Desperate Times
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.
Stan.
I am hurt! You are disagreeing with me…. not fair.
Perhaps I should have put more time into the post, but my essential arguement is that the money that they are using to subsidize the purchase of these units could go to other programs that acutally have a long term positive impact on the economy… and those they are trying to keep employed.
The US pushed consumerism to avoid a deep recession, and never recovered.
Sure, there were 8 years of growth, but how many of those people who moved up i those 8 years are now at risk of falling back farther than they were?…. and now imagine if the same happens in China.
I realize that jobs are #1, and I realize that this subsidy is in part a way to save jobs, but China should take a lesson here and focus on developing long term policies that develop truly stable growth.
Good luck on Chinalyst. I am staying out of it this year
R
http://www.allroadsleadtochina.com
Hey, I wasn’t pushing this blog for Chinalyst — I shun the spotlight.
On the subsidy thing, I guess the question is what the alternatives are. The auto industry example suggests that in some cases, it may be easier to use existing industries/structures that can absorb money and keep people employed. If it takes a long time to get green jobs up and running, for example, you have a big problem.
This is a tough issue because one is put in the uncomfortable position of agreeing with a policy that you don’t like and that you know is bad. Strange, that.
Stan.
Don’t worry, I am not expecting you to spam your client dbase in search of votes. you got mine.
Using the auto industry, subsidizing the sales of cars through access to financing, reduced registration fees, removal of tolls would essentially all open up some consumers to purchases, but I would argue that China would be better off upgrading buses, digging subways, and developing low energy transport technologies.
The question for me comes down to the fact that there are no easy options, and selling an extra 10 million units is really just putting off solving issues for a few months that will be exponentially more difficult to solve
So, rather than put money into an industry like TV and mobiles (especially the low priced ones that are being subsidized), perhaps planners could take a larger picture look at this and see how some of these factories (that are clearly too many) can be taken offline and the labor put to good use. Some (not all) will have technical skills that can be transferred, while others could be trained into other industries.
R