Stimulus Works in China
China released figures showing that its GDP grew at a 7.9 percent annual rate in the second quarter. It's growth is projected to accelerate further in the second half of this year. While this rate is still down from its growth rate prior to the downturn, there are few countries that would not be ecstatic over a growth rate close to 8.0 percent.This growth rate is especially striking, since China has seen its export market in the United States, and elsewhere in the world, collapse during this period.
What's the secret to growth in China? Stimulus; they threw lots of money at the problem. The government promised to spend $650 billion over 18 months to boost the economy. This would be the equivalent of a stimulus package of $2.3 trillion in the U.S. economy.
Big spending had big results. Now China's economy will be shooting ahead while the U.S. economy will be struggling with rising unemployment rates. If only we could export our Blue Dogs and deficit hawks to China, we might be able to compete.
LOL.
Of course, China DIDN't send its stimulus money to districts that voted for its president, DIDN'T cram it with pork and DIDN'T give a cent to the states for use as cash to plug holes in state budgets.
Dean Baker believes in the size of the ship, not the motion of the ocean.
July 16, 2009 3:37 PM | Reply | Permalink
Well, it's easy for China to spend without consequence because they have a surplus, isn't it?
Also, are we sure we believe China's GDP figures?
July 16, 2009 4:26 PM | Reply | Permalink
By the way, in case anyone cares, I agree with Dean that the first stimulus should have been bigger. Not sure about the need for a second one though, this one hasn't had time to work.
July 16, 2009 6:05 PM | Reply | Permalink
and single-payer health care is sufficiently popular in Canada and Britain that no right-wing party dares to run against it. But why copy models that work when we have a perfectly fine dysfunctional system at hand.
July 16, 2009 4:44 PM | Reply | Permalink
Why do you say it is a disfunctional system? Don't forget the bounty our system hands off to the very wealthy here. That is what it is designed to do, so I see it as a superbly functional system. Now, if Congress had any interest at all in designing the system to do something else, perhaps we could come up with a better system, and many of our brilliant Congress critters would find themselves grossly outspent in the next election cycle. Yes, I see our system as performing just as the Congress wanted it to.
July 16, 2009 6:50 PM | Reply | Permalink
Well put
July 17, 2009 4:16 PM | Reply | Permalink
Have the Chinese offered anything for the Blue Dogs or for Deficit Hawks? Export is certainly an option. The Chinese do have a fascination with the consumption of exotic critters.
July 16, 2009 5:11 PM | Reply | Permalink
Yez. I hear there are peploe who enjoy the taste of dog in China. Actually, I've even seen it with my own eyes.
Methinks they need a good Asian junket, on the taxpayer! Whaddya say?!?
July 16, 2009 7:53 PM | Reply | Permalink
I've heard bluedog is good with a little chili power. Also good for your yang.
July 17, 2009 12:36 PM | Reply | Permalink
"Have the Chinese offered anything for the Blue Dogs or for Deficit Hawks?"
Hard labour.
July 16, 2009 5:26 PM | Reply | Permalink
Wal-Mart
July 17, 2009 12:01 PM | Reply | Permalink
Not an economist, but of late have been reading lots info about economics (suddenly very relevant (-; ). What I've read about China's economic stimulus hasn't been salutary. Lots of investment in heavy industry and purchases of commodities for 'future utilization,' but not much to stimulate the Chinese consumer economy--a seeming necessity since the US won't be consuming so giddily for a good long while, if ever. So perhaps their stimulus looks good on paper now, but won't provide long run benefit.
This is not an argument for or against a US stimulus.
July 16, 2009 8:01 PM | Reply | Permalink
China also was not engaged in unheard of levels of deficit spending before it started debating a stimulus bill. Even apart from the political problems this causes (which Dean Baker addresses), it might well affect incentives to economic activity per se.
No one thinks China will need to raise taxes to punitive levels to, say, fund its debt. Or fund its health care bill. So they're willing, able, and eager to do business there.
Barack Obama: Four Trillion in Four Months.
July 16, 2009 8:07 PM | Reply | Permalink
Also, China isn't involved it two land wars.
Get us out of Iraq and Vietnam and there'd be plenty of stimulus money.
July 17, 2009 12:03 PM | Reply | Permalink
Sorry, meant to say Afganistan.
July 17, 2009 12:03 PM | Reply | Permalink
That was funny. Not that I don't agree (although I'd just as soon lower taxes on working people or pay down debt than spend money on health care), but it was funny.
July 17, 2009 12:07 PM | Reply | Permalink
Mr Baker,
What makes you think China’s economy grew 7.9% in the second quarter?
Sure, some financial publication leaked the figure that was announced the next day, but let’s not confuse that with real economic data. As an economist in Asia paying very close attention to China since 1980, I can tell you that in my professional opinion China’s economic statistics are unreliable, by OECD standards, and giving credit to their stimulus package is just plain nonsense.
1. The Rmb4 trillion announcement some months back included Rmb3 trillion of projects already planned or in place. 75% empty propaganda.
2. Of the remaining Rmb1 trillion, very little has been disbursed.
3. China can afford this kind of spending (when it occurs) because they aren’t trying to clean up after the most irresponsible administration in history.
July 16, 2009 9:15 PM | Reply | Permalink
Of course there are some doubts about the accuracy of China's statistics. See this.
Also we have to look at their exchange rate vis-a-vis their GDP sized 2008 at the official exchange rate $4.2 trillion against purchasing power parity of $7.8 trillion (CIA), so there's plenty of room to have the Yuan appreciate.
So far 2009 they show a deflationary CPI of about 1.5% all year but their Producer Price Index seems to be still dropping, now standing at -7.8% for June.
Industrial Production is up 10-11% and retail sales 15% for the year but both imports and exports are still down, yet their urban fixed asset investment is up 33% and luxury pads are still selling.
So, yes, they start from a very different position from the US, but this is property/infrastructure driven growth -- with all the inefficiency and corruption that entails in China -- and it doesn't seem that there's been much of a move to create a more consumer driven, more free economy.
So the jury's out.
They are running a 10% annual deficit and, as many Chinese are want to do, playing a heavy bet.
July 16, 2009 9:46 PM | Reply | Permalink
Check out this new paper! Guess who gets top billing as both forseeing the financial crisis and having a cogent analysis for his predictions? OK, so they are in alphabetical order....
Dirk J Bezemer**
University of Groningen
ABSTRACT (78 words)
This paper presents evidence that accounting (or flow-of-fund) macroeconomic models helped anticipate the credit crisis and economic recession. Equilibrium models ubiquitous in mainstream policy and research did not. This study identifies core differences, traces their intellectual pedigrees, and includes case studies of both types of models. It so provides constructive recommendations on revising methods of financial stability assessment. Overall, the paper is a plea for research into the link between accounting concepts and practices and macro economic outcomes.
...
See page 10:
http://mpra.ub.uni-muenchen.de/15892/1/MPRA_paper_15892.pdf
July 17, 2009 3:52 AM | Reply | Permalink
Actually, I think you mean page 9.
-- ARG
July 17, 2009 2:59 PM | Reply | Permalink
What price glory? Here's some rather sobering insights on the downside of the current "great leap forward", from a review of a 2005 Cornell University study:
Given the history of the Chinese Communist Party, there is absolutely no reason to believe it will be a model for "advancing democracy, human rights and social and economic well-being". The very idea is laughable except for possbility China's current reality will be the template for a global sweatshop village.
July 17, 2009 12:37 PM | Reply | Permalink
notthere,
Nice bit of redirection, from fiscal stimulus to exchange rate policy. Very deft.
China’s fiscal stimulus is 100% domestic, of course, which makes the exchange rate a red herring. Why would anyone care if the US dollar is 10%, 20%, 30% or even 50% over-valued? There's no demand, so it isn’t going to help China’s economy. The entire issue is a nonstarter.
-Yes, urban consumer goods and services are cheaper than a year ago. One might hope a stimulus package would help generate a bit of inflation.
-No, we have no way of knowing what’s happening to industrial production. The survey only covers SOEs and some medium-sized companies. The hundreds of thousands of smaller firms are left out of the survey.
-Urban fixed asset investment? Did you remember to deduct the change in the value of the land before spewing that 33% figure? No? Utter nonsense, in that case.
-15% retails sales in the first half . . . exactly 15% in Q-1 and lo, exactly 15% in Q-2. It’s a miracle.
So yes, starting from a very deep statistical hole, the economy looks good.
= = = = =
San Fernando Curt,
2005 article . . . based on 2004 data . . . according to the officials statistics (see above), the economy was half as large as today, prices were rising at their fastest pace since 1996, trade was about 45% of today’s size and the forex reserves less than 30% of today’s $2.13 trillion.
2004: Migrants were flocking to the cities, not staying away in droves because of the lack of overtime work.
As for “advancing democracy, human rights and social and economic well-being,” I can’t say I’ve come across that phrase in any Chinese Communist Party document, ever.
Who’s objective is that, anyway?
July 19, 2009 9:18 PM | Reply | Permalink
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