Fiscal stimulus is more effective than monetary easing, and China's strong
state has been able to do to what the US government, hamstrung by its private
sector, could not. "Unlike the United States, which relied largely on its
central bank’s efforts to cushion the crisis and foster recovery", writes
Stephen Roach, "China deployed a CN¥4 trillion fiscal stimulus (about 12% of
its 2008 GDP) to jump-start its sagging economy in the depths of the crisis.
Whereas the US fiscal stimulus of $787 billion (5.5% of its 2009 GDP) gained
limited traction...the Chinese effort produced an immediate and sharp increase
in “shovel-ready” infrastructure projects that boosted the fixed-investment
share of GDP from 44% in 2008 to 47% in 2009." The different policy responses
will have significant consequences for growth and living standards in the two
countries, Roach says. Now at Yale, he was formerly Morgan Stanley's chief
economist and later headed it's Asian operations.
China set's America's mental trap
Stephen Roach
Project Syndicate
May 29 2014
NEW HAVEN – The temptations of extrapolation are hard to resist. The trend
exerts a powerful influence on markets, policymakers, households, and
businesses. But discerning observers understand the limits of linear thinking,
because they know that lines bend, or sometimes even break. That is the case
today in assessing two key factors shaping the global economy: the risks
associated with America’s policy gambit and the state of the Chinese economy.
Quantitative easing, or QE (the Federal Reserve’s program of monthly purchases
of long-term assets), began as a noble endeavor – well timed and well
articulated as the Fed’s desperate antidote to a wrenching crisis.
Counterfactuals are always tricky, but it is hard to argue that the liquidity
injections of late 2008 and early 2009 did not play an important role in saving
the world from something far worse than the Great Recession.
The combination of product-specific funding facilities and the first round of
quantitative easing sent the Fed’s balance sheet soaring to $2.3 trillion by
March 2009, from its pre-crisis level of $900 billion in the summer of 2008.
And the deep freeze in crisis-ravaged markets thawed.
The Fed’s mistake was to extrapolate – that is, to believe that shock therapy
could not only save the patient but also foster sustained recovery. Two further
rounds of QE expanded the Fed’s balance sheet by another $2.1 trillion between
late 2009 and today, but yielded little in terms of jump-starting the real
economy.
This becomes clear when the Fed’s liquidity injections are compared with
increases in nominal GDP. From late 2008 to May 2014, the Fed’s balance sheet
increased by a total of $3.4 trillion, well in excess of the $2.6 trillion
increase in nominal GDP over the same period. This is hardly “Mission
accomplished,” as QE supporters claim. Every dollar of QE generated only 76
cents of nominal GDP.
Unlike the United States, which relied largely on its central bank’s efforts to
cushion the crisis and foster recovery, China deployed a CN¥4 trillion fiscal
stimulus (about 12% of its 2008 GDP) to jump-start its sagging economy in the
depths of the crisis. Whereas the US fiscal stimulus of $787 billion (5.5% of
its 2009 GDP) gained limited traction, at best, on the real economy, the
Chinese effort produced an immediate and sharp increase in “shovel-ready”
infrastructure projects that boosted the fixed-investment share of GDP from 44%
in 2008 to 47% in 2009.
To be sure, China also eased monetary policy. But such efforts fell well short
of those of the Fed, with no zero-interest-rate or quantitative-easing gambits
– only standard reductions in policy rates (five cuts in late 2008) and reserve
requirements (four adjustments).
The most important thing to note is that there was no extrapolation mania in
Beijing. Chinese officials viewed their actions in 2008-2009 as one-off
measures, and they have been much quicker than their US counterparts to face up
to the perils of policies initiated in the depths of the crisis. In America,
denial runs deep.
Unlike the Fed, which continues to dismiss the potential negative repercussions
of QE on asset markets and the real economy – both at home and abroad – China’s
authorities have been far more cognizant of new risks incurred during and after
the crisis. They have moved swiftly to address many of them, especially those
posed by excess leverage, shadow banking, and property markets.
The jury is out on whether Chinese officials have done enough. I think that
they have, though I concede that mine is a minority view today. In the face of
the current growth slowdown, China might well have reverted to its earlier,
crisis-tested approach; that it did not is another example of the willingness
of its leaders to resist extrapolation and chart a different course.
China has already delivered on that front by abandoning a growth model that had
successfully guided the country’s economic development for more than 30 years.
It recognized the need to switch from a model that focused mainly on export-
and investment-led production (via manufacturing) to one led by private
consumption (via services). That change will give China a much better chance of
avoiding the dreaded “middle-income trap,” which ensnares most developing
economies, precisely because their policymakers mistakenly believe that the
recipe for early-stage takeoff growth is sufficient to achieve
developed-country status.
The US and Chinese cases do not exist in a vacuum. As I stress in my new book,
the codependency of China and America ties them together inextricably. The
question then arises as to the consequences of two different policy strategies
– American stasis and Chinese rebalancing.
The outcome is likely to be an “asymmetrical rebalancing.” As China changes its
economic model, it will shift from surplus saving to saving absorption –
deploying its assets to fund a social safety net and thereby temper fear-driven
precautionary household saving. Conversely, America seems intent on maintaining
its current course – believing that the low-saving, excess-consumption model
that worked so well in the past will continue to operate smoothly in the future.
There will be consequences in reconciling these two approaches. As China
redirects its surplus saving to support its own citizens, it will have less
left over to support saving-short Americans. And that is likely to affect the
terms on which the US attracts foreign funding, leading to a weaker dollar,
higher interest rates, rising inflation, or some combination of all three. In
response, America’s economic headwinds will stiffen all the more.
It is often said that a crisis should never be wasted: Politicians,
policymakers, and regulators should embrace the moment of deep distress and
take on the heavy burden of structural repair. China seems to be doing that;
America is not. Codependency points to an unavoidable conclusion: The US is
about to become trapped in the perils of linear thinking.
Rhttp://www.project-syndicate.org/commentary/stephen-s--roach-forecasts-stiffening-economic-headwinds-for-the-us-as-excess-chinese-saving-dries-up#ZZ6mi1KRyiM9mT4f.99
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