February 7, 2009

China Should Press the Keynes Test Button, and Hold It Down (Update!)

A few months ago it became clear to me that China is one of the nations is in more profound danger from a general world economic recession.

Yes, not the U.S., China. China, with its big surpluses and large savings is actually under greater threat than the United States.

This is because, like the United States in 1930, China is the big export nation.

When consumer demand falls around the world, nations more reliant on exports, like China or Germany face a fall in demand for their output. But in China's case, exports are such a large part of all of its entire economy that the proportional effect is worse.

Now we are learning that this is happening more dramatically than officially reported.

Plunging exports. Factory closures. More than 20 million people thrown out of work. Official data showing that China's economy is cooling but still growing strongly obscure what economists say is a sharp recent decline that has inflicted obvious pain....

...experts say that compared to the previous three months — the system used by most other major countries — China's growth fell to as low as 1 percent or possibly zero....
Those who have followed the discussion on China know that it's widely thought that China needs to grow above 6% due to its large number of job seekers.

Why is China in so much trouble? Why can't it just rely on itself to grow?

China has an enormous savings rate, near 50%! This means that it produces about twice as much as its people consume.

Basically, in terms of sustainability, China has a huge consumption shortfall.

So China was already in need of Keynesian stimulus of certain kinds even before the sudden great crisis it is now beginning to face.

China consumes such a low amount of its production for several reasons, and some of these are key to what can be done to save China from enormous turmoil.

Part of the reason Chinese workers save so much is a sense of insecurity. They have insecurity about health costs, and insecurity about having something in their old age.

In China the culture requires children to care for their aged parents, but the One-Child Policy means that this care for aged parents will often fall on a single set of shoulders, or for instance four parents being cared for by one married couple.

One program to increase retirement security was founded in the U.S. during the Depression -- Social Security was created in 1935.

So one step China needs to do to help its citizens begin to support each others' jobs through adequate domestic consumer demand is to provide more of a sense of security against illness and old age. Feeling more secure, Chinese can then save a lesser amount and spend more. During a recession, these new social programs can be funded through deficit.

Social programs meant to increase a feeling of security, more doctors and health care investment, and more schools -- these are a few of the types of stimulus China needs now.

China needs to press the Keynes Test Button down even more firmly, and hold it down.

Update: I just saw this great news. Very encouraging:

Earlier this month, Beijing announced it will spend $125 billion to build hospitals across China, as well as to expand medical insurance to cover 90% of China's 1.3 billion people by 2011. The government has also announced a significant expansion of its pension program....
It appears China is doing some good things in it's stimulus package. It's not yet clear if it is enough to accomplish the very needed effect of increasing feelings of security, and thus increasing Chinese consumer spending significantly. We should watch for the outcome over the next 6 months.

November 2009 Update: Reuters lays out the current situation.


  1. China will be fine, but this is a reasonable essay. Try to give Chinese leaders credit for being as aware of where the country is as we think we are. I rather think they are lots more aware.

  2. I'm certain there are many in China that have a great detailed knowledge of their economic/social situation. Here I'm focusing not much on those details (only an important example is offered), but instead I'm aiming to address the big picture economic choices -- how China should respond to the situation of exports, domestic consumption, and stimulus.