Latest posts by Richard Ebeling (see all)
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Keynesians never seem to learn. Every time an economy slows down or reverses gears and “goes negative,” in terms of growth and employment, their only answer is a call for “aggregate demand” stimulus and more government spending manipulation.
An example of this is a recent article by Washington Post columnist, Robert Samuelson raising the question, “China’s Coming Crash?” (May 24, 2015). Samuelson summarizes the economic data behind the apparent economic slowdown in the Chinese economy.
Gross Domestic Product growth in China has decreased from its sizzling annual rates of 10 percent to seven percent or less. The Chinese housing market has seen significant price declines. And government debt at local levels has exploded in recent years from six percent of GDP less than ten years ago to more than 33 percent by 2013, putting a drag on government spending.
The American media have had numerous articles about high-rise residential housing complexes in China that run for miles along the highways that are hardly occupied; or “ghost cities” with shopping malls that stand eerily empty; or industrial plants that have disproportional unused production capacity; or infrastructure construction projects funded by municipal, provincial and national government spending binges that often seem to have no rationality other than expenditures to generate production and employment for anything.
China’s Twisted Economy Seen Close Up
Over the last three years I’ve traveled to China twice and had a chance to see some of this close up. And there is very little, if anything, that is exaggerated in these news reports. Many different “supplies” in the Chinese economy are way out of balance with a wide variety of actual “demands.”
For example, in the industrial city of Wuxi, about 90 miles west of Shanghai, the city government zoned and subsidized a huge complex of dozens of restaurants one right after another along the famous Grand Canal. Nicely built, one establishment next to the other with a touch of traditional Chinese architectural style, they offer plenty of alternative dishes of Chinese cuisine.
There is only one problem. Whether you go out for a meal on a weekday evening or on the weekend, few of them are even half occupied with customers and others seem to be practically empty all the time. A concentrated complex of high-end dining establishments constructed according to government plan, with little thought, clearly, to either the amount of consumer demand or their potential profitability.
A construction boom in Wuxi saw the destruction of entire neighborhoods of people’s small shops and residential homes to make way for skyscraper business office buildings, with no hesitation to evict property owners and their families without any financial compensation under the Chinese version of “eminent domain.” Businesses with “good connections” to the municipal and provincial governments wanted the land for their construction projects and the previous occupants and owners were left out on their own.
The high rise apartment complexes that dot the skyline in and around Wuxi all got the “go ahead” for the companies constructing them by giving free or heavily discounted sets of posh apartments, once they were built, to the politicians and bureaucrats with whom they wheel and deal. These “servants of the people” would then give these sets of apartments to their family members or turn around and try to sell them for prices far above the “discount” at which they obtained them for their crony business associates.
The apartment complexes as a whole often stand 70 to 80 percent unoccupied, being priced far beyond what most of the surrounding population of ordinary Chinese can afford to pay as rent or condominium costs to purchase them from the companies that have built them.
All of this was fed by cheap credit financed by monetary expansion by the Chinese central bank and with tax breaks or subsidies from the central or local governments. The Chinese version of “capitalism” is a twisted and corrupt political game of privilege, power, connections, bribes, and manipulation to feather the financial nests of local politicians, Communist Party members, and ministry bureaucrats with power and clout to determine where government money is spent and who has access to politically directed loans supplied with paper money at artificially lower rates of interest.
China’s Crony Capitalism Serves Privilege and Power
It has served two purposes: privilege and power. After the death of Mao Zedong in 1976, the new Chinese Communist Party leader, Deng Xiaoping, said that it was “glorious to be rich” and it did not matter what color a cat might be as long as it could catch mice.
Permitting growing degrees of market-based arrangements to emerge with limited private property rights after decades of strict socialist central planning under Chairman Mao has allowed hundreds of millions of Chinese to escape from centuries of poverty and hardship. It has demonstrated that even a little bit of capitalism, no matter how impure and imperfect, goes along way in improving the lives of ordinary people.
But for the Communist Party hierarchy and the bureaucracy through which their control is manifested, it has allowed their own privileged enrichment through corrupt deals, government-business “partnerships” and favors and perks for determining where and in what form the post-Mao political plundering would operate.
At the same time that it has created wealth that has alleviated the impoverished condition of multitudes of Chinese, it has generated the “fat” that has enlarged the bounty to be extracted from the producers by those in political control.
The creation of wealth also has been the way to maintain and solidify the power of the Communist Party. What does it matter what the color of the cat is – “capitalism” or “socialism” – as long as it serves as an institutional method for the Chinese Communist Party to rationalize and justify its hold on power as the “leadership” without which the improvement in the condition of “the people” would not have been possible?
Censoring Information to Control Minds
At the same time, the Party has used that power to manipulate, control and restrict sources of information and access to non-governmental news. Sitting in my hotel rooms in China, regardless where in the country, an attempt to access on my computer certain “Western” search engines or websites on the internet either were impossible to connect to or were cut off after a brief moment.
Flipping among the television channels in my hotel rooms, the monotonous content of most of the movies at night did not require knowledge of the Chinese language. One movie after another was about the heroic People’s Liberation Army’s fight against the murderous Japanese invaders during the Second World War.
Self-sacrificing Chinese men and women partisans fighting behind Japanese lines give each other yearning looks of romantic desire, in the films, as they forgo their personal desire to, instead, go and die for “the people” against the evil Japanese occupiers.
The Japanese were cruel and murderous in their invasion of China in the 1930s and 1940s. It is estimated that at least 10 million Chinese civilians died in the war. But it was clear to me that these films, repeated in an unending stream on the televisions of hundreds of millions of Chinese homes, are meant as propaganda tools to legitimize the history of the right to rule by the Communist Party.
Mao’s communist Red Army and guerilla forces are portrayed as the defenders against the foreign invaders; while the members of the, then, non-communist Nationalist (or Kuomintang) Chinese government headquartered in the wartime capital of Chungking far up the Yangtze River are shown as corrupt and filled with traitors unwilling to fight or collaborating with the Japanese.
Creating Jobs, Any Jobs, Considered the Basis of Communist Legitimacy
But while militaristic and ideological propaganda are essential political tools for the justification of communist monopoly rule in China, in the eyes of the Party leadership, it is the promise and delivery of jobs and an improved standard of living for “the masses” that is crucial to prevent anger or resistance to the existing political order and regime within the country. In other words, a growing economy is the Chinese version of “bread and circuses” to keep the unruly mob passive and obedient.
That is why, as the Financial Times reported in May, the Chinese government has ordered banks to provide funding to insolvent or potentially bankrupt businesses and municipal “public works” projects for which the tax revenues are insufficient to support locally. Explained the Financial Times (May 15, 2015):
“China has ordered its banks to prop up insolvent provincial government projects, in the latest effort to support rapidly cooling growth and put off dealing with the mountain of debt that has built up in the past six years.
“Authorities told financial institutions to keep lending to local government projects even if the borrowers are unable to make principal or interest payments on existing loans.
“The directive, issued jointly by the finance ministry, banking regulator and central bank, highlights the challenges facing China as it struggles to deal with the massive volume of debt left in the wake of its post-crisis stimulus, amid a sharply slowing economy.
“It explicitly banned financial institutions from cutting off or delaying funding to any local government project started before the end of last year and said any projects that are unable to repay existing loans should have their debt renegotiated and extended.
“The directive issued on Friday also said that if existing projects could not be finished with the loans they already have then they should look first to private sector investors and then to local governments, who are required to raise the money by selling bonds.”
Keynesian Demand Management to “Solution” to China’s Problems
And this gets us back to Robert Samuelson’s diagnosis and prescription in the Washington Post for what economically ails China.
The Chinese economy, he says, is suffering from over-investment and under-consumption. If the investment boom cannot be prolonged, then the answer to a threatened falling off of capital projects and jobs in that part of the economy is consumption stimulation.
You see, according to Samuelson, the Chinese save too much and spend too little. The government needs to introduce more of the welfare state: “China needs to strengthen the social safety net so that people can save less to meet personal disasters.”
This is an old Keynesian song – a broken record, in fact, that keeps going ‘round and ‘round. Saving is a drag on the economy, while consumption spending is the source of “aggregate demand” that fosters production and employment.
China is not suffering from insufficient consumer spending. What the Chinese economy is experiencing is a vast misdirection of capital and labor caused by political directives, below market-based rates of interest, and huge monetary expansion.
Government-Created Malinvestment is the Cause of China’s Problems
It is not that there has been too much investment in China; rather it is a problem of the wrong types of investments – malinvestments– in unsustainable capital projects and enterprises. Precisely because China’s is a politically twisted market and not a competitive free market, government mismanagement and unworkable planning has resulted in mismatches between supplies and demands.
Investments undertaken have been in the wrong places, in the wrong amounts, and involving the wrong durations of time to complete and maintain in terms of long-term profitability, and in terms of producing the types and quantities of final goods that consumers actually are willing, able and desirous to buy.
Attempting to either prop up projects and employments that are underlyingly unprofitable, the way the Chinese government is reported to be trying to do, or to follow Robert Samuelson’s Keynesian policy prescription to “stimulate” consumer demand by more government guarantees and spending on the welfare state to substitute for private savings, will merely superimpose on the existing distortions and imbalances another set of layers of misdirected investments, capital projects and employments that cannot be sustained in the longer-run.
Savings Makes Investment, Production and Jobs Possible
Savings is not the “enemy” of progress, prosperity and employment. Quite to the contrary. Savings is essential to provide the resources and finances to undertake time-consuming capital projects that increase output, raise productivity, and enable the employment of workers during the periods of production leading up to the finishing and sale of products that may recoup the costs of investment and production.
What is destabilizing are government interferences with markets and prices – including financial markets and interest rates – that when allowed to function in free and competitive ways assure that investment does match savings (regardless of how much income earners may be deciding to save), and that what is produced is tending to reflect what consumers actually want and desire to buy, and are willing to pay for.
The potential economic crisis in China is not a “failure of capitalism” or proof of insufficient consumer “aggregate demand” as the Keynesians would claim. It is, instead, another case study in the failure of government intervention and political distortions introduced into heavily regulated and managed markets.
Free Markets are the Cure for Economic Imbalance
The cure for such imbalances in supply and demand, in mismatched relationships between savings and investment, and the misdirection of capital and employment due to government’s misplaced hand in market activity is the same whether in China, America, France, Japan, or Greece.
Markets must be left free to sort out the mismatches and distortions so to rebalance the patterns of production and supply for a proper coordination with non-manipulated consumer demand and actual available savings to support and sustain profitable capital projects.
No doubt and unfortunately, the Chinese and the world will be witness to another episode of wrong government monetary, fiscal and interventionist policies that prolong the agony, delay or prevent the market cures, and set the stage for a future cycle of another artificial boom followed by another inescapable bust.