Thursday, November 13, 2008

China Stimulus Package Worth 15% of GDP!

On Sunday, the Chinese government announced that it would invest $586 billion in an economic stimulus package to develop new housing, upgrade roads, railways and airports, and rebuild areas devastated by its May 12 earthquake.

"...We call it 'China's New Deal,' " says Ting Lu, an economist with Merrill Lynch, referring to U.S. President Franklin Roosevelt's plan to jump-start the economy in the 1930s.

Ting says the new stimulus measures are aimed to help China's countryside, where two-thirds of the nation's 1.3 billion people live.

"If you want to stimulate consumption, and persuade them to buy TVs, washers and fridges, you must provide electricity, running water and TV signals. [China] needs significant infrastructure investment in rural areas," he says.
The new public investment initiative is worth over 15% of GDP - a much larger stimulus package than anything remotely on the horizon in the U.S.

However, some progressive economists, such as Dean Baker and Mark Weisbrot of the Economic Policy Institute, have called for a stimulus package of $300-400 billion, which would be 2.0 to 2.7% of US GDP. Congressional leaders are currently considering a much smaller package of $50 - 100 billion, but the prospects for that smaller package remain uncertain.

Chinese stimulus vs. U.S. bailout
San Francisco Chronicle
Thursday, November 13, 2008

Compare the goals and the execution of America's $700 billion-bank bailout to those of China's $586 billion-stimulus plan: In America, the $700 billion was handed over to the Treasury with few rules and little planning. The money was immediately the subject of fierce lobbying by everyone from crumbling car manufacturers to a Hispanic business group that represents plumbing and home-heating specialists. So far, the chief recipients of the American package seem to be insurance-company executives who can't seem to stop sending their employees on luxury resort vacations. Oddly enough, the bailout has failed to loosen up the credit markets in any meaningful way.

Meanwhile, the Chinese government has been very specific about how its money will be spent: on tax cuts, infrastructure and social programs such as health care and education. Some begged China to use its foreign reserves to bail out the U.S. financial system. Perhaps China had a look at the feeding frenzy on Capitol Hill before declining: The Chinese are shoring themselves up against the global doom by investing in their own country's domestic needs. What a concept.

Of course, China's fiscal position is drastically different from ours. China's national savings rate was a breathtaking 51.2 percent of GDP last year. This suggests that while overcommitted U.S. consumers (we're the country with the negative savings rate, remember?) panic, China's best route to keeping itself afloat lies in developing its own domestic economy and encouraging the Chinese to be consumers. The government realizes that it will be helped in this pursuit if it offers people better health care and education. As a bonus, the government's spending on those things will keep the Chinese economy from collapsing at the very moment when other countries aren't so lucky. What a marvelous thing a crisis can be, when it's handled properly.

Many economists have pointed to the size of the Chinese package (China's GDP is about a quarter of the size of ours) to point out that, if anything, America needs to
throw more money at the problem. They may well be right: Considering the depth of the crisis, this is no time for timidity. But what's even more important than the size of our bailout is whether the money is being spent wisely: as an investment that will help the American economy recover and eventually, grow. And right now, the signs coming out of both Congress and the Treasury aren't comforting.

AddThis Social Bookmark Button


WPA Posters

Created with Admarket's flickrSLiDR.