Sure, this is late, but I read a couple of articles on the Economist that seemed interesting:
Hu’s counting – Hu claims that China saved Americans money.
Hu’s counting II – Hu claims that China created jobs for the world.
So I was listening to NPR as usual and they were interviewing this guy, I think he was some kind of Democrat politician, who was talking about the bailout plan. He said that government spending is more effective in stimulating the economy than tax cuts since parts of those tax cuts would be saved.
The biggest problem that I have with Democrat politicians (and actually most politicians in general) is that they ignore the basic fact that savings is what drives the economy. If you looked at the savings rate for countries, there is a direct parallel between the savings rate and the growth rate. People in Thailand, Singapore, South Korea, and post-reform PRC had really high savings rate of around 30-40% and they experienced very high growth rates. Then you looked over at sub-Saharan Africa and their savings rate was somewhere around 15% and they all had very low growth rates.
The argument that was made by Keynes is that when people save money, they’re not spending. When people are not spending, revenue for firms go down. When revenue goes down, firms hire less people, which leads to less jobs, and less income for the people. As a result, when people save money, they actually hurt themselves because their income decreases. Thus the term ‘Paradox of Thrift’ was coined.
Note: This is not just a liberal term. Bush, right after 9/11, told people to go shopping based on the idea that savings is bad. Even when Republican politicians propose tax cuts, they do so not to promote savings, but to promote higher consumption.
So what happens when people save money? Do they just stick it under their mattress and forget about it? Probably not, except in the case of Japan in the 90s when people were ‘hoarding’ (not saving) money due to poor confidence in t he banking system.
Instead, savings goes into financial institutions, bonds, financial assets, and stuff like that, but for simplicity sake, lets just look at banks. People put money in the banks. What happens to that money? Do banks really just sit on all that cash and not lend it out as a bunch of people were saying before? Well, during the time when people were saying there was a ‘credit crunch’, interest rates were actually decreasing, which means that banks were trying to loan money out. If a bunch of people were demanding credit and were unable to get it, the interest rate should have increased. Which it didn’t (and just to dispose of another myth, while the Federal Reserve can influence the interest rate by printing or destroying money, it doesn’t exert control over it).
So people put money into banks. The banks do not just sit on it since the way that banks make money is by loaning it out. If people are pulling out of the stock market (which is why it tanked so much in the past few months), then they have to put it somewhere. Lets assume that they’re putting it into their savings account just for continuity sake. Now the banks are overflowing with money and they want to loan it out. Who do they loan it out to? Well obviously to people that they think would be able to pay it back. Now this is not always the case, which is what led to a few bank collapses, but the majority of the banks in America are still solvent, which means that most of the loans made were good.
So who borrows money? Well, sometimes its by people who want to buy a new yacht, but usually, its businesses that want to invest so that they can increase production and efficiency in the future. Higher investments means higher productivity. On the micro level, this can be seen as an outward shift in supply, which leads to lower prices and higher quantity. Multiply that supply-demand chart by 300 million and you got increased production due to higher capital to labor level and as a result are able to reach a higher income level (Solow growth model). Everybody is richer, everyone has more, and everyone is materially better off. Now those people who are seeking spiritual enlightenment are left wanting, but everyone else should be happier.
At least this is what the people who say that the Paradox of Thrift is all screwed up. Next time, I’ll counter the argument that the Paradox of Thrift is totally wrong and that spending AND saving can both lead to growth.
People say that China needs to have GDP growth of over 6% a year to ensure enough job creation to prevent social and political unrest. I mean the high economic growth in China can legitimize almost everything that the CCP has done since reforms in 1978. Ending the Democracy Wall movement? Well, they countered that by opening up rural agriculture markets. Crushing the Tiananmen protests? The number of people lifted out of poverty since the reforms have saved and improved the lives of millions. The suppression of political and religious freedoms? China’s open economy has put a McDonalds on every block and brought the Olympics to Beijing.
Ok, so of course economic growth doesn’t legitimize everything, but all those people who hate on China usually avoid criticizing the CCP’s handling of the economy (except in the cases of high inequality and damage to the environment). So if ‘crisis’ really is hitting China’s economy, then something must be done.
As the demand for China’s exports shrinks, he said that as part of relaunching the economy, the country had to focus now on expanding domestic consumer demand.
Ah yes, increasing domestic consumer demand to make up for the huge drop in exports. But then again…
Mr Wen said that among the reasons behind the current global downturn were “inappropriate macro economic policies in some economies, characterised by [a] low savings rate and high consumption”.
So China is going to change the structure of their economy so that it can become the reason for the next global economic downturn instead of a victim of someone else problems? Ok, I’m kidding, but does China really need to increase their domestic consumption?
Increasing domestic consumption would mean all those goods waiting in warehouses would be sold and firms would receive higher revenue. This means that they would be able to hire more people and thus save the economy.
However, if savings are really high in China, firms can borrow money at a really low interest rate. Since there is currently lower consumption demand, firms should just focus on investing for the future so that they can produce better and more goods at a lower cost. Or at least that’s what all those classically trained economists would say.
If we were talking about America’s economy, I would say that we should encourage Americans to save more so that banks with bulging vaults would be forced to loan that money out to reputable and innovative companies. However, since China doesn’t have the best financial system in the world, a lot of those savings might be wasted on poor investment choices, like propping up a failing SOE. So yeah, I think Mr. Wen is right that increased domestic spending, may it be through coupons to buy a new fridge or discounted bicycles for rural folk, would do a lot of good in getting China through the current economic downturn.
I’ve been off-topic since the Olympics ended, so I guess it’s time to bring China back into this blog. But what should I write about? There’s just so much!
I’m not a big fan of the government jumping in and ‘spending’ a country out of a recession. I mean the government is inefficient and though the CCP gets things done faster than the American Congress, they’re also a little corrupt so who knows how many pockets will be lined when this bailout plan is implemented. However, with that said, China’s economic growth has long neglected the western half, so maybe it’s necessary for the government to step in, build infrastructure, and ‘spread the wealth around’. I mean 16% of China’s GDP is a lot of money… it can’t all be wasted on government official banquets and tacky landmarks, right?
So Gong Li changed her nationality to Singaporean. I remember during the Olympics, the ethnic Chinese Singapore ping pong team got some praise because they were ‘second tier’ players exporting Chinese culture to the outside world. So why are they hating on Gong Li? I mean she’s been making pretty shitty movies since ‘To Live’ came out so it’s not like they’re ‘losing’ somebody awesome like Yao Ming. Jeez, they’re not even losing her. It’s not like she’s changing her ethnicity to Japanese or something…
A bunch of people are being moved out of their houses because the government is building something shinier on top the land so people decided that they don’t like that and they got a bunch of people to join them to protest and a lot of people came to watch and the police came and then there was yelling and shouting and possibly some singing and then after it was over the local government said that the incident was caused by a few trouble makers because 99% of the residents love them. Yay.
There has been a few posts on the internet with schoolgirls getting beat up and humiliated by other schoolgirls. This is pretty rare in the US, not because it doesn’t happen, but because it’s usually not put up on the internet since they’re afraid of getting identified and charged for sexual assault. These schoolkids are too naive and for some reason put it out there and now they’re all getting arrested and stuff. If only they listened to their parents and retained the Cultural Revolution mentality… though I guess it’s better that they didn’t since now they’ll get caught and will get punished for not playing nicely.
Eh… writing about the news is kind of boring. I’ll think of something more interesting to write next time.
First I lost faith in Marx. Now I’m losing faith in Keynes. Marshall, Humes, Mill, Smith and all them classical folk that I used to dislike are turning me towards the dark side. I had no idea those guys were so subversive.
I’m politically liberal so I was always big into the government intervening. When I first studying political economy, I fell for Marx and his awesome beard. I wanted there to be global revolution, an egalitarian society, and witness the inevitable collapse of capitalism that Marx predicted. I mean the working people having nothing to lose but their chains? That’s one helluva pick up line.
My love for Marx slowly dissipated when I met other Marxists who turned out to be pompous elitist assholes who were more interested in showing off their intellectual superiority and how ‘down with the people’ they were with their communist-chic style of dress instead of actually contributing anything to society. So instead, I turned to Polanyi who said there was a big role for the government in protecting the people from the market. I liked that idea because I saw in my mind this image of the corporate machines and the invisible hand crushing the life out of poor starving children before Uncle Sam and Captain America swoop in to save them with social safety nets and injections of liquidity.
And from that, I naturally became a Keynesian. I mean all the economics that we learn as an undergrad, unless you got to one of them special schools that teach neo-classical stuff, is based on Keynes. You know, all those IS-LM curse, AS-AD stuff. The reason why I liked Keynes was because he was so cool. Like he didn’t give a shit about what the social norms were. I mean he pissed on the grave of all those dead white classical economists AND he was an equal opportunity employer of sexual partners. Oh, and instead of telling an unemployed hardworking Mexican in the Central Valley that he was gonna be unemployed because there’s a economic downturn and that’s just the way the market worked, he would have said that the market is fucked up and the government should do something that helped that Mexicano y su familia. That was pretty cool in my eyes.
However, the more I learn about Keynes, the more I begin to see him as someone who just had a personal grudge against the classics instead of someone who truly found error in the old market theories. Just a couple examples that have been pointed out by my professor is that Keynes believed that ‘capital’ in the classical sense meant industrial goods and machinery. He also believed that savings = hoarding. And then there was his argument that changes in credit supply or demand would lead to changes in income instead of the proportion of income saved/consumed. He didn’t have a basis for what he was arguing. He just said that the oldies were wrong and he was right. When other people tried to tell him he was interpreting the literature wrong, he just brushed them off and gave these half-assed excuses.
Now I still think Keynes’ idea hold strong in times of major economic crisis. Like during the Great Depression, massive money creation by the central bank might have been able to dampen the crisis in the short run. But his overly-quoted statement that we’re all dead in the long run is kind of short sighted. It’s like instead of building a good house and ensuring that it’ll last for a thousand years without much maintenance, you build a shoddy house and constantly patch it up.
I haven’t finished all my re-reading of Keynes yet, but after reading Humes and Mill, I’m starting to turned more and more towards the dark side of economic liberalism – which is usually associated with rich white folk like that duck that swam in piles of gold coins and gun-toting libertarians like Moses. Scary shit.
So a lot of people have been saying that the economic crisis has helped Obama while foreign policy is McCain’s strength. For me personally, it’s kind of the opposite.
First let me say that I have already voted absentee for Obama for reasons I mentioned in a post a few days/weeks ago.
I dislike McCain mostly for his foreign policy views, mainly the Iraq war. I don’t like war for many reasons. First of all, it leads to people dying, obviously. But on top of that, there’s the increase in government spending that would cause increased inflation (if they are printing money to pay for it) or shoot up interest rates (if they are borrowing from the public). Then there’s the strained international relations that comes from war, which can negatively impact trade. Productivity is decreased as skilled mechanics, tenchnicians, or engineers are taken out of the work force and sent to a foreign country to repair tanks and launch missiles. Some people would argue that war leads to a ramp up in industrial productivity, but that usually takes place only during a total war (where the entire country is geared towards war, not the computer game series) so during wars like Iraq, it’s just a shift in productive power from the domestic to the government sector. And on top of that, I don’t think going into Iraq is protecting America.
As can be inferred from above, I’m not a huge fan of government spending, though I’m far far FAR from libertarian. For example, public goods like education, parks, and infrastructure should definitely be maintained by the state (as well as defense I guess since it’s necessary to prevent Bermuda from invading). In the area of ‘steering’ the economy, I’m a bit iffy, though in areas such as encouraging the use of more fuel efficient cars through government rebates and improving technology through government investment, I think the positive externalities that result from such actions can outweigh the costs of bureaucratic inefficiency.
Which is why I don’t like Obama’s economic policy too much, though McCain has also played the populist card as well. I mean why should homeowners be bailed out by the government? Why does ‘main street’ (damn, I hate that term) deserve to be helped any more than ‘Wall Street’? As for more regulation, Fannie Mae and Freddie Mac were both government institutions. It was the government that encouraged private banks to give risky loans to consumers, so how can it be believed that a new government institution in charge of overlooking credit markets will do any good?
However, I came upon the belief that while I’m more Republican in terms of my economic thoughts in that I like freer markets, I’m voting for a politician and politicians just don’t know much about economics. So I am forced to vote based on my political ideology and as a result, I’m voting for Obama.
Though if Glenn Hubbard ran for president, I would vote for him.