Carnegie Endowment for International Peace
Policies that increase income inequality can in some cases lead to higher savings, higher investment, and greater long-term growth. But, in other cases, such policies either reduce growth and increase unemployment or force up the debt burden. What determines which of these outcomes takes place is whether or not savings are scarce and have constrained investment.
A number of Chinese companies are trying to shore up their stock prices with programs that encourage employees to buy shares and ensuring them against losses. These programs have implications about leverage in China and about the way losses may be distributed within the banking system.
In a recent much-remarked-upon and very short op-ed, George P. Shultz and Martin Feldstein argue that the only way, or at least the best way, to cut the U.S. trade deficit is for Washington to cut the U.S. fiscal deficit. It is at least as likely, however, that cutting the fiscal deficit will simply increase debt or increase unemployment.
Contrary to conventional thinking, a savings glut does not necessarily cause global savings to rise. A savings glut must result in an increase in productive investment, an increase in the debt burden, or an increase in unemployment.
As long as China has debt capacity, it can achieve any GDP growth rate Beijing requires, simply by allowing credit to expand. But debt levels are already high, and credit must expand at an accelerating pace to maintain growth. China is probably still a few years away from reaching its debt limits, but the more debt grows, the lower the country’s growth rate average will be over the long term.
Contrary to what one might first expect, Mexico’s role in global trade is actually beneficial to the United States. While restricting Mexican imports will reduce the American deficit with Mexico, it will increase the overall American deficit.
The Chinese development model is an old one and can trace its roots at least as far back as the infant industry protection, internal improvements, and system of national finance of the American System of the 1820s and 1830s. Understanding why the many precedents for its growth model have succeeded in some few cases and failed in others will help us enormously in understanding China’s prospects.
Whether the U.S. current account deficit is harmful or not to the U.S. economy depends on the assumptions we make about capital scarcity. In a world awash with excess capital and insufficient demand, the U.S. current account deficit is a drag on growth.
The three scenarios listed in a recent Financial Times article set out the range of plausible economic outcomes available to China. The most likely is that China experiences a long, but orderly, growth deceleration as it grinds away at its debt burden, but under easily specified conditions each of the three is possible.
Rejecting the Trans-Pacific Partnership should not mean the rejection altogether by Washington of the very idea of a stable, rules-based trading system. The world is better off with such a regime.
China’s success will depend Beijing’s ability to centralize power, to begin to sell off government assets, to rein in credit growth, and to accept much lower GDP growth rates.
China’s rebalancing can only occur in a limited number of ways, and each of these has a fairly predictable impact. The path Beijing chooses to follow will likely be based on political decision-making.
China’s problem is excessive debt in the economy, not a banking system facing insolvency. Beijing’s reform strategy should reduce the debt burden as quickly as possible to minimize the economic costs.
There is no way Beijing can address its debt problem without a sharp drop in GDP growth, but as unwilling as Beijing may be to see much lower growth, it doesn’t have any other option.
China is embarking on ambitious economic reforms to boost its growth prospects. What is the rationale behind these new reforms and what are the prospects for their success?
A simple model can help illustrate the problems that China will face over the coming decade.
Because savings and investment must always balance, the idea that the savings rate in any country is determined at home is nonsense.
While it is difficult to predict the nature and timing of the shocks buffeting China’s economy, China’s difficult economic situation makes such crises inevitable.
Some analysts contend that the RMB is no longer undervalued but is in fact overvalued. However, a more careful analysis suggests that the yuan is still undervalued, but perhaps not by much.
The structure of investment strategies in the Chinese stock markets had always guaranteed that this would be a brutally volatile market that trades almost exclusively on “the consensus about the consensus”, and therefore prices will reflect very rapid shifts in this consensus.
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