Marvin Gandall wrote: > Wages have reportedly been steadily rising in China even though labour > income as a share of it's dynamic GDP growth has been declining. Why would a > shift from export- to consumer-led growth, a shift which is already well > underway, necessarily be accompanied by a fall in consumer income even if > growth slows somewhat - as the Chinese authorities are hoping it will?
It's not the gradual "shift from export- to consumer-led growth" that causes the fall in consumer income. Rather, it's the sudden fall in China's exports or export growth -- and the associated fall in fixed investment spending via the accelerator effect -- that causes a fall in GDP and thus a fall in consumer income and a multiplied fall in consumer spending. It's recession, not the shift, that's the problem. (Since China's mostly a market economy these days, simple Keynesian economics applies.) To provide a sustainable basis for continued Chinese macroeconomic expansion, labor income would have to either stay constant or rise as a percentage of GDP. If the share is falling, as it has been, then the gap has to be filled by either rising exports, rising fixed investment, rising luxury spending, rising credit-based working-class spending, or rising government purchases (all as a percentage of GDP). The first of these is increasingly shaky, given the fact that the US is falling down on its job of being the world's consumer of last resort. The second can happen (encouraged by high and rising profits), but leads to increased industrial capacity which reproduces the demand problem on a larger scale. Also, fixed investment spending is notoriously flaky (subject to fluctuations), especially when profits are hurt. (It's not consumption that falls drastically in recessions, but fixed investment.) Increased luxury spending seems to be happening in China, but is also quite flaky, i.e., easy to delay when incomes are stagnant or falling. Note that in most recessions, property incomes (the basis of both fixed investment and luxury spending) take the first hit, since profits represent a residual which may not be realized by demand. On credit-based working-class spending and government purchases, see below. In theory, the monetary authorities could prevent the recession (by lowering interest rates) but they are already afraid of inflation. Like Ben Bernanke, they face bad choices: more inflation _or_ a recession (or both?) Further, as I understand it, they are committed to keeping the yuan's fluctuations within a planned range. The commitment to a (relatively) fixed exchange rate ties the monetary authority's hands. This makes the recession more likely. (The fixed exchange rate system of the early 1930s encouraged the US Federal Reserve to deflate the economy.) Once the Chinese economy's growth slows, that likely causes a fall in fixed investment (the accelerator effect again). As in the US, a "growth recession" is usually followed by an actual recession (falling GDP or GDP _per capita_). To prevent the recession, it's likely that the government has to spend more. Maybe the earthquake, the Olympics, and the conflicts in Tibet (and all over the place, it seems) will cause increased spending. I know much too little about the Chinese economy and government policy, beyond the generalities of simple Keynesian economics. Is there an expert in the house? > My understanding also is that the state is encouraging the development of > mortgage, credit card, and other forms of consumer debt which are found in > the US and other advanced capitalist countries, and, to this end, is > gradually opening up the banking sector to US and other Western and Japanese > banks, mutual funds, private equity firms, and venture capitalists. One of > the major objectives of the US in its "strategic economic dialogue" with the > Chinese, notably under former Goldman Sachs CEO Henry Paulson, has been to > further Wall Street penetration into the burgeoning Chinese economy and > financial markets. So Chinese consumers could embrace the American Way of Debt.[*] Then they could join us in our excessive indebtedness, moderating the recession. They might owe some of the money to US institutions, but (of course) much of the funds lent to them originated in China. The US financiers don't care, of course, since the main profit center these days is fees for organizing loans, not the interest on the loans themselves. Of course, the pushing of loans to earn fees is one basis for the fraudulent and/or unwise mortgages which helped fuel the US housing bubble (and crash). I said "moderating the recession" but with working-class incomes falling relative to GDP, the expansion of credit likely simply _delays_ the recession. Given the instabilities sketched above, the recession seems increasingly likely (unless the government steps in). Then the consumer debt represents a serious demand-side imbalance that can make the recession worse (than it would be _sans_ consumer debt). If prices actually fall, China could be in debt-deflation territory. > An expanding US capitalism for a long time provided its workers with a > steadily rising standard of living, including - especially most recently - > through easy access to consumer credit. Why should Chinese economic > development be any different? I don't think that the US and China are that different on the macroeconomic level (since most of macroeconomics is about highly-aggregated financial stocks and flows seen in all capitalist economies). US capitalism provided its workers with a steadily rising standard of living from the late 1940s until the 1970s (in the "strong labor" era). That provided a stable foundation for US domestic demand-side growth (as long as the economy was largely autocentric), though there were other problems (on the supply side) that are beyond the scope of this already too lengthy missive. In the late 1970s and early 1980s, the US economy went through a "regime change," switching to a "weak labor" system. Wages stayed flat, especially compared to GDP growth. That is, the US in the neoliberal era has become more like the US in the 1920s or China nowadays. That meant that US growth has become increasingly dependent on the factors listed above (exports, government purchases, fixed investment, luxury spending, or credit-based working-class spending) to maintain the growth of demand. This doesn't mean that the US economy automatically sinks into stagnation. (As I understand it, the US had a political economy similar to that of the 1920s during the late 19th century, but there was no depression as "great" as that of the 1930s.) Exports could be boosted by the falling dollar (during the last few years), but of course that means "stealing" demand from other countries, broadcasting recession to the rest of the world. (This "theft" doesn't occur much from China, due to the relatively stable yuan. However, China is hit by falling exports if the US goes into recession.) The role of government purchases is similar, i.e., hurting US macro-demand in the late 1990s and helping demand in the 2000s (the war, tax cuts for the rich). In the period when exports and government stimulus were hit hard (the late 1990s, early 2000s), fixed investment (first in high-tech and later in housing) could boost the economy. So could credit-based working class-spending and luxury spending. But, as mentioned, these types of spending are flaky and have involved a serious accumulation of debt, which becomes a serious problem when asset deflation (the popping of the housing bubble) occurs. In the end, it's the Keynesian state which acts as the savior. These days it's likely to privatize gains and socialize risks. [*] A tip of the chapeau to Jessica Mitford. -- Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own way and let people talk.) -- Karl, paraphrasing Dante. _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
