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Monday, September 3, 2012

China: Modest Growth or Full Employment?

As summer slid into fall in 2012, the Chinese government was giving no hint of any ensuing economic stimulus program. This was more than slightly unnerving for some, as a recent manufacturing survey had slumped more than expected, to 49.2 in August. A score of 50 separates expansion from contraction. A similar survey, by HSBC, came in at 47.6, down from 49.3 the previous month. Bloomberg suggested that China might face a recession in the third quarter. So why no stimulus announcement?  Is the Chinese government really just one giant tease?

Wang Tao, an economist at UBS, explained the “very reactionary, cautious approach” as motivated by the desire to avoid repeating the “excesses of last time.” Specifically, the stimulus policy in the wake of the 2008 global downturn sparked inflation and caused a housing bubble. According to the New York Times, China was avoiding “measures that could reignite another investment binge of the sort that sent prices for property and other assets soaring in 2009 and 2010.” Any binge cannot be good, particularly given the irrational excitement that can take on a life of its own in the market.
So too much stimulus can cause inflation and put people’s homes at risk of foreclosure, whereas a lack of stimulus means that a moderate growth rate is likely, rather than that which could give rise to full employment. It almost comes down to a choice between stability of shelter and income.  Is there no way out of this tradeoff?
Targeted government spending directed at providing jobs beyond that which the market is providing can unhinge the employment criterion from the management of the macro growth rate. That is to say, the Chinese government could see to it that citizens who want a job have one (paid for by the Chinese government). The government would not need to balance employment with inflation and housing in deciding whether to stimulate the economy. A modest growth rate can co-exist with full employment, but it takes a partnership between government and the market.


Bettina Wassener, “As Growth Flags, China Shies From Stimulus,” The New York Times, September 3, 2012. http://www.nytimes.com/2012/09/04/business/global/as-growth-flags-china-shies-from-stimulus.html?_r=1&hp