The view from China

Feb. 26, 2009 – 22:53:12
It’s interesting to view America’s economic problems from the outside — way outside, in this case. The Wall Street Journal published a translated portion of The People’s Bank of China’s most recent quarterly monetary policy report. With an obvious reference to the U.S., the report explains China’s view of the origins of what is now a global crisis:

“One of the main causes of this crisis is that some economies’ long-term development model of low savings and high consumption proved difficult to sustain.”

China’s solution to its own problems is a Keynesian approach similar to President Obama’s. In short, it’s all about upping aggregate demand:

“We need to focus on expanding consumption, especially consumer spending,” the report explains.

“In the short term, we can first consider incentive policies for rural and urban low-income households such as increases in subsidies, expanded consumer credit, etc., which have a direct impact on spending. Over the medium term, raising the consumption of urban middle-income households should be a focus of policy. And for the long term, improving the social safety net, as well as improving the structure of national income and narrowing the income gap, is the fundamental way to promote growth in consumption.”

My first thought was that China, with a command economy, would have a much easier time than the U.S. climbing out of this mess. Maybe not. According to the report, the marginal propensity to consume is only 0.57 for its urban residents. The MPC is the proportion of additional income that will be consumed rather than saved. So for every extra yuan a Chinese resident receives — from a stimulus package, for example — he will sock .43 yuan into savings. The downside of that admirable thrift is that China must pump almost twice as much into the economy to increase consumer demand.

China’s economy does not, in the short term, need more savings. (Some savings becomes investment, a component of demand. Investment, though, increases production capacity — the last thing China, or America, needs.) China, like America, needs more consumer demand. Because we are more inclined to spend every dollar we get, the U.S. may have an easier time than China increasing aggregate demand.


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