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Richard Mellor

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China?s ?Keynesian? policies
« on: August 09, 2018, 06:05:46 AM »
China?s ?Keynesian? policies

by Michael Roberts

China?s reaction to Donald Trump?s trade war has been to  retaliate with its own tariffs on US exports to China, particularly  agricultural/food exports like soybeans.  Also the government has  allowed the Chinese currency, the yuan, to depreciate towards the bottom  of its controlled range against the dollar.  This makes Chinese exports  cheaper in dollar terms and so defeats the purpose of Trump?s tariff  increases on Chinese goods coming into the US.

But there is a third move: a considered expansion in government  investment in and funding of construction projects to boost domestic  output to compensate for any decline in exports.  The policy of  government investment was hugely successful in helping the Chinese  economy avoid the consequences of the Great Recession back in 2008-9.   While all the major capitalist economies suffered a contraction in  national output and investment, China continued to grow.  In 2009, when  GDP in the advanced countries fell by 3.4%, Chinese growth was 9.1%.  Only one capitalist economy also grew ? Australia ? an economy  increasingly dependent on exports of its raw material resources to its  fast-growing Asian giant neighbour.

Simon Wren-Lewis, leading British Keynesian economist and blogger, claims that China?s success in the Great Recession demonstrated two things: 1) that it was austerity that caused the Great  Recession and the weak economic recovery afterwards in the major  capitalist economies and 2) it was Keynesian policies (ie more  government spending and running budget deficits) that enabled China to  avoid the slump.

Well, it is no doubt true that after a massive slump in investment  and production in the capitalist sector of the major economies in  2008-9, cutting back further on government spending would make the  situation worse.  In that sense, ?austerity? was a wrong-headed policy  for governments to adopt. 

But as I have argued in many previous posts, austerity was not some insanity in economic terms for capitalism, as  the Keynesians think.  It has a rational base: namely that with  profitability in the capitalist sector very low, costs must be reduced  and that includes reducing taxation of the capitalist sector.  Also the  financial sector had to be bailed out.  It was much better to pay for  that by reducing government spending and investment rather than raising  taxes.  And the huge increase in public debt that resulted anyway would  require controlling down the road.

But what about getting economies out of the slump with more government spending?  Wren-Lewis comments ?China  is a good example of that idea in action. What about all the naysayers  who predicted financial disaster if this was done? Well there was a  mini-crisis in China half a dozen years later, but it is hard to connect  it back to stimulus spending and it had little impact on Chinese  growth. What about the huge burden on future generations that such  stimulus spending would create? Thanks to that programme, China now has a  high speed rail network and is a global leader in railway construction.?

So you see, Keynesian policies work, as China shows, says  Wren-Lewis.  But were China?s policies really Keynesian?  Strictly  speaking, Keynesian macro management policies are increased government  spending of any type (digging holes and filling them up again) in order  ?stimulate? the capitalist sector to start investing and households to  spend, not save, all through the effect of the ?multiplier?.

Sure, Keynes talked about going further, with the ?socialisation of investment? as the last resort.   But no government of Keynesian persuasion has ever adopted that policy  (if it meant taking over capitalist investment with state investment).   Indeed, the Wren-Lewis?s of this world never advocate or even mention  the idea of the nationalisation or socialisation of capitalist sectors.   For them, Keynesian policy is government spending to ?stimulate  demand?.

China?s policy in the Great Recession was not just ?fiscal stimulus?  in the Keynesian sense, but outright government or state investment in  the economy.  It actually was ?socialised investment?.  Investment is  the key here ?as I have argued in many posts ? not consumption or any form of spending by government.  The Great  Recession in the US economy was led and driven by a fall in capitalist  investment, not in personal consumption or caused by ?austerity?.  In  Europe,100% of the decline in GDP was due to a fall in fixed investment.

As John Ross said on his blog at the time, ?China  is evidently the mirror image of the US ?If the Great Recession in the  US was caused by a precipitate fall in fixed investment, China?s  avoidance of recession, and its rapid economic growth, was driven by the  rise in fixed investment. Given this contrast, the reason for the  difference in performance between the US and Chinese economies during  the financial crisis is evident.?  

Wren-Lewis thinks that Keynesian measures would have done the trick and it was ?a failure of imagination? by the governments of major economies not to act, but instead impose ?austerity?.
It?s true that the governments of the major capitalist economies did  not follow China?s example partly because they were ideologically  opposed to state investment ? indeed, their first measure of ?austerity?  was to cut government investment projects ? the quickest way to cut  spending.

But the main issue was not ideology or a ?lack of imagination?.   It is that Keynesian stimulus policies do not work in a predominantly  capitalist economy where the profitability of capitalist investment is  very low and so investment is falling.  With government investment in  advanced capitalist economies only around 3% of GDP compared to  capitalist sector investment of 15%-plus, it would take a massive switch  to the public sector to have an effect.  ?Stimulating? capitalist  investment with low interest rates and welfare spending would not be  enough.  Capitalist investment would have to be replaced by  state ?socialised? investment.  That only has happened (temporarily) in  war economies (as 1940-45).  In the last ten years, in the US, Europe  and Japan, it has been capitalists who made the decisions on investment  and employment and they did so on the basis of profit not economic  recovery.  Quantitative easing and fiscal stimulus ? the two Keynesian  policy planks ? were ineffective as a result. In contrast, China?s fixed  investment increased rapidly because it was driven by a programme of  both direct state investment and use of state owned banks to rapidly  expand company financing.

This difference between Keynesian measures in capitalist economies  and China?s state-directed investment is about to be tested again.  Most  mainstream economists are predicting that China will take a hit from  any trade war with Trump?s America and economic growth is set to slow ?  indeed, there is a growing risk of a huge debt-induced slump.  But the  Chinese authorities are already reacting.  Ordinary budget deficits  (fiscal ?stimulus?) are being supplemented with outright state funding  of investment projects (dark blue in graph).

Most of this government investment funding is coming from sales of  land by local authorities.  Through local government funding vehicles  (LGFV), they build roads, homes, cities by selling land to developers.   But funds also come directly from the national government (80%).


We can expect such funding to rise and investment projects to expand  if China?s exports drop back from a trade war with the US.  State  investment will keep China?s economy motoring, while the major  capitalist economies flounder.
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