Too much travel and a longish writing commitment have kept me from posting on my blog recently, but I plan to return to it over the weekend. I did want to mention a couple of things quickly today however.
The first is that the unemployment situation here has gotten grim enough that the government is trying to mediate labor and pay disputes and to make it harder for companies to lay off workers. They are especially worried about the implications for social unrest. According to a Bloomberg piece today:
A survey of 84 cities showed demand for workers fell 5.5 percent in the third quarter, the first decline in years, Vice Minister for human resources Zhang Xiaojian said at the press conference today. The ministry should be able to keep the urban unemployment rate within the government’s target of 4.5 percent this year, although the rate will “worsen” next year, Zhang said. That figure does not include an estimated 200 million migrant workers who have left their home town in the countryside to work in cities. Even before the current global crisis, the country faced a huge gap between 24 million new job seekers and the 12 million jobs created annually, according to the ministry.
Most people believe that the official urban employment rate significantly understates real urban unemployment, and although I have hear that real unemployment is as high as 10-11%, I have seen nothing very credible on the issue. I assume unemployment is higher but I don’t really know what it is.
If unemployment is rising, however, it does mean that there will be serious pressure to do whatever it takes to support employment growth. One thing that I am worried about (and this was the subject of the “longish writing commitment” I mentioned above) is that it puts pressure on the government to engineer measures to expand export growth. For example I suspect that the fight over whether or not to continue appreciating, and even depreciate, the RMB is intense. Two days ago Bloomberg had a piece that said the following:
The yuan fell as policy makers focus on supporting exporters amid signs the world’s fourth-largest economy is slowing because of global financial turmoil…”We expect the dollar to move higher versus the yuan as the focus shifts decisively to growth,” said Thomas Harr, a senior foreign exchange strategist with Standard Chartered Plc in Singapore. “But not a massive move though, probably up to close to 7 in the first half” of next year, he said. The currency traded at 6.8270 per dollar in Shanghai as of 9:45 a.m., compared with 6.8269 yesterday, according to the China Foreign Exchange Trade System.
Perhaps more importantly, Xinhua said in an article on Monday that:
China‘s Ministry of Finance announced on Monday a list of 3,770 items involved in the third export tax rebate increase this year. The items include labor-intensive, mechanical and electrical products. New export tax rebate rates on these items were also announced. The change take effect Dec. 1.
The announcement came four days after the State Council, or cabinet, said it would raise export tax rebates for the third time this year as part of the government’s 4-trillion-yuan (571.4 billion U.S. dollars) economic stimulus package. Rises in tax rebate rates varied among different items. For example, the rate on tires was raised from 5 to 9 percent while glassware was up 5 to 11 percent. Rates on labor-intensive products such as luggage, shoes and umbrellas were elevated from 11 to 13 percent.
The 3,770 items accounted for 27.9 percent of the country’s total exports, according to a statement posted on the government’s website. The statement said the government would also eliminate export duties on certain types of steel, chemical and grain products and reduce export duties on some fertilizer products, also effective Dec. 1. China raised export tax rebates in Aug. and at the beginning of this month on a range of goods to shore up flagging exports.
Export subsidies, depreciating RMB – all of this might seem to make sense if you look at China as divorced from the global balance of payments system. These measures to boost exports are, after all, pretty standard ways of increasing production.
But if you think of China’s role within the global balance of payments, it seems to me that this is little more that a form of Smoot-Hawley-with-Chinese-characteristics. Global demand is slowing, just as it did in the 1930s, and China as the leading source of global overcapacity is trying to address its global demand problem by shifting the burden abroad.
In that light I should mention a recent exchange I had with some friends. Reference was made to a recent Washington Post OpEd piece by the British historian Niall Ferguson in which I think he got absolutely correct the importance of the China-US link in the global balance of payments, but he was wrong when called for a significant fiscal boost from the US. My response to his piece was:
Ferguson is probably right to compare the 2008 G20 with the failed 1933 London conference, but the problems with this account, I think, is that he has the US playing the same role in the 1930s as today. But the positions are very different.
In the 1930 it was the US who had huge overcapacity which it exported abroad (via huge trade surpluses) and it was Europeans who were over-consuming, financed by capital exports from the US. When the credit crunch came it was unreasonable, as Keynes argued bitterly, to expect the rest of the world to continue demanding US goods, especially since the financing of their consumption had been interrupted. Since US production significantly exceeded US consumption (with the balance consisting of course of the trade surplus), the need for demand creation most logically rested in the US.
As we all know, in spite of FDR’s Keynesian reputation (he wasn’t) the US not only failed to expand fiscally as much as it needed to but it actually tried to use trade restrictions to protect its overcapacity problem and “export” its lack of demand to the rest of the world. That didn’t work, and when world trade collapsed the US had to bear the full adjustment cost of the gap between production and consumption, and it did so in the most difficult possible way, by contracting production.
Today it is China who is exporting overcapacity and it is the US who is consuming too much, fed by Chinese financing. With the collapse of bank intermediation US households and businesses are cutting consumption and raising savings. This is a necessary adjustment. Calling on the US government to engage in massive fiscal expansion to replace lost private demand is crazy. It means that we should continue the current game that has led us into so much trouble, but instead of having US over-consumption and rising debt at the private level we must have it at the public level.
If Keynes were around today he would probably make the same point he did over 60 years ago. Demand must be created by the current account surplus countries, which have, to date, relied on net exports to protect themselves from the consequence of their overcapacity. They must force demand up quickly in order to close the gap, and since expecting private consumption to rise quickly enough is unrealistic, it has to be public consumption – a large fiscal deficit.
Just as the US stupidly tried to increase its ability to dump capacity abroad by creating import restrictions (which has the effect of further expanding domestic production), China seems to be hoping for the same thing by increasing export rebates and slowing the currency appreciation (there is even increasing talk of depreciation).
This can’t work for long. The world has excess production and there is a need for the US to reduce its demand and increase its savings. The only proper place for new demand to originate is, once again as in the 1930s, from current account surplus countries. They should be engaged in demand creation, not supply creation. If they continue trying to export their way out of a slowdown, there will almost certainly be a trade war, as in the 1930s, and the full force of the adjustment will be borne by the current account surplus countries, again as in the 1930s. Remember that back then the current account deficit countries, like Germany after 1932, found it relatively easy to limit the impact of the crisis by forcing balanced trade — which has the effect of increasing demand (domestic) and reducing supply (foreign).
It is amazing to me that people like Ferguson, who have been arguing correctly for years that US consumed too much and saved too little, are now terrified of the necessary adjustment, and are arguing that it should be stopped and even reversed. The process cannot be stopped – US savings are too low and will rise one way or the other. The global imbalance between production and consumption must grow because US and European consumption must decline, and if we cannot find a new source of demand, there will have to be a contraction in production. In an open world, the contraction will be paid for by everybody more or less equally, with those aggressively pursuing export growth getting off relatively lightly and the rest doing worse. In a closed world most of the cost will be borne by the countries with overcapacity.
If Asian countries continue to try to boost exports it is not hard to see why this could easily lead to trade barriers.
China needs to resolve this problem by expanding fiscally, not by stimulating exports. The US in the same position sixty years ago tried to do the same thing China is doing (half-hearted fiscal stimulus and more interfering with trade in order to alter the terms in its favor), with disastrous consequences mainly for itself. Instead of looking for and dreading Smoot-Hawley in US or European policy-making, we really need to worry about an Asian Smoot-Hawley.
Remember that there is no difference in this case between restricting imports and subsidizing exports and, by the way, currency depreciation does both.
I now feel entirely on the same thinking pattern. Alas! This outcome is clear. IMHO, a mixture of:
1 – subsidies to the industrial actors of all natures, either formal or not. Massive loans to the automobile industry belong to that league along with more traditional tools,
2 – currency depreciation, I expect a deliberate “surprise” one by the OBAMA administration at the beginning of this year. This would be THE ONE TO MAKE SENSE at this time. But it will not be, alas the unique one.
3 – trade barriers of all kinds, expect a strong resuscitation of non financial ones since currency depreciation is a much stronger “across the board” medicine.
The first item – financial support including to dead industrial bodies – is essential. Since the banking system is drowning, the active state intervention will certainly not even be mentioned.
Especially in China. But certainly not only in China.
So aside from this natural effect of US savings increasing, what else is there that US policymakers should do? In your view, what would be the best moves for an Obama administration? Would it involve trying to convince the Chinese of these measures you recommend? What would be the worst thing an Obama administration is likely to do?
It’s not either or. China can go fiscal while doing tax rebates. Personally, I don’t think that the tax rebates are going to do more than band-aid the situation since taxes on nothing are nothing.
Pettis: Calling on the US government to engage in massive fiscal expansion to replace lost private demand is crazy. It means that we should continue the current game that has led us into so much trouble, but instead of having US over-consumption and rising debt at the private level we must have it at the public level.
First the US government is the only entity that can generate the demand that is necessary and with all of the money that is going into treasuries it has a lot of free money that it should be doing.
Second, the problem with what the US did from 2002-2008 was not that it expanded the economy. That was good, and it got us out of the 2002. The problem with what the US did was that this investment was in non-productive goods and that the benefit to the consumer was in the form of low interest loans rather than in higher wages. The US should try to generate demand by reducing consumption and having a massive effort to increase investment in roads, factories, health, education and anything else that will generate long term returns.
Pettis: China needs to resolve this problem by expanding fiscally, not by stimulating exports.
China doesn’t have a big enough economy to resolve global problems. It’s going to have a tough enough time fixing internal problems.
Quote: The world has excess production and there is a need for the US to reduce its demand and increase its savings.
*THIS* is the crazy part. We have overproduction and the solution is to reduce demand….. Hello???? If we have overproduction then we want to increase demand by any means possible.
Pettis: It is amazing to me that people like Ferguson, who have been arguing correctly for years that US consumed too much and saved too little, are now terrified of the necessary adjustment, and are arguing that it should be stopped and even reversed.
From my point of view the implication here is that they were wrong in the first place.
Pettis: The process cannot be stopped – US savings are too low and will rise one way or the other.
If you have savings rates that are too low in an era of overcapacity, you can have the government print money and stuff it into people’s bank accounts. Boom. Instant savings. Take debt and print money to erase it. Boom. Instant equity. That’s actually more or less what the government has been doing.
None of this makes sense in normal times, but if you have people without jobs, and factories that can produce stuff that aren’t producing it, and the only problem is lack of money, you can print it.
Thank you for some sanity and reality.
One other thing is that I don’t think that trade policy is really going to make that much difference. You can issue as many tax rebates as you want, but if no one in the United States is buying then it’s not going to make much of a difference. Also, I don’t think that trade is going to be a major source of friction because what either China or the United States can do is constrained by WTO rules, and WTO provides a forum for everyone to coordinate policy.
What is going to be more interesting is the complex interactions between trade, monetary and fiscal policy. For example, if China takes huge fiscal stimulus but the US does not, then you are going to see the RMB weaken, and this could produce a worse balance of trade with the United States unless China agrees to peg its currency to avoid devaluation. So if either China or the United States or Europe takes fiscal stimulus, this is going to require some coordination of trade and monetary policy with the other actors.
The other thing is that very unexpected things have happened and will continue to happen and figuring out ways of reacting to them is going to make things very interesting.
[...] Notes on Chinese trade policy Filed under: china, finance — Tags: china, finance — twofish @ 7:17 am http://mpettis.com/2008/11/rising-unemployment-increases-the-pressure-for-misguided-trade-policies/ [...]
That’s a great analysis. Comparing USA’30 with China’08 is a very helpful analytical tool and allow us to make a little bit of clarity in possible future developments of ’08 crisis.
There is just a specific element of you analysis that doesn’t sound correct to me. You posted:
“Remember that back then the current account deficit countries, like Germany after 1932, found it relatively easy to limit the impact of the crisis by forcing balanced trade — which has the effect of increasing demand (domestic) and reducing supply (foreign)”.
Germany suffered a tremendous GDP collapse (-40%) between 1929 and 1933. Germany unemployment in the years following 1929 reached over 30% (more than USA) (data from Findlay – O’Rourcke – Power and Plenty – Ch.8).
This level of unemplyment was one of the reason that pushed Hitler to power in 1933.
It is not nice to say but was Hitler Economic Policy, with substancial deficit spending (to build arms and highways), to reach full employment again in 1937. On my opinion that was one of the reason of the substancial support of German people toward Hitler in the following years (1938-1945).
This is a reminder that substancial financial and economic crisis have strong political implications.
Regarding Germany again, I’m not sure that forcing balanced trade was responsible for the rapid rebound in the economy after the huge fall in 29-32. It may have played a part, but I suspect that the major public spending stimulus – mostly military buildup – was as or more crucial.
If we are going to take lessons from that era (while hoping it won’t be as bad), to me that suggests that if the US is to rebound relatively quickly, a big sustained fiscal stimulus is going to be necessary – not to prop up exporting countries but to support itself. That could also allow a gradual unwind of the imbalances through a steadily falling US trade deficit and steadily rising Chinese consumption – which seems a lot more achievable than a sudden switch.
The experience of Japan in the 30s is interesting as well – I seem to remember it ran a largely balanced current account but was quite dependent on trade. The government brought in a large spending programme – again, unfortunately mainly military – and it suffered the least out of any of the developed countries.
Going back further into history, do you have any thoughts on the long depression of 1873-90? From my very limited knowledge, it seems that there are parallels between then and the last few years. It seems to have been an unpleasant global deflationary period due to production overcapacity in the US and Germany (still industrialising, net exporters) but ultimately set up extremely strong growth in them at the expense of the UK (net importer) losing its dominance in the world economy.
[...] point is good one. The Michale Pettis post that she links to is interesting. The conclusions that Michale Pettis and herself draw is all [...]
The person that was most responsible for German economic policy between 1926 and 1937 was Hjmar Schlacht, and it’s likely that had Hitler not been able to claw his way to power in January 1933, that Weimar would have followed roughly the same policies, and someone other than the Nazis would have gotten credit for the economic recovery. The major public works projects that the Nazis benefited from were actually approved under the Kurt von Schleicher government.
The other thing that you have to be sensitive to are differences between 1930 and 2008. Fortunately, most of the differences seem to be favorable to less pain.
ForFor said: “with substancial deficit spending (to build arms and highways), to reach full employment again in 1937″.
Germany was on the verge of bankruptcy in 1939. War was about the only “solution” to sustain the mirage of success. In fact the financial policy of the Third Reich has failed badly.
Even here in Germany many people think that Hitler was successful during peace time. He wasn’t. Financially it was smoke and mirrors. They invented a massive SIV by issuing MEFO bills to hide the debt from the official balance sheet.
http://en.wikipedia.org/wiki/Mefo_bills
Within six years the national debt level rose from 15% to 43% GDP. Remember that in these days money equalled gold. Since Germany consumed all the money they we running out of reserves.
But I absolutely agree with your conclusion: “This is a reminder that substancial financial and economic crisis have strong political implications.”
Twofish, again you completely miss the point. You say “We have overproduction and the solution is to reduce demand….. Hello???? If we have overproduction then we want to increase demand by any means possible.” There is no “we” here. There are a group of different countries with very different problems, and necessarily with different objectives. “We” don’t have an overproduction problem. China has an overproduction problem and the US has an overconsumption problem. To argue that the solution to this is for the US to expand consumption, I would submit, is not terribly useful. At any rate it is irrelevant. US household and business consumption is contracting very sharply. I am not sure why you think this isn’t the case since the numbers are not only clear, but shockingly clear. If US consumption decreases, the problem for countries that depend on US consumption to resolve their overproduction problems necessarily increases. By the way your “print money and stuff it into people’s bank accounts” solution doesn’t make sense. If it is so easy to boost domestic demand that why, why hasn’t China done it?
Forfor and Cris, you are right about Germany before 1932-33, which is why I made the point about recovery after balanced trade (a Nazi program). And it is probably true that at least part of Germany’s recovery was caused by fiscal expansion – and not only for military purposes, remember the autobahn. But remember that the investment multiplier depends on the savings rate, and countries with trade deficits and who are very open to trade have a higher ‘savings” rate in the multiplier because of the savings rates of the current account surplus countries, which by definition is likely to be higher. Of course the point about Germany is not that the US is exactly like Germany and will soon suffer a Nazi takeover. It is simply that countries must adjust and will adjust within the balance of payments constraints.
Cris, the point about Japan is very interesting and I have to admit I don’t know as much about Japan in the 1930s as I should, but my superficial understanding is that Japanese trade was highly managed. Part of the reason for the “Co-Prosperity” scheme was for trade management purposes.
The drive to open new labor markets in search of cheaper costs (reduced wages), played a significant role in China’s rise as an economic power. Cheap labor in China made the country the world’s sweatshop. The US shifted emphasis from production to consumption, with its manufacturing capacity being exported. Cheaper labor means higher profits, but at the expense of reducing the pool of consumption, thus overproduction/overcapacity.
Global overproduction/overcapacity mirror loss of investments (in the US) in producing things while relying on debt (to fuel consumption) as a way to substitute for reduced wages. The expansion of debt itself was a function of speculation, which comes as overproduction exceeds consumption, requiring surplus capital to be channeled into the financial speculative arena.
Hence, the credit/debt crisis is itself a product of overproduction/overcapacity.
“The years 1843-5 were years of industrial and commercial prosperity, a necessary sequel to the almost uninterrupted industrial depression of 1837-42. As is always the case, prosperity very rapidly encouraged speculation. Speculation regularly occurs in periods when overproduction is already in full swing. It provides overproduction with temporary market outlets, while for this very reason precipitating the outbreak of the crisis and increasing its force. The crisis itself first breaks out in the area of speculation; only later does it hit production. What appears to the superficial observer to be the cause of the crisis is not overproduction but excess speculation, but this is itself only a symptom of overproduction. The subsequent disruption of production does not appear as a consequence of its own previous exuberance but merely as a setback caused by the collapse of speculation. However, as we cannot at this moment give a complete history of the post-1845 crisis, we shall enumerate only the most significant of these symptoms of overproduction.”
Marx/Engels
http://www.marxists.org/archive/marx/works/1850/11/01.htm
Of course, neither do we face under consumption, since limits to growth are dictated in the end by ecological restraints: nature bats last.
Thank you for this post. It adds real clarity and draws a very useful parallel that I will try to explore. Its really nice to know someone reporting from within China. I have subscribed to this blog.
Twofish your language does you a disservice. Boom…I can’t think of anything solved by doing one thing. Anyway the problems are nearly always the unintended consequences of simple things. Its almost always better to tread lightly were ever possible.
In a crisis situation, you want to keep things as simple as you can because the situation will naturally make them complex.
I think the basic issue is that we have some fundamental disagreements as to the nature of the current crisis. I personally don’t think that the US has an overconsumption problem or that China has a overproduction problem.
The problem is that the US had a financial system that turned the productivity increases created by globalization into low interest rates rather than higher wages, and that created a financial system that was dangerously unstable.
If you want to boost savings, you boost wages.
Michael: By the way your “print money and stuff it into people’s bank accounts” solution doesn’t make sense. If it is so easy to boost domestic demand that why, why hasn’t China done it?
Because it’s not easy to print money and stuff it into people’s bank accounts. It takes a few months for any fiscal stimulus to take affect which means step one is to make sure that the financial system is stable enough so that you have a few months.
[...] to Naked Capitalism, Michael Pettisand Tim Iacono for some fine writing that helped link many of the pieces above together. If [...]
Very interesting reading and some good views/discussion!
One thing Japan did was massively devalue their currency which helped them tremendously during the Great Depression years – they ‘stole’ a lot of European and British trade e.g. Toyota … that old textile company … ended up making and exporting a lot of garments!
I have a question – what is your view on the US undertaking a massive devaluation of the greenback (very soon e.g. 1Q09)?
(Forgive me if I come across and ignorant on what might be obvious to you – I’m mere trader not an economist – but here is a scenario on which I would dearly value your comments).
A greenback devaluation scenario:
- China devalues the yuan to help their exporters
- But the US doesn’t want a further deluge of cheaper foreign products right now (?) because they want to stimulate demand for consumption of domestic products – whether from China or anyone else including the Japanese e.g. buy GM not Toyota etc.
- Rather than directing protectionist action at China alone, they devalue the greenback very significantly e.g. 30 to 50%
- it then makes it more expensive for US consumers to buy other than USofA products -> resulting in stimulation of US manufacturing
- it also makes it a lot cheaper to visit and immigrate to the US
- throw in a requirement to invest or buy a residence and make it easier for people to qualify for immigration, and you start to create demand for that enormous inventory of US housing
- granted, commodities double, including the most important – energy/oil to USD 100 bbl (we’ve lived through USD 147!), but this is taken by the administration to be ‘pain that is good’, as it maintains the incentive to move to alternatives and is the medicine required to wean the US consumer off the ‘gas’!
- the devaluation upsets many – not the least of which is China, but with China planning to devalue the yuan, the Americians realise it may well be every man for himself (when it comes to China) in this time of crisis
- various other stimulus measures are undertaken at the same time, but a devaluation is something that can be done faster than any infrastructure project and therefore it comes as Obama’s first action in office
An over simplification? Totally missing something? Totally up the creek?! I probably am and would greatly appreciate your views.
I do not think that financial crisis impacted seriously much more than the US. I am full of confidence by chinese government for turnning over the situation whiched affected chinese economies even the unemployment rate may be cut down than before.
[...] And it is interesting to see that during the 1930’s it was US (then surplus country with largest gold reserve) that suffered mor…. [...]