whether austerity, with its immediate and concrete
benefits to the well-to-do and theoretical
long-term benefits to the human race, should
prevail.
The opponents of stimulus point
to the Chinese experience as evidence of the
catastrophic consequences of government spending.
Keynesian economists, who apparently recoil at the
concept of a successful economic initiative
growing out of China's manifestly corrupt,
neo-mercantilist state capitalist regime,
apparently find the 2008 Chinese stimulus
difficult to defend.
Gordon Chang, who,
like Minxin Pei, has a very well-aged bottle of
champagne ready to uncork when the Chinese economy
finally collapses, tried to taunt Nobel economics
laureate and newspaper columnist Paul Krugman into
defending stimulus in an article for Forbes titled
"Hey, Krugman, ask China if the stimulus is a good
deal". [1]
Krugman, among the most
vociferous advocates of additional stimulus in the
United States, has primly declined to defend the
Chinese stimulus. In a December 2011 column, he
wrote:
I've been reluctant to weigh in on
the Chinese situation, in part because it's so
hard to know what's really happening. All
economic statistics are best seen as a
peculiarly boring form of science fiction, but
China's numbers are more fictional than most.
I'd turn to real China experts for guidance, but
no two experts seem to be telling the same
story. [2]
Fortunately, Chinese China
experts seem to have a relatively clear and
circumstantial understanding of what happened with
the stimulus. That understanding appears to be
fundamentally Keynesian. Some major stimulus was
necessary. However, there are profound doubts
concerning the wisdom of the stimulus in
conception, execution, and the handling of its
messy aftermath.
Bad news, great and
small, has served to concentrate attention on the
shortcomings of the Chinese stimulus. The recent
collapse of a Harbin bridge segment - built on a
rush schedule as part of the stimulus package -
serves as a symbol of out-of-control spending and
shoddy results. On the macro scale, Chen Zhilong,
an economic journalist of reformist views,
provided an indictment of Chinese stimulus
policies on his blog:
A province might have seven or eight
airports, but 80% can continue to exist only
through government subsidies. In the central
region, eight out of 10 or so high-speed rail
lines aren't making money; in coastal areas
without resources or markets, "poor counties
also want to build big ports", and are dredging
deepwater berths, but there isn't a single
money-marking berth, leaving a pile of debts for
posterity. This brings with it financial
difficulty, low investment efficiency [and] bad
bank debt, [and] exacerbates overcapacity and
encourages corruption.
For an extended
period, almost all increased investment has been
concentrated in industries with overcapacity. In
2008, iron and steel annual capacity had already
reached 500 million tonnes. There was a chance
to restructure the industry but instead in 2009
there was a burst of additional capacity, the
nationwide capacity of big iron and steel
facilities increased to 700 million tonnes, a
situation of severe overcapacity and wide-scale
losses. At the beginning of this year, Zhanjiang
[in Guangdong province] received approval for
another large-scale iron and steel project.
Cement manufacturing capacity is over 300
million tonnes. Utilization of aluminum-smelting
capacity is only 65%; the photovoltaic industry
has become a black hole for money.
[3]
Massive over-investment on the
industrial and civil-works side translates into
dismal if not negative returns on investment. From
a Keynesian perspective, that's not a mortal sin.
Even under the most favorable circumstances, it
may take decades for large civil-works projects to
justify their investment.
Stimulus
spending is not supposed to be the implementation
of targeted government investment aka industrial
policy, or what conservatives would characterize
as stealth socialism. It is merely an emergency
measure to sustain demand temporarily while the
private sector gets out of its funk, banks resume
lending, businesses start investing again and so
on and so on.
However, persistent, massive
over-investment in a favored sector that crowds
out other investment and drags down the economy,
with few effective mechanisms for restructuring
and rationalization after the worst damage has
been done, is bad.
An important metric for
the success of a stimulus program is how quickly
and effectively it can be wound down - the lumps
and bumps it made in the economy smoothed out, as
it were - in case another stimulus program is
desired. The Chinese regime's record in this
regard is not good.
During the stimulus
period, banks were encouraged to lend
promiscuously, and a lot of that money showed up
in real estate, inflating a bubble of
world-historic proportions. The government has
been gingerly attempting to pop the bubble for the
past year or so, but success in bringing down
prices has also brought real-estate developers to
their knees. It is suspected that banks and
financiers are colluding with strapped real-estate
companies and one another in shadow financing
vehicles that are little more than Ponzi schemes
to keep non-performing real-estate loans from
showing up on their books.
Local
governments, which became addicted to income from
real-estate development, are facing massive budget
shortfalls as the market deflates. The central
government has not come up with a compelling
formula either to deal with these shortfalls or to
force the local governments to cut back on
spending and borrowing and bingeing.
The
overcapacity of the manufacturing industry is
almost comical in its magnitude. China, once a
steel importer, now has 100 million tonnes of
excess capacity and is roiling export markets and
balance sheets around the world. Inside China, a
Chase analyst estimates that mills and middlemen
are holding 100 million tonnes in unsold
inventory. Some mills took advantage of their
borrowing power to swill at the stimulus trough
and pour money into unproductive real-estate
investments as well as unnecessary capacity. [4]
Crucially, the Chinese economy is not
being given the opportunity to grow out of its
problems. Lagging economic growth in the West
means reduced exports, more excess capacity, more
bad loans.
Trying to duplicate the 2008-09
stimulus in an environment of dodgy bank balance
sheets, massive overcapacity, and continued
weakness in global demand would not be an
effective emergency measure; it would be a recipe
for economic suicide.
The Chinese
government has responded to the dire overall
slackening of export and domestic growth with a
modest stimulus package estimated at $157 billion,
one-quarter of the magnitude of the 2008 stimulus
and - ironically or, perhaps, tellingly - roughly
equivalent in percentage of GDP to the
underwhelming stimulus enacted by the US after
President Obama's election.
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