Not all Chinese ngdp is created equal

Economists are familiar with the use of monetary and fiscal policy to stimulate or restore nominal gdp, or other measures of aggregate demand if you prefer.  But China faces a bigger dilemma.  Part of its earlier pro-growth program overstimulated particular sectors of the economy, for instance construction and a variety of heavy duty state-owned enterprises.  Not coincidentally, those are the same parts of the economy which have experienced excess capacity and decreasing returns.

The more specific dilemma is this: China’s main paths for boosting its nominal gdp path also tend to stimulate or re-stimulate these overextended sectors.  Think for instance of pushing more credit through state-owned banks to favored state-owned firms.  Or consider fiscal policy.  At the margin that could mean municipal governments spending more on what they know best how to do, namely building more physical infrastructure.

Chinese stimulus, in the broad sense of that word, thus worsens previous Chinese malinvestments.  China would like to stay on a smooth ngdp growth path, but they don’t know how to do this without overextending themselves in particular sectors all the more.

It is fine to call for “reform,” but there are two extra problems.  First, most of the best reforms will lower ngdp in the short run and maybe even the medium run.  Second, the ngdp crunch may be coming more quickly than reforms can be instantiated.

Over the next months, you will read many blog posts, from other economists, about China in an aggregate demand framework.  Be wary of them if they do not appreciate this point.

Here are my earlier remarks from 2012.


Why are you insightful on Chinese economy stuff, but when it comes to America you seem to be sucking up to the left (e.g., Ezra Klein/Vox, trans-rights but not Christian rights, symbolic progess for African-americans but little attention to AA-youth unemploymemt)? Cucky.

'trans rights but not Christian rights'


Can you name a right a Christian doesn't have?

I used to pooh-pooh the notion of a "War on Christianity" too. Although the "War on..." rhetoric is overblown, it does appear that conservative Christians are losing some of their First Amendment rights, whether it be through penalizing speech, as in a Chick-fil-A case [], or whether it be through compelling speech, as in the case of wedding photographers and cake bakers.

That said, I see no evidence that Tyler is "sucking up to the left" on "economy stuff".

The Denver airport thing is ridiculous, and they will surely that attempt, as they should. That's a good example.

But how is baking a cake "speech"?

If I explicitly didn't serve Christians at my business because I felt they were lying sinners going to the atheist version of hell (it's Omaha, Nebraska, by the way), it would be no question of discrimination. Why should Christians be granted the right to discriminate?

"granted" the rights? Why should anyone be forced to serve anyone?

Agreed that cakes are borderline. If it's a plain, pre-made cake, like those at supermarkets, then it's probably not speech. In that case, though, one wouldn't need to tell the baker why one was buying the cake, so there wouldn't be any issue. If it's a decorated cake with a message and/or an ornament (two grooms vs. 1 bride and 1 groom), or if one asked the baker to specifically custom bake a cake that was appropriate for the occasion, then the cake might represent the baker's artistic creation, which would be a form of speech.

Suppose you sold non-gospel music at your music store but refused to sell gospel music preferred by Christians. Is that discrimination because, having held yourself out to the public as offering music that is liked by customers, you must offer such customer-liked music to all customers regardless of religion?

Also relevant is that public accommodations law was enacted at a time when discrimination against racial minorities was widespread enough to be debilitative. It might very well have been the most narrowly tailored measure available to allow minorities to participate in society. In the case of photographers, bakers, etc., calling the next provider in the yellow pages would seem to be a more narrowly tailored means of accomplishing the objective of allowing gays to marry. Honestly, what other reason would there be to force a particular photographer or baker to participate in a same-sex wedding other than to declare that individual's religious views as invalid or unworthy of consideration?

Christians aren't allowed gay marriage, for one.

But they're explicitly "allowed" to bake a cake for gay marriages.

Oh no, Christians are losing the right to discriminate. That's soooo discriminatory.

It seems Mr. Cowen had a severe bout of food poisoning in China and will never forgive them for it.

Or they charged him too much and then called him out on his cheapness. He will never forgive that either.

Or maybe it's just, like, his opinion, man.

Oh, Brazil. Next year Olympics will be a great show.

I'm shocked that huge government stimulus paid for with other people's money was malinvested!

The U.S. relied on a combination of short-term fiscal stimulus (one year) and long-term monetary stimulus (seven years and counting), while China is relying on a combination of long-term fiscal stimulus and long-term monetary stimulus (assuming China stays the course). Cowen criticizes China's main choice for fiscal stimulus (infrastructure) but not the fiscal stimulus, which is progress of sorts. I suggest a comparison of fiscal stimulus concentrated in infrastructure (China) with no fiscal stimulus - indeed, fiscal contraction (U.S.). Even assuming the fiscal stimulus is "malinvestment", in the long run will China be worse off or better off than the U.S.? I suppose it depends on the meaning of "malinvestment". If the choice is between malinvestment and no investment, which is better for the long-term? Arguably malinvestment because at least there's investment for the future (even if it creates (more) excess capacity today). As for the U.S. choice, no fiscal stimulus and long-term monetary stimulus, how does inflating the value of (financial) assets add to productive capacity and real economic growth?

"If the choice is between malinvestment and no investment, which is better for the long-term?"

-Malinvestment, but China has more options than that.

Agreed that fiscal stimulus inherently distorts allocation and distribution of wealth and, hence, can worsen "malinvestment". Monetary stimulus, however, does not pick winners and losers and should actually alleviate one of the frictions that inhibits markets from self-correcting: nominal rigidity.

Fundamentally, I still don't see how China is not following the Japanese economy although I don't what year we are in (1970, 1980, 1987, 1989?) It is a very manufacturing based economy with loads of investment and a declining work force demographics. (And Chinese manufacturing does not have the named Brands that Japan did so their Producer Surplus will be contained unlike some of Japan's brands of the 1980 - 1990.) So we will see increasing wages in a very low profit business and I am not sure the Chinese political system is ready for a higher unemployment and stagant wages economy. So I have confidence China does not collapse but I don't see it thriving either.

Good points that fit right into a view that ngdp targeting is naïve and simplistic - imo they shouldn't be confined to China.

Fair enough---on the other hand the United States spends $1 trillion dollars a year on national security (DoD, VA, DHS, black budget). This is also, from the perspective of a classic economist, a "malinvestment."

When the US economy tanks (maybe soon again), how come no one blames "malinvestment" in national security as one precipitating cause, even if it is believed to be a necessary expenditure?

The US will spend $10 trillion in the next 10 years on "national security."

Wasted money as expenditure is just wasted money(though in this case lives were also wasted). When you waste money with the pretence of investment and a promise of future return for people holding stock, mutual funds, bank accounts, then when the waste is revealed(often suddenly), this might cause systemic damage as people without information sell even good assets. Also, protecting the losses from being exposed, some of the elites often send in more malinvestment.

What was the worst malinvestment during the Bush Administration? The Iraq War!
What has the world gained from that one?

A is not arguing that something like the Iraq War wasn't a loss. A is pointing out that since there was no pretense of a promise of a future return, there wasn't systemic (economic) damage to the US economy because of it.

To illustrate the point, consider the second-worst malinvestment during the Bush Administration: the housing bubble. That one did have spurious promises of future returns (as opposed to the Iraq War), and thus triggered much worse economic consequences for the US than the Iraq War did.

Surely the housing bubble was worse? If we'd had the Iraq War but avoided the Great Recession would you not think we'd be better off financially? The Iraq War was a pretty small thing by the standards of wars. The housing bubble was a pretty large thing by the standards of economic disruptions.

Historically, I'm not sure avoiding either was possible. Hindsight is 20/20. But it strikes me as obvious which was worse for the balance sheet.

In terms of "malinvestment," in classic economic terms, national security outlays, at $1 trillion a year, dwarf the housing bubble.

If too many housing units were produced in the bubble, say 2004 to 2008, that is "present value malinvesting." But if those units eventually fill up with people, then they become economic goods. Built too early, so to speak. And in fact, property value have recovered, commercial and residential (little discussed, there was a mirror collapse in commercial property values).

But $1 trillion spent on national security is pure malinvesting. A defense outlay is like building a bridge to nowhere in the middle of the desert and then blowing it up at the end of the year and doing it again next year.

So, we had had $7 trillion in national security malinvesting since 2008.

Tyler Cowen says centrally-planned malinvesting plays a role in China's economic woes.

It is not PC to go further in my comments.....

"Economists are familiar with the use of monetary and fiscal policy socialist central planning to stimulate or restore nominal gdp.."

...more like dogma than familiarity

The whole world sucks right now. Crisis of some sort everywhere: political instability/civil war in MENA, fragile economic state of Eurozone (mainly due to Greek crisis), migrants "invading" different EU borders because things back home look terrible, Venezuela going down by the second, Brazil is in trouble, China is in trouble, Russia is deep trouble, Ukraine is a mess, oil exporters facing tough times...


Oh I don't know, the kids started school today- lots of good cheer, hugs and screeches of delight. Laughing banter when i grabbed a coffee, colleague shared interesting travel stories.... It all seems kind of like yesterday and a little like tomorrow will be.

I'm not familiar enough with the Chinese economy to know whether this is a sensible suggestion. If you want to stimulate the economy, don't want to stimulate the sectors that would get the first benefit of lower interest rates, and don't want to spend money directly through state-owned enterprises or construction, then how about cutting taxes on business? If unemployment is the issue, then I;d look for some kind of employer-paid payroll tax or social insurance contribution that goes to the government.Or, if they have none, then some kind of business income tax.

Max L.

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