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Working on
this week’s story about China’s economy,
I was reminded of the “macro wars” that raged in Western countries after the global financial crisis of 2007-09. During that bracing period, economists crossed swords with each other in the media and blogosphere about the best response and how to handle the slow growth that followed.
The warring parties divided into three. One group argued central banks had all the tools they needed to revive their economies, if they were willing to use them. A second camp argued that central banks could only do so much. Monetary easing might be ineffective if banks were fragile or if indebted firms and households were unwilling to borrow. They argued that extraordinary fiscal stimulus was therefore vital, albeit politically impossible.
A third group was wary of any heroic efforts to resuscitate growth. In their view, the crisis-struck economies needed to work off the excesses of the past, including overborrowing and overbuilding. Aggressive monetary or fiscal easing would not help and might even hurt. They argued for macro restraint. And in political circles, if not academic debates, their counsel often prevailed.
While this debate was raging in the west, China got cracking on a clumsy but undeniably effective stimulus effort of its own. Led by local governments and financed by banks, this lending and spending spree allowed the economy to grow by over 9% in 2009, an otherwise miserable year for the world economy.
What relevance do these old battles have for China today? The country’s economy is not recovering as quickly as expected from its exit from covid-19. Some forecasters think GDP will not grow at all in the second quarter, compared with the first. A brief revival of the all-important property market has petered out. Industrial prices are falling sharply and consumer-price inflation is almost zero.
As our leader explains,
it seems like a good time for China’s policymakers to stimulate spending once again. China’s central bank has cut interest rates by a smidgen. But despite the country’s past success in fighting off downturns, local expert opinion seems divided about its policy options today. The country’s economists are having their own version of the West’s macro wars.
Some are confident the country’s central bank could revive growth if it acted boldly enough. (What if it cut interest rates to zero?) Others doubt whether rate cuts by themselves can be effective, given the inhibitions of banks and borrowers. But they still see plenty of scope for fiscal stimulus of one sort or another. A third camp seems wary of aggressive easing, whether fiscal or monetary. Past efforts to rescue the economy have, after all, contributed to overborrowing by local governments and overbuilding in the boondocks. No one wants a repeat. At the moment, this third camp still seems influential within the government.
In 2008-09, the West’s stimulus response was restrained, relative to China’s. In more recent years, these positions have reversed.
China has been stingy
compared with the West. In the long aftermath of the global financial crisis, China learnt what it was like to have too much stimulus. The West learned what it was like to have too little. It may be that the winning side in any macro war is doomed to lose the next one.
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