The Chinese fiscal stimulus memory hole

by on August 31, 2015 at 12:23 am in Current Affairs, Economics | Permalink

Remember back in 2009, and a bit thereafter (pdf), when so many people were praising China’s very activist, multi-trillion fiscal stimulus?

Yet some of us at the time insisted this would only push off and deepen China’s adjustment problems.  There was already excess capacity and high debt and favored state-owned industries, and the stimulus was making all of those problems worse and only postponing a needed adjustment.  The Chinese incipient contraction was based on structural problems, not a simple lack of aggregate demand.  As I wrote in 2012:

To keep its investments in business, the Chinese government will almost certainly continue to use political means, like propping up ailing companies with credit from state-owned banks. But whether or not those companies survive, the investments themselves have been wasteful, and that will eventually damage the economy. In the Austrian perspective, the government has less ability to set things right than in Keynesian theories.

Furthermore, it is becoming harder to stimulate the Chinese economy effectively. The flow of funds out of China has accelerated recently, and the trend may continue as the government liberalizes capital markets and as Chinese businesses become more international and learn how to game the system. Again, reflecting a core theme of Austrian economics, market forces are overturning or refusing to validate the state-preferred pattern of investments.

How’s that debate going?  While the final outcome remains uncertain, Austrian-like perspectives on China are looking pretty good these days.

Just as you go to war with the army you’ve got, so must a country conduct fiscal stimulus with the policy instruments it has.  And most forms of Chinese fiscal stimulus make their imbalances worse rather than better.  Yet dreams of fiscal stimulus as an answer to the macro problems on the table never die:

Sangwon Yoon writes for Bloomberg:

China is sliding into recession and the leadership will not act quickly enough to avoid a major slowdown by implementing large-scale fiscal policies to stimulate demand, Citigroup Inc.’s top economist Willem Buiter said.

The only thing to stop a Chinese recession, which the former external member of the Bank of England defines as 4 percent growth on “the mendacious official data” for a year, is a consumption-oriented fiscal stimulus program funded by the central government and monetized by the People’s Bank of China, Buiter said.

“Consumption-oriented” is the key word there.  I don’t blame Buiter for speaking precisely, but few readers will pick up on his careful use of words.  Still, switching to more consumption is a surrender to lower rates of economic growth, not a way of keeping the growth rate high.  That is a good idea, but a funny kind of stimulus.

In the meantime, the consumption sector in China seems to be faring poorly.  On the way up, investment rose at the expense of consumption, but on the way down they are falling together.  Funny how things like that work out, and it does suggest that a consumption-oriented stimulus maybe can break the fall but it won’t restore prosperity.

It’s striking how little recent discussion I’ve seen of China’s much-heralded fiscal stimulus of 2008-2009.

This is an object lesson in relying too much on short-run macro models, or models in which sticky prices are the only imperfections, or models where the quality of investment is not a factor.  Whatever you think of the American Great Recession, the Chinese case is very, very different.

1 E. Harding August 31, 2015 at 12:39 am

“The Chinese incipient contraction”

-Which has not happened throughout any part of the 21st century yet recorded.

“China is sliding into recession”

-Of 4% RGDP growth. For actual recessions, look at Latin America.

“On the way up, investment rose at the expense of consumption”

-Which is why consumption in China has collapsed since 2009.

“Whatever you think of the American Great Recession, the Chinese case is very, very different.”

-Yeah; ’cause it’s not a recession, much less a great one.

2 Andao August 31, 2015 at 1:10 am

If you read Tyler’s previous post, you’ll see at least two provinces are in recession:

3 E. Harding August 31, 2015 at 1:29 am

Composition effects.

4 E. Harding August 31, 2015 at 1:42 am

Money may be flowing out of these provinces to the rest of China, where it can be used more efficiently.

5 derek August 31, 2015 at 8:45 am

The banker said that if the Chinese officials announce 4% growth that means the economy is shrinking.

They will not tell the truth, because the issue is no longer economic but political. As you said, there hasn’t been a downturn for a few decades.

6 Dzhaughn August 31, 2015 at 10:57 am

Poor job of reading, E. Better look up “incipient” and “mendacious” in a dictionary.

7 E. Harding August 31, 2015 at 2:58 pm

If China was growing at 4%, it’d still be catching up to the West.

8 guest September 1, 2015 at 12:06 am

Shhhhhhh, why are here with your facts?

9 JWill August 31, 2015 at 1:17 am

Maybe 2015 is a better time to deal with the unraveling than 2009 was. Unless you think the global economy was already at floor in 2009 and further shocks wouldn’t have made things worse. But its not exactly easy to fault someone for agreeing with the premise (that further stimulus is just delaying the inevitable) while thinking “we can deal with it better in the future than we can now”.

10 Donald Pretari August 31, 2015 at 1:24 am

Now, wait a second. To the extent that China is a planned-economy, it can surely mal-invest. After all, that’s what planned-economies do, mal-invest. Are you saying only Austrians know that?

11 Rick Hull August 31, 2015 at 4:03 pm

While they may not have a monopoly on the term, it’s definitely a hallmark. Many non-Austrians deny the possibility of malinvestment and refer instead to overinvestment.

12 Cloud August 31, 2015 at 1:40 am

What I get from Buiter is actually kind of helicopter money suggestions, if you think that works?

13 Tom Warner August 31, 2015 at 3:18 pm

Precisely, though not said if in loans or tax cuts or payments, or how he imagines the money being funneled into consumption. Would it be given away to households and merely presumed spent on consumption? Loaned to producers of domestic market consumer goods? Without spelling it out the idea seems less than half baked. China has its set ways and proposing something far out in left field from them such as monetary financed cash payments to households seems more escapist fantasy than engagement.

Tyler weaves together so many ideas I don’t know where to start. I mostly agree but with many caveats eg exports actually did very well till 2013, and consumption actually skyrocketed in 08-13 (the share of GDP shrank is all). A lot of that share decline was individual free albeit range-restricted choices to save more for investment in residential housing, to live better or for investment. I have sympathy for the Austrian view but not to the extent it’s a moralizing harangue or out of touch with the data.

14 Jonathan August 31, 2015 at 2:47 am

When it comes to the euro, Tyler can take solace in the fact that while his predictions have been wrong, the eurozone is at least a hideous economic mess.

For China, on the other hand, the last five years seem to have been a thumping success relative to the rest of the world, even if you want to discount a fair amount of the stated GDP growth on fudge factor/distortion grounds.

15 Axa August 31, 2015 at 6:33 am

Past performance is not an indicator of future returns 😉

16 Dan August 31, 2015 at 3:21 am

As Matthew Yglesias wrote in 2013:

“When I visited China in 2009, it was already the conventional wisdom among well-informed China watchers that China was a bubble economy driven by unsustainable levels of investment and primed for a crash any day now. Now in 2013 it’s the conventional wisdom among well-informed China watchers that China is a bubble economy driven by unsustainable levels of investment and primed for a crash any day now. And one of these days China really will crash! And one of these days the bull run we’ve seen in the S&P 500 will crash! All prices eventually fall! All economies (except Australia, apparently) have recessions sooner or later! Bad things happen! […]

But to be really impressive, what you need to do is say something concrete about timing. Is this happening in the next six months? Next year?”

17 MOFO. August 31, 2015 at 9:15 am

I think this is non-sense. There are lots of little, unpredictable things which can throw off the timing of an inevitable decline. If you want to be impressive, predict in advance the nature of the crash. What will fold, what will happen next, etc.

Look at it this way, if someone went to the doctor, and he said “you have liver cancer and will die in the next 6 months” and you actually lived 8 months before dying of liver cancer, you wouldn’t say “pfft, that doctor didnt know anything. Conversely, if you went to the doctor and he said “you have liver cancer and will die in the next 6 months” and 6 months to the day later you are hit by a truck, then you wouldnt say “wow, that doctor really knows his medicine!” Especially if an autopsy shows no liver cancer.

To me, knowing what is going on and what that implies is impressive, getting the timing of a particular even right is just lucky guessing.

18 frozen peach August 31, 2015 at 3:32 am

what did krugman have to say? anyone have a link?

19 Nathan W August 31, 2015 at 3:35 am

While traffic is pretty bad in the major cities, the fast trains and minimal congestion for inter-city travel must be doing wonders for the time of “productive” people and make it easy to move goods.

I gather there are a handful of airports that don’t do a lot of business, but I think you will find this in other countries too. It seems to me that most train stations, bus stations and airports are quite busy most of the time.

I.e., I don’t buy the story that China has already “overinvested” in infrastructure. But the time has to come sooner or later.

Meanwhile, there are still several hundred million Chinese who can be doing far more productive things than near-subsistence farming, and with nearly 100% literacy, I don’t see why they get into far more productive occupations, if jobs are available.

The first time I was in China was nearly ten years ago. Already at that time, it was understood that “soon” China would have to turn towards domestic consumption for continued growth. Since minimum wages are controlled at a local level, there is great scope to improve the buying power of hundreds of millions of working class labourers while permitting other regions to pursue development which is primarily driven by the advantage of low wages combined with properly functioning infrastructure.

Finally, I am a huge pessimist that India will take on the mantle of Chinese growth in global economy. Between incessant power outages and extremely poor/slow road/rail connections and a proclivity for immediate rent-seeking across all levels of society, I think foreign producers would be crazy to want to set up shop in India.

20 agra brum August 31, 2015 at 5:09 am

And China got many of those trains and some airports through its stimulus spending. The party may end…but they have a lot more useful goods now. Still seems worth it.

21 derek August 31, 2015 at 9:04 am

What is the maintenance cost of all those wonderful things, and is their usage able to support the cost?

Expensive assets require a thriving economy to maintain. Otherwise they start literally falling apart. There is a 6 year rule in property management. You can start with a well functioning building, not spend money for 6 years, then in the 7th every dollar you saved gets spend in emergency repairs. This has made the career of many property managers, getting a promotion and moving on in the fourth year. All these assets require substantial investment to maintain, and if Chinese officials lack the cash, they will, as have US and Canadian politicians, scrimp on keeping things up. At a certain point the original cause for economic turmoil gets forgotten as the extremely difficult decision are forced upon them as things stop working.

I hope things can settle out quickly.

22 agra brum August 31, 2015 at 1:43 pm

However, China’s leaders do not need to get any tax raises on a ballot to maintain their infrastructure. And they are being used heavily. So it only takes a decision by the leadership to allocate capital or raise fares to generate extra maintenance income.
It’s not like the US where a bond to fund construction might get voted on, but then maintenance is perennially underfunded by state governments that cannot run a budget deficit.
Anything can be neglected…but a Chinese state owned prestige transport mode used by party leaders is likely to stay well funded and maintained.

23 Nathan W August 31, 2015 at 2:27 pm

Good questions. I took a high speed train the other day between non-major centres and it was nearly full the whole way, with lots of people getting on and off at the stops. I think there will be a lot of revenue for at least the high speed trains. The slow trains cost a pittance compared the the high speed ones, but people seem to value their time.

As for the other infrastructure assets, perhaps your concerns are on the money. I have no idea.

24 Zach August 31, 2015 at 6:28 pm

This is very obvious if you walk through East Berlin. All of that effort focused on production instead of maintenance… The irony is that a lot of East Berlin looks infinitely better now, even though Germans never tear anything down — they just came in and renovated.

25 Harun August 31, 2015 at 3:27 pm

China also got many second and third tier cities building gleaming steel conference halls that will be under-used.

Building airports and trains that were needed anyway is fine. But with stimulus, suddenly new projects must be found, and almost by definition, they will not be the good, low-hanging fruit, but more likely white elephants.

26 Artimus August 31, 2015 at 4:19 am

“Very, very different”? Tyler, please don’t start talking like Donald Trump!

27 rayward August 31, 2015 at 5:20 am

I won’t take the bait and try to defend the China-style top-down economy. But let’s not overlook a couple of details while (prematurely) celebrating China’s demise. First, the slow-down in China’s economy is partly the result of a slow-down in the world economy and a drop in demand for China’s relatively cheap goods. Second, the slow-down in China’s economy is partly the result of a re-balancing of comparative advantage, as (labor) costs here have declined and costs there have increased (relatively speaking). Third, China has spent decades doing what theorists on the right prefer, which is to save and invest; yet now some of those same theorists are critical of China for over-investment and excess capacity. Fourth, fiscal stimulus may be a contradiction for some theorists, but investment in infrastructure and productive capital today will make China more productive tomorrow – “where were you when the infrastructure and productive capital in the U.S. were deteriorating” may become the hard question asked in the U.S. in years to come. Finally, China bashing is ironic given the similarities between the U.S. and China, both with high levels of inequality and a financial assets bubble, a bubble that China is having great difficulty managing and a bubble that has caused the U.S. regulators (i.e., the Fed) to become all tied up in a wad for fear that doing nothing will make the bubble worse and doing something will cause it to burst. Maybe Cowen is engaging in a little self-examination

28 Axa August 31, 2015 at 6:37 am

Well, where’s the “China” who will buy China debt to keep the stimulus going?

29 chuck martel August 31, 2015 at 6:47 am

” investment in infrastructure and productive capital today will make China more productive tomorrow….”

If the Chinese bosses are particularly adept at predicting the future, maybe so. On the other hand, if they’re typical human beings they’ll be wrong about the usefulness of some of that infrastructure investment and it will be malinvestment. Tomorrow the Chinese will be saddled with uninhabited apartment complexes and unoccupied passenger trains. Infrastructure development is best left to the people that will use it, not as an economic stimulus to the present.

30 Hayek August 31, 2015 at 7:16 am

Yet more Keynesian failure that will be expunged from record by the party of science. Evidence based and all that.

The Chinese just did it wrong. And not enough. Yeah that’s it.

31 curmudgeonly troll August 31, 2015 at 7:59 am

China has its flaws and quirks, but if I was an Austrian, I probably wouldn’t wait by the phone for clients asking for advice on how to not be like China.

If China is what failure looks like, a lot of countries would love to fail like that.

32 derek August 31, 2015 at 8:58 am

There are lots of examples in the last century of places that built and looked very good for a short while. Greece did amazing things for the Olympics, upgraded roads and infrastructure. Canada’s cities in the 70’s were hives of infrastructure spending, but the crunch meant that it was another 35 years before we would see any more major infrastructure in those cities, all the while the models of central planning meant that the concrete pylons were encased with expanded plastic to keep pieces from falling on the cars.

Everything that China has built will look like shit in 5 years unless there is continued investment and growth. Empty buildings fall apart and deteriorate at a high rate, as do roads and bridges.

Throw in social or political turmoil and things can go in reverse very quickly.

Chinese officials were up to 2009 very smart. They had growth that was paid for by a thriving export economy. Then they started listening to western economists who had created the fragile structures that collapsed in 2008 for ideas, felt the heady rush when they drove the world economy for a couple years. Now this. They will be lucky to get out with their heads, in fact quite a few of them realize that and are buying properties elsewhere.

33 TallDave August 31, 2015 at 11:44 am

A few, but certainly no one in the OECD. China is still poorer than Mexico.

34 Nathan W August 31, 2015 at 2:30 pm

There are at least two Chinas. East coast is very wealthy. For example, smart phones and car ownership abound. In rural and Western China, there are still hundreds of millions living in near subsistence agriculture, which sort of skews the aggregate data.

35 Harun August 31, 2015 at 3:33 pm

Mexico has the same issue. Poor interior, rich areas near the coast or near the US border.

36 BenK August 31, 2015 at 9:44 am

Ultimately, there is only one way to fix what ails China: a different kind of restructuring and investment. Corruption at all levels, get rich quick, and cheap summary statistics must be eliminated. Durable goods must be judged on quality – including durability – not just size. A return to core Confucian values could be recommended, at the minimum – a long term perspective on family, community, and government. Honesty and virtue expected of all, enforced by all. Year by year economic growth cannot substitute for this kind of reform; and the process will take decades.

37 Nathan W August 31, 2015 at 2:32 pm

If there is a return to Confucian values, it will be with an emphasis on obedience, imo.

38 B Cole August 31, 2015 at 10:07 am

In terms of classic economics, the US investment in its 1 trillion dollar a year national security industry is also a malinvestment.

So if we have a recession, is it due to our federal malinvestment?

39 TallDave August 31, 2015 at 11:39 am

That would be one of those fun instances like WW II where living standards are lower but measured economic growth isn’t.

Maybe Tyler can get his students to calculate GDU?

40 James Hartwick August 31, 2015 at 1:16 pm

“the US investment in its 1 trillion dollar a year national security industry is also a malinvestment”

This was brought up a few days ago as an example of malinvestment, but I don’t think it holds.

1) Is it a malinvestment in that you don’t get what you pay for? Arguably yes, arguably no. Yes, we pay a lot of money to keep Europe safe and Korea safe and Japan safe, but arguably the economic prosperity of those places repays the military expenditure many times over. Similarly, we pay a lot of money to have a Navy that keeps the sea lanes safe, but arguably the prosperity generated by sea-borne trade repays the military expenditure many times over.

2) The malinvestment in the military doesn’t suck in a lot of private investment that loses its shirt. This is as opposed to stock markets (like in China, or the US) or the mortgage market (like in the US) where the malinvestment didn’t just cost the government money — it cost very many private individuals money. And when a bunch of private individuals start going bankrupt (which is a lot more likely than the government going bankrupt), you can have serious social problems.

In sum, you may be able to make the case that federal defense spending is a malinvestment. But that would be a weak case because 1) you actually do get a lot of good for your defense dollar, and 2) the downside of malinvestment is relatively limited.

41 Nathan W August 31, 2015 at 2:33 pm

“The malinvestment in the military doesn’t suck in a lot of private investment that loses its shirt.”

Not in the direct sense, but it involves a boatload of taxation, which necessarily comes at a cost to private investment.

42 Art Deco August 31, 2015 at 5:37 pm

And, yet, we’re better off than Canada, or, really, any occidental country other than Switzerland and Norway.

43 Nathan W August 31, 2015 at 9:26 pm

USA Median household income, 2009-2013 $53,046 (

Canada median “family” income – $76,000 (

Is this a problem of improperly compared data?

Well, at least public health care means that some traffic accident wont send me into bankruptcy. Has this changed under the “Affordable Care Act”?

44 JWatts August 31, 2015 at 3:42 pm

“In terms of classic economics, the US investment in its 1 trillion dollar a year national security industry is also a malinvestment. ”

Malinvestment: “are badly allocated business investments”.

US security expenditures aren’t “investments” except in the very loosest sense.

45 Art Deco August 31, 2015 at 5:35 pm

In terms of classic economics, the US investment in its 1 trillion dollar a year national security industry is also a malinvestment.

Since when are your normative judgments ‘classic economics’?

46 TallDave August 31, 2015 at 11:36 am

Yes. Also, Chinese living standards are suffering from some of the worst pollution in the world.

Austrian theory often seems more applicable in lower income countries, probably money illusion is a smaller factor when corruption is high.

47 Lord August 31, 2015 at 12:06 pm

Did anyone really think they could grow at +7% forever? Cartoonish.

48 JamesQ August 31, 2015 at 1:12 pm

One op-ed I recall from January that discussed the failure of China’s fiscal spending efforts:

“As the world’s elites gather in Davos next week, expect more big names to join the chorus calling for increased government spending to enliven the flailing global recovery….Before anyone rushes to spend, however, it is worth noting that the big emerging nations–China, Russia and Brazil–have just tried a full-throttle experiment in stimulus spending, and it failed…The emerging [nations] spent …6.9% of GDP…What happened? Emerging nations borrowed from the future to produce that flash of growth in 2010, and now they face the bills. Their government budgets have fallen into the red…To pay for this deficit spending, public debt has risen significantly”

How Spending Sapped the Global Recovery –

49 ABV August 31, 2015 at 1:27 pm

Just back of the enveloping it, China is roughly at the same per capita GDP as the USSR at its peak. It’s heavy industry seems to be failing just as spectacularly. How far can the better balanced south carry the rest of the team and the government? They’re already giving the north their water…

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