Now That’s a Stimulus Package (Updated)
Concerned about future growth the Chinese government is about to implement a stimulus package:
SAN FRANCISCO (MarketWatch) — China unveiled on Sunday what it described as a “massive” economic stimulus package worth over half a trillion dollars in an effort to reverse slowing economic growth in the world’s most populous country.
China’s state-run news agency Xinhua said Sunday that the program will “will loosen credit conditions, cut taxes and embark on a massive infrastructure spending program in a wide-ranging effort to offset adverse global economic conditions by boosting domestic demand.”
The package is valued at about 4 trillion yuan ($586 billion), to be spent over the next two years.
That certainly shows what you can do when you’re an unanswerable autocracy, you run a trade surplus with practically every country in the world, and you’ve got trillions in reserves sitting in the bank.
As I interpret things the oligarchs who run China see things somewhat the same as I do: to have its desired effect a fiscal stimulus must be considered proportional to the size of the economy you’re trying to stimulate. $586 billion amounts to about 8.25% of total Chinese GDP. A comparable stimulus package in the United States would need to be something like $1.2 trillion.
Said another way, we shouldn’t expect a stimulus package here like this any time soon.
I actually think China’s stimulus package is a very good thing. China’s infrastructure certainly needs help and I’ve been arguing for more than a decade that China needs to cultivate its domestic market. Unfortunately, China has plenty of government boondoggles cf. all of the schools that fell down during the recent earthquake so there’s no way to know if the money will be spent prudently.
Contrariwise I’m skeptical about stimulus packages for the United States. We don’t have trillions in cash (or effectively in cash) sitting around, borrowing at the rate we’re starting to is bound to have some impact on interest rates eventually, our Congress has shown no willingness to run surpluses during times of economic growth to offset Keynesian stimuli during economic slowdowns, and as I see it the complaints about infrastructure here are mostly rent-seeking. It’s one thing for the citizens of Minnesota (for example) to tax themselves to re-build their bridges. It’s something else altogether for the citizens of Mississippi (for example) to be taxed to re-build a bridge in Minnesota.
I think we should be very, very cautious about taxing the people in New York and Chicago, which have infrastructure issues of their own, to build interstate highways in Hawaii or billion dollar bridges that help a couple of hundred people who live on an island off the coast of Alaska. But that’s what will happen under a federal system when you federalize local problems.
Here’s an interesting quote from the New York Times coverage of the Chinese stimulus package:
Analysts were expecting China to announce a big stimulus package but were surprised at the size of it.
“That is much more aggressive than I expected,” said Frank X. Gong, a Hong Kong based economist at J.P. Morgan. “That’s a lot of money to spend. They’ll building subways, railroads, bridges, roads. The key is to stimulate end demand.”
Mr. Gong said that after the Asian financial crisis in 1997, Beijing undertook a similar, but much smaller, stimulus package, earmarking huge sums to build the country’s massive highway and toll road system, which helped keep the economy growing in 1998 and 1999.