The economic meltdown, as viewed from China, looks like a slow-motion train wreck. Here are some local views on two issues that I have always found to be logically difficult.
I asked five people from different walks of life in China what they thought about the “trickle down” theory of economics. To a person, they thought it was a rationalization thought up by wealthy people as an excuse to ask for lower taxes.
One person, a publisher, offered the observation that those who used their money to develop innovative products and services were part of a positive economic multiplier process, but people who were just living off their wealth were not. His thinking was that a large middle class stabilizes a society socially, economically and politically by providing an educated, enfranchised, motivated and skilled work force that creates demand by spending and provides capital through their savings.
I asked him if taxes were a disincentive to work hard and strive for success. He said that taxes have to be related to the value of the services provided. He also pointed out that Bill Gates and Warren Buffett seemed more concerned about the mechanics of their businesses than the money they made or kept.
I asked him about the logic of the idea that wealthy people have a higher proportion of funds available to invest and that investment is a necessary part of providing the capital needs of business. He laughed and indicated that the need for capital is based on demand, and there can be no demand if no one can afford anything. His assumption seemed to be that a large middle class is more important than a small upper class.
I then asked what they thought about the idea that you can live beyond your means on borrowed funds which you pay off through increases in your net wealth due to savvy investments. After some thought and a few probing questions, everyone agreed that the concept relied rather heavily on the investment ability of the individual and might work in some cases, but not for the majority of people, unless there was a very favorable economy.
I asked if this was true only for individuals and governments as well. They made it clear that it seemed rather self-evident. One interesting comment from a 23-year-old recently graduated student was that, “It’s just the way Americans do things. It’s what you do.”
For most Chinese, outside southeastern China, the global economic crisis has been blunted by various factors that were covered extensively in the latest World Bank Quarterly Report on China.
In summary, during the first eight months of 2008, the report indicates the following about the Chinese economy: GDP went from 12- to 9-percent growth; modest growth in domestic consumption; slowing domestic investment growth; slowing foreign direct investment in-flows; slowing real estate sector; construction activity down; equity markets down sharply; materials costs down; inflation down.
Despite a rather muted effect, by Western standards, China has chosen to move macro policy center stage, putting emphasis on growing domestic demand and employment to blunt the impact of declining growth in its export markets and on social “rebalancing” and infrastructure investments.
On Nov. 9, the Chinese government outlined a large growth and employment stimulus package. The government’s 10 major support areas are: public housing projects; rural infrastructure investment; transportation infrastructure; health and education; the environment; innovation and restructuring of existing industries to make them more efficient and growth of new industries; post-earthquake reconstruction; increasing household income, especially in rural areas and second-tier economies around China; rolling out the VAT reform nationwide in 2009; and increased bank lending to SMEs and reduced bank reserve requirements.
The effect of these moves has yet to be seen, but they signal a shift away from the Chicago school towards a more Keynesian approach to the issues. It is probable that President-elect Barack Obama will move the United States in the same direction after he is sworn in.
What is notable is that many of the assumptions we made last year about the world political/economic/social systems have changed, and as you think about the future during the upcoming holidays, it might be worth looking at how these changes will affect the world we live in. Happy holidays to all from Beijing.
