One of my Chinese staff recently told me she has heard that some of the South Korean and Japanese plants in Suzhou with thousands of assemblers each have been laying off people since the beginning of October. The news put me in mind of a Financial Times op ed piece that irritated me a bit, since it seemed to echo the same sort of nonsense current President Bush encouraged Americans to do when the dot-com bubble burst in 2001: consume.

Editors of the Financial Times implored China to spur slowing economic activity in the country by encouraging consumption. The Chinese government’s announcement of a half-trillion dollar stimulus package for the economy was the cause for the piece. I disagree, though, with the Paper’s assertion that – to paraphrase President George W Bush just after 9/11 – people should go to the Mall and spend. Instead, the Chinese government needs to begin building the sort of Social Security institutions and creating WPA (Works Progress Administration) -style programs for the people that are losing their jobs through the latest economic re-strucuturing: a movement away from low-margin export manufacturing to more capital-intensive production and services. It was just such government investments that put America back on track eighty years ago as an economic superpower during the Great Depression.

“Having cut interest rates three times within the past month, the Chinese State Council has now taken the advice of the IMF and the World Bank, and authorized $586bn of stimulus spending over the next two years. Housing, utilities, disaster relief and transport are expected to be the main beneficiaries.”

Another FT article cites: Arthur Kroeber, managing director of Dragonomics in Beijing, said the actual extra investment as a result of the fiscal package might be as little as one third of the headline figure, at around Rmb 1,300bn. That is still around 2 per cent of GDP each year, but much less than initial reports suggested, largely because a lot of the likely investment in roads, rail, health, education and rural areas had already been announced.”

Though the Chinese government’s opaque plan for stimulating its economy seems to be going more toward fixed asset investment, there is still little sense that it has the will to begin building the sort of social institutions that will give individuals and families a sense of financial safety and security that will see them open their purses and wallets wider in order to spend. Beyond social security institutions and work programs are efforts that involve the development of a truly independent judiciary and greater liberalization of industry – especially at the local level, where corruption is endemic.
The Financial Times Op Ed piece goes on to say:

“The Chinese government recognises that it must build domestic consumer demand, but it is time for the leadership to put its money where its mouth is. Alas, the planned stimulus does not attempt to boost public and private consumption. It aims, instead, to keep the economy ticking over until it can start exporting again. This will not work. This is the golden opportunity to redirect the pattern of growth towards consumption and away from the previous massive reliance on exports and investment.”
If people do not have jobs and feel insecure about government institutions – whether the government is with them or against them, in a manner of speaking – the people will not simply go out and spend – especially when the indications are that other countries are suffering economically and that at any time in changeable China policies might change that punish the very behaviours that had at first been encouraged. A push toward consumption when so much of China’s infrastructure and industry is immature is rash.

Indeed, the same article points out:
“In the absence of a domestic safety net, Chinese household savings have been as high as a quarter of disposable income.”

It was Paul Krugman’s piece in the International Herald Tribune meant to influence incoming President Obama’s economic stimulus plan for the States that inspired me to apply the same thinking to China’s own situation. Indeed, China’s current demographic reflects America’s of the 1920′s more than that of the America of today: then America was in the grip of a demographic shift from the countryside to the city and a movement from an agricultural base to an industrial one, all underpinned by rampant speculation.

However, Krugman points out a little known fact about government fiscal policy during the Great Depression in the States:

“This may seem hard to believe. The New Deal famously placed millions of Americans on the public payroll via the Works Progress Administration and the Civilian Conservation Corps. To this day we Americans drive on WPA-built roads and send our children to WPA-built schools.

Didn’t all these public works amount to a major fiscal stimulus?

Actually, it turns out FDR was TOO conservative in priming the infrastructure pump of the would-be superpower to get the people to feel secure enough to begin spending again:

“And FDR wasn’t just reluctant to pursue an all-out fiscal expansion – he was eager to return to conservative budget principles. That eagerness almost destroyed his legacy. After winning a smashing election victory in 1936, the Roosevelt administration cut spending and raised taxes, precipitating an economic relapse that drove the unemployment rate back into double digits and led to a major defeat in the 1938 midterm elections.”

In other words, FDR steered the American economy back into a deep recession – some would even say another trough of the Great Depression – by doing TOO LITTLE, not too much to put people back to work. The frightening revelation is the sort of fiscal stimulus that got America working again, gave it the boost of confidence it had lost for more than a decade, and created the basis for an economy that has just finally imploded with the latest debacle:

“What saved the economy, and the New Deal, was the enormous public works project known as World War II, which finally provided a fiscal stimulus adequate to the economy’s needs.”

Let’s hope China errs on the side of too much fiscal stimulus.