Total new financing in January reached Rmb2.5tn ($400bn) – up more than 50 per cent from December and more than double the figure a year ago – eclipsing even the start of 2009 when China unleashed stimulus spending to battle the global financial crisis.
There are suggestions that this will stoke inflation in China, which may well be the case, but the real longer term issue is whether the country’s long term growth trajectory is now beginning to slow down. Commentators such as The Telegraph’s Ambrose Evans-Pritchard have discussed the so-called “Lewis turning point” and applied it to China. The Lewis Point, named after St Lucia’s Nobel economist Sir Arthur Lewis, is when the supply of workers dries up and city wages soar. It is when labour turns the tables on capital, and profits crash....
Why does this debate matter? Because this will have major implications for the Chinese domestic economy and the world economy. If we are in fact close to the Lewis turn point, it means much higher inflation. Without the endless stream of excess rural labour, wages are going to go way up in China and this means inflation will be a problem. Add to that the current makings of another credit bubble and it could become a very mess[y] challenge for China’s new leadership.MacroBits
Inflationary winds in China?
Marshall Auerback
(h/t Kevin Fathi via email)
21 comments:
I could really go for one of those Lewis points in the US job market.
CEO of Apple is going to be sitting w/ Michelle Obama at the SOTU speech... Don't tell me "bring the jobs home" blah, blah...
20 million jobs? I doubt it...
Even if China gets expensive, they will just resort to "dumping" if they have to get rid of product...
Rsp
I suppose you will have seen that Mitchell responds to Palley (without mentioning the name). It's a proper thrashing indeed.
http://bilbo.economicoutlook.net/blog/?p=22701#more-22701
Bill's name was conspicuously absent from Pally's BS...
I think one thing that has to be attacked is this kind of thing from Palley:
"There is no finance constraint on G because of the capacity to issue sovereign money. However, once the economy reaches full employment output, taxes (T) must be raised to ensure a balanced budget satisfying the condition
(3) D = G - T(y
*
, t) = 0 Ty* > 0, Tt
> 0
This balanced budget condition must be satisfied in order to maintain the value of fiat money. In a no growth economy, having the fiscal authority run persistent money financed deficits will cause the money supply to increase relative to GDP, in turn causing inflation."
This widely believed falsehood has to be attacked... it leads to "a fear of full employment" ... looks monetarist at core so that is a vulnerability right there ...
Humans, created in God's image, it is safe to assume are probably always going to want to net "save" (Greek soteriou "salvation" or "saving" or "keeping") so a deficit will probably always be resultant and we should not be afraid of that but rather have the govt simply accommodate it...
When we save or "keep" it looks like we are in effect trying to "play God"... perhaps this desire should just be accommodated...
rsp,
Bill's name was conspicuously absent from Pally's BS...
"In a most recent attack on MMT, which stirred a lot of people it seems and led to my in-box being substantially boosted over the last week, I couldn’t find any reference to my own work. I am not miffed that someone chooses not to cite my publications.
But one of the first principles you discuss with doctoral students is the need to capture all the major contributions (articles, books) in a field of study. It is not good enough to selectively ignore – that is, refuse to take notice of or acknowledge”, “intentionally disregard”, “fail to consider” – some of the major works in a field including my own. I not seeking admiration or recognition here – just stating a fact."
I believe that's what Tom Hickey meant by "shoddy."
Yes, neither Mitchell nor Fullwiler were cited.
Matt, I don't think we can assume that any monetary expansion beyond full employment will get absorbed by private sector savings. I thought MMT was perfectly happy to accept that government spending beyond the level of full employment could generate price instability.
But one of the first principles you discuss with doctoral students is the need to capture all the major contributions (articles, books) in a field of study. It is not good enough to selectively ignore – that is, refuse to take notice of or acknowledge”, “intentionally disregard”, “fail to consider” – some of the major works in a field including my own. I not seeking admiration or recognition here – just stating a fact."
The MA is a teaching degree. Candidates must prove that that have mastered the fundamentals of their field in order to be qualified to teach in it.
The PhD is a research degree and the process of writing and defending a PhD dissertation is to show that the candidate can do original work in the field. This means that one has to show that one's work is original and at the cutting edge of the subject chosen.
That means that the candidate has to be familiar with ALL the work done previously in that specialized area that is relevant to the thesis. The first thing that the thesis adviser does when the first draft is submitted is go to the bibliography in order to make sure that the candidate has covered the bases. This is so basic that there is never an excuse for a scholar with a terminal degree in the field ever, ever to make such an error in professional life.
This need for comprehensiveness is burned in, along with the prohibition against plagiarism, that is, being sure to thoroughly document sources so there is no confusion about provenance. Ignorance of the field and failure to document are two of the mortal sins of scholarship.
DanK I don't think we can assume that any monetary expansion beyond full employment will get absorbed by private sector savings. I thought MMT was perfectly happy to accept that government spending beyond the level of full employment could generate price instability.
Yes, it all depends on "a full employment budget" wrt to the sectoral balance approach determining the necessary of offset based on changing saving desire and using functional finance to target the appropriate response. This is "MMT 101."
Dan,
Yes I think it "could be"...
but I think what Bill says today is that a deficit or not (I'm paraphrasing) is more dependent on the private balance... for instance in the 90's we had a very small CAD (oil $10/bbl and China not open in earnest yet) but the private balance shot up due to margin lending in the equity accounts (dot com mania, etc) so we could have fiscal surpluses then and decent employment with price stability...
So it looks to me like even if we were at "full employment", if the non-govt sector wanted to net save, we would have to expect a certain level of ex post deficit... and that should not bother us "as a rule"...
People, I believe, will want to save.. or at least SOME people will always want to save... they do this out of some sort of fear in my view...
Bill has called this savings "a hedge against uncertainty over time", (you know what type of (real) problems we humans face everyday Dan) .... this is like "playing God" in my view... it is not unreasonable to expect some of our fellow humans to respond this way...
so I think we should acknowledge this and accommodate them to a reasonable extent...
I dont believe these "savers" will all of a sudden start spending their savings wildly and start to bid up retail prices... I just dont see that happening, they are full of fear..
rsp,
So it looks to me like even if we were at "full employment", if the non-govt sector wanted to net save, we would have to expect a certain level of ex post deficit... and that should not bother us "as a rule"...
Unusual for most (other than the bottom) to spend all income on consumption, and private dissaving over time is unsustainable. So the general case is private sector propensity to save. If net exports don't offset, then a deficit is required for a full employment budget.
Hard for a person to get around the math on that one Tom... except for certain hardcases among us ;) rsp,
Matt, sure, but the question is whether the saving will actually go up to absorb any excess government spending at full capacity and automatically suppress inflation pressure. It's hard for me to believe it would. If the economy is producing at full capacity at time t, and the government's deficit continues to rise past that time, then unless the entire amount of additional money is absorbed into additional private sector saving, demand will rise and there will be inflation, no?
the question is whether the saving will actually go up to absorb any excess government spending at full capacity and automatically suppress inflation pressure. It's hard for me to believe it would. If the economy is producing at full capacity at time t, and the government's deficit continues to rise past that time, then unless the entire amount of additional money is absorbed into additional private sector saving, demand will rise and there will be inflation, no?
There are a lot of factors involved in addition to a full employment budget, some economic and come political, differing in different countries. I don't think that MMT economists would deny that. But as a general principle, the MMT analysis of the full employment budget holds. Policy would have to be fitted to the case, however, and it would be different in different countries and in the same country over time. However, the sectoral balances and functional finance are basic principles that apply across cases. Many of the specific factors involve economic policy, and so political choices. MMT does not speak specifically to most of that.
I see your point Dan but here: " the government's deficit continues to rise past that time..."
I dont know if it is like the govt looks at the deficit and then says: "we should spend some more" type of thing...
For instance what I witnessed here in the mid-Atlantic anyway back in 2004 after the end of major hostilities in Iraq and into the transition into the Iraq reconstruction phase was that DoD started to compete with the bank financed non-govt sector for limited building materials and DoD (via their contractors, KBR, Dyncorp, Blackwater, whoever..) started to increase their bid and thus created price instability in building materials and thus related domestic property prices... DoD literally wiped out the inventory of the yards in this area ... there were drywall shortages... a 4 x 8 sheet of plywood went up to like $50 per sheet which you can get now for $13 at Home Depot...
so it's not like Rumsfeld looked at employment and the deficit and thought it was ok so that if he added to the deficit by purchasing domestic supplies of lumber at $25 per sheet more than the average price paid over the last year that there would not be any price instability...
So it's like Warren says, the price structure is a function of the price that the govt agrees to pay for things and/or the price the govt allows the banks to lend against things...
It's a bit monetarist imo to look at it as though "if the deficit increases at the point of full employment" then "inflation" will "naturally" happen... the deficit is ex post results...
It's like if we could ever get your Public Enterprise really cranked up, the govt administrators would have to be very careful about what they paid for things, which shouldnt be a problem as we have great IT available today to track price history... if bids come in 10% higher than last year, we would have to take a step back and figure out what was going on... and perhaps delay purchase if there was a short term supply or demand shock that was causing the non-govt to present 10% higher prices...
rsp,
Matt, govt can virtually always get a price under the market due the quantity demanded. The notion that govt "always" overpays is incorrect. If you are a bidder in the game, you find that other bidders really, really want that big contract and are willing to low bid for it due to the volume. Even though the margin is narrow, the total is huge and very worth doing.
If the market is well supplied I agree Tom... but also, govt administrators have to be on the ball too...
for instance today I think govt could get some good prices in general...
rsp,
Matt, no doubt that there is cronyism involved as well as cheating, like bribery.
Matt, a couple of things - Palley slips in a "no growth" condition on the economy, which is not realistic. He also talks about deficits, not spending, which is more sensible.
Governments don't set out to deficit-spend, they set out to spend, and the deficit results from public, private and foreign choices. If an economy were at full employment, then "further" spending will be taken up partly by increased taxation, and not necessarily all by increased saving (domestic or foreign) and inflation. As you say, the deficit is ex post.
Well-targetted fiscal policy can stimulate the economy so much that it is hard to get much of a deficit out of it! - tax receipts automatically go up too. That's the mistake that Cristina Romer makes when she says that fiscal policy was never tried in the Great Depression. It was, and it worked very well. Should have been somewhat more, but not to the extent indicated by the "never tried" myth.
*******
Myths about China is an old billyblog disagreeing that China is nearing the Lewis turning point, and whether it would be such a big deal, even if it were.
Calg,
"Governments don't set out to deficit-spend, they set out to spend, and the deficit results from public, private and foreign choices. If an economy were at full employment, then "further" spending will be taken up partly by increased taxation, and not necessarily all by increased saving (domestic or foreign) and inflation. ....the deficit is ex post."
Aces! rsp,
@ Calgacus
IIRC, the MMT economists point out that if the tax rate is too steep, tax withdrawals will create a drag on expansion, and possibly even recovery.
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