Baccardax: China's Lesson on Crass Keynesianism
I couldn't resist seeking out the simplified Chinese characters for "crass" when news broke Tuesday about the potential for a second stimulus plan to come from this week's National People's Congress.
Outspoken German Finance Minister Peer Steinbrueck famously dismissed Britain's plans to reduce a small portion of its value-added tax as "crass Keynesianism" last fall when the world's major economies were debating the size, timing and merits and style of government spending to revive slumping economies.
He might want to review that opinion.
Last fall, you see, China wasn't debating the moral hazard of bank rescues or the inflationary implications of Keynesian policies or even the long-term consequences of interfering with the business cycle.
It was long past that; the Central Bank had already teed-up the world's biggest – 4 trillion yuan, 17 percent of GDP – stimulus plan several months previous, when the economy was still expanding at double-digit rates. By November it had delivered.
Okay, I'll concede that Herr Steinbrueck was more concerned about the quick-flip from supply-side economic theory to deficit spending by many of his G-7 counterparts, and China's estimated $2 trillion in foreign currency reserves (and its healthy 22 percent debt-to-GDP ratio) don't necessarily raise similar issues, but the larger point remains hard to defend: spending, it seems, works.
After surging more than 6 percent today, China's benchmark stock index, the Shanghai composite, is up 21.7 percent this year – almost a mirror image of the 22 percent dip for the S&P 500.
Next week's report on economic growth will probably show an uptick in expansion to around 8 percent in the first quarter of this year from last quarter's "disappointing" 6.8 percent (we should all be so sluggish!)
The aforementioned foreign exchange reserves are rising, credit is expanding and inflation is decelerating at a rate of -0.4 percent.
Most importantly, unemployment will likely remain stable at 4.4 percent. This is a critical figure for a nation with around 20 million rural Chinese out of work and several million graduates holding only diplomas.
Premier Wen Jiabao has already warned that sub-five percent growth rates would create the conditions for civil disorder, so it's certainly in his interests to throw everything he can at the domestic economy while he waits out the global recession.
His newfound focus on contentment gave us the bizarre spectacle of an on-line chat session last Saturday where he fielded softball questions from "ordinary" Chinese on issues ranging from government corruption to national healthcare.
So while we don't have details as yet to support suggestions that this new round of profligacy, hinted-at by Li Deshui, the former head of the nation's statistics bureau, will match the previous, expect this year's 10-day meeting to be one of the most "People-friendly" in the history of the National People's Congress.
"This government has every reason to use the NPC as a showcase for all that has been done to boost the economy and for all that it intends to do," said Carl Weinberg, the Chief Economist and long-time Sinophile at High Frequency Economics.
You have to wonder if (and certainly hope that) leaders in the West, who return from round after round of informal summits, scheduled pow-wows and one-on-one sit-downs with little or nothing in terms of definitive action, are watching with interest.
For better or for worse, they're at the epicenter of the global financial markets and are likely to remain there for some time. At present, however, the patchwork of efforts has shown little in the form of global co-ordination and even less in the form of effective articulation.
We need to both see it *and* believe it before markets are going to turn in any meaningful way.
In the utmost of ironies, the Chinese are the only ones to have understood what Ronald Reagan convinced the United States was true: deficits *don't* matter. National debt is only an issue if it *doesn't* create more wealth and opportunity along the way. We're better-off today not because of the austerity of the previous generation but because they knew (or were convinced) that you had to spend (wisely) in order to earn. And it worked.
Governments need to get out the checkbooks. Fast.