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.

Update

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.

FILED UNDER: Economics and Business,
Dave Schuler
About Dave Schuler
Over the years Dave Schuler has worked as a martial arts instructor, a handyman, a musician, a cook, and a translator. He's owned his own company for the last thirty years and has a post-graduate degree in his field. He comes from a family of politicians, teachers, and vaudeville entertainers. All-in-all a pretty good preparation for blogging. He has contributed to OTB since November 2006 but mostly writes at his own blog, The Glittering Eye, which he started in March 2004.

Comments

  1. Ted says:

    Communists get it right while capitalists and their friends HOPE the correction of the free market comes before the rest of the country is socialized.

    Any Neocon still got my ticket to China from 4 years ago??

  2. tom p says:

    “our Congress has shown no willingness to run surpluses during times of economic growth to offset Keynesian stimuli during economic slowdowns,”

    Sigh….

    Sigh….

    Trying to come up with something more to say, but that says it all. Wait a minute… Every single paycheck I get, I put aside 1/8 (40 hr/wk) to 1/2 (if I get that much overtime) of to help hold me thru the inevitable lay-off. Why can’t we do the same?

    And I say “we” in the strictest sense. How many said “Thanks, but no thanks” to Bush’s tax cuts? How many said “Thanx, but no thanks” to the recent tax rebate?

    I thought long and hard about what to do with the money I got from the “China Economic Recovery Act”… Finally decided on just giving it to my sons. They were going to pay for it, they might as well get it.

  3. Web Smith says:

    We should take a lesson from China. With a $3.5 trillion economy, they invest cash in their country, which will result in an increase in consumer spending and create a demand for goods and services, which will cause prices to rise and put more people to work.

    With a $14 trillion economy, we borrow and give $2.5 trillion to the banks who sit on it, which will cause more companies to fail, more people to be laid off, fewer goods and services to be purchased, and prices to drop.

    Someone paid attention in class and someone didn’t or was it the $32 million that the poor banks spent on campaigns to get the bank bailout bill passed. When the population recovers and starts buying things again, the banks will start handing out the money and it will cause inflation.

    We deserve it. We re-elected the people who voted for the bill.

    Finance

  4. No doubt we need to encourage investment in our infrastructure, but rent-seeking behavior is simply the price we have to pay for federalism.

  5. Brett says:

    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.

    One thing, though, Dave – the federal government has played a major role in infrastructure projects like this since, well, forever (witness the highways, or canals before that, or railroads). It’s hardly “rent-seeking” unless federalism itself is rent-seeking; it’s the federal government using its revenues to promote better and more economic integration where the states alone can’t pull it off.

    But if you really want to blame something, blame the Balanced Budget Amendments in the states for not being well-constructed enough for something like this. The reason why they want to lend the states money is because when an economic downturn comes around, state tax revenues decline. Since they have to have balanced budgets, this means they are required to either raise taxes or cut services – both bad in a recession.

  6. Dave Schuler says:

    Brett:

    Thomas Jefferson refused DeWitt Clinton’s request for funds to build the Erie Canal largely on the grounds I’m giving. Look up the definition of rent-seeking: any pursuit of money from the government is rent-seeking behavior. It’s definitional.

    Additionally, is majority funder the same as major role? I don’t think so, especially with respect to projects that aren’t interstate ones and that don’t have noticeable national impact.

    The point I think you’re missing is that people in the states are better positioned to determine the priorities for their states and if they don’t find particular infrastructure projects sufficiently important to pay for with their own money why should it be paid for with mine? Illinois has plenty of infrastructure problems of its own.

    Finally, I think you’re giving state governments too much credit. State politicians don’t want to take the heat for raising taxes. It’s much safer to go to Uncle Sugar for the dough.

  7. Steve Verdon says:

    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.

    Why does it show that? Sounds alot like some the stimulus plans coming out of DC. Of course, that they have trillions lying around in their treasury means such a bailout might actually work, unlike the ones coming out of DC.

  8. Dave Schuler says:

    Steve, I think you’re conflating the stimulus package proposals coming out of Washington with the bailout proposals. The bailout proposals aren’t intended to produce fiscal stimulus and I have no reason to believe they’ll do so.

    The stimulus package proposals I’ve seen, relative to the size of our economy, have been quite puny.

  9. Steve Verdon says:

    Steve, I think you’re conflating the stimulus package proposals coming out of Washington with the bailout proposals.

    Well I think you are drawing a false distinction. Government spending is government spending. The bailout is the government spending money to either:

    1. Jump start the economy be un-freezing credit (best case scenario/belief).
    2. Prevent a major economic recession by un-freezing credit (most likely scenario/belief).

    It is still spending though, just not on infrastructure or make-work programs.