A simple model of China’s model of China

by on November 11, 2008 at 7:22 am in Political Science | Permalink

Compared to the U.S. economy, the Chinese economy has fewer automatic stabilizers, such as welfare programs and unemployment insurance.  That implies their fiscal policy should, if possible, be especially countercyclical, compared to what is called for in most richer countries.

Chinese leaders view volatility as serially correlated and increasing from the source outwards.  Given Chinese history, they expect that shocks grow and spread rather than dampening down.  So when a shock comes, the demand to hold and indeed hoard very safe assets increases rather than decreases.  Chinese fiscal policy ends up being pro-cyclical rather than countercyclical.  And it is hard to succeed with fiscal policy in the first place.

Fortunately, I’m just making that model up.  Why should we expect lots of mistakes to be made? 

1 8 November 11, 2008 at 8:37 am

The Chinese are far more sensitive to worker anxiety than either the Democrats or Republicans. You can find plenty of “hands clean” comments from Republicans who are happy to pin the coming economic crisis on the Democrats. For the CCP, there are no clean hands.

On the flip side, the worst Democrats can expect is some kind mutant hybrid in the form of a country run by a redneck-libertarian Palin-Paul alliance. Whereas if the CCP falls, almost anything could happen.

2 Pablo Martínez-Almeida November 11, 2008 at 10:16 am

Everyday we read some worrying news about Chinese economy. If it turns into ChinaDown the Chinese Government will face a difficult situation just in time for the 20th anniversary of the 1989 protests in Tiananmen Square.

Twenty years ago some intelectuals and university students led those protests. Next time workers could take their place.

3 gloucester12000 November 11, 2008 at 2:22 pm

“Fortunately, I’m just making that model up”

This is the most honest thing that has ever been said on this site and by economist in general. Economics field uses math like English department uses obscure words to sound profound and hide shallowness. Tyler won’t respond to Krugman on Great Depression and instead write a new post opening on a new terrain when original terrain has not be covered and no final conclusion has been reached. What a coward and intellectual charlatan.

4 Lee November 12, 2008 at 12:42 pm

I am very confused by your posts on China. It’s as if you can write
something clearly about any other issue but China.
If you don’t understand the issues deep enough related to China, then don’t
write about it.

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