International Law

Desperate Times

By Stan

Doesn’t happen often, but I disagree with Rich over an economic policy issue. Here’s his take on part of the fiscal stimulus package:

With many looking to China to buy up demand that has fallen off, I thought I would highlight one of the recent articles that I think frames some of the poor decisions that are being made in the name of growth:

Farmers in 10 more provinces and cities can buy household appliances and get government subsidy from today on, the Ministry of Finance and other ministries said on Sunday.

The campaign, under which farmers can buy the designated appliances and receive a 13 percent subsidy from government, first started on December 1, 2007, covering four provinces and cities – Shandong, Henan, Sichuan provinces and Qingdao city.

Why does China need to subsidize the consumption of these products?  simple… keep people employed

China is now the largest manufacturer and exporter of color TV sets, refrigerators, washing machines and cell phones. The campaign is expected to digest the excess production capacity of Chinese household appliances and benefit its upstream industries like iron and steel, plastic and nonferrous metal melting, industry analysts say.

Call me crazy, but this is a policy about as poor as the Bush policy giving everyone 300 USD.  It is not only not sustainable, it will in the end potentially cost China in a number of ways that will only be more expensive than had they simply allowed the capactity to fall off and take care of those employees.

My disagreement is simple and tracks a similar debate that is going on right now in the U.S. with respect to the auto industry. During normal times, you absolutely would not want to do something like this. Rather, you would like to see these industries shrink as they are way over capacity.

These are not normal times. Jobs are the #1 priority to Beijing, and I suspect that this subsidy program may provide a way to inject funds into the system in a relatively quick and easy fashion. I’m actually a big fan of the "cut everyone a check" program, but the problem is that it does not guarantee spending. Programs that guarantee spending (e.g. the Food Stamp program in the U.S.) are best during recessions, and this subsidy looks targeted in this fashion.

Will there be negative consequences? Absolutely, and several. However, the question is whether you want to start shrinking these bloated industries right now or wait until the emergency is over. I think you gotta wait a little while.

Full disclosure: I’ve been reading a lot of Paul Krugman lately and may have been influenced just a wee bit.

Full post as published by China Hearsay on December 01, 2008 (boomark / email).