The Chinese fiscal stimulus memory hole

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.


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