Ben Bernanke — China’s trilemma—and a possible solution

Ben gets one right.

So what to do? An alternative worth exploring is targeted fiscal policy, by which I mean government spending and tax measures aimed specifically at aiding the transition in China’s growth model. (Spending on traditional infrastructure like roads and bridges is notwhat I have in mind; in the Chinese context, that’s part of the old growth model.) For example, as China observers have noted, the lack of a strong social safety net—the fact that Chinese citizens are mostly on their own when it comes to covering costs of health care, education, and retirement—is an important motivation for China’s extraordinarily high household saving rate. Fiscal policies aimed at increasing income security, such as strengthening the pension system, would help to promote consumer confidence and consumer spending. Likewise, tax cuts or credits could be used to enhance households’ disposable income, and government-financed training and relocation programs could help workers transition from slowing to expanding sectors. Whether subsidies to services industries are appropriate would need to be studied; but certainly, unwinding existing subsidies to heavy industry and state-owned enterprises, together with efforts to promote entrepreneurship and a more-level playing field, would be constructive.

There are recent indications China might be moving this direction. On Saturday, Premier Li Keqiang noted the budget deficit target for 2016 would be 3.0%, an increase from 2.3% in 2015. Mr. Li also spoke about using “mergers, reorganizations, debt restructuring and bankruptcy liquidations” to deal with “zombie enterprises”—failing state-owned enterprises supported by government assistance—and added that the government will spend $15.3 billion to help those laid off as a result. Further fiscal reform measures were announced on Monday.

Targeted fiscal action has a lot to recommend it, given China’s trilemma. Unlike monetary easing, which works by lowering domestic interest rates, fiscal policy can support aggregate demand and near-term growth without creating an incentive for capital to flow out of the country. At the same time, killing two birds with one stone, a targeted fiscal approach would also serve the goals of reform and rebalancing the economy in the longer term. Thus, in this way China could effectively pursue both its short-term and longer-term objectives without placing downward pressure on the currency and without new restrictions on capital flows. It’s an approach that China should consider.

Now why did he not say something similar when he was Fed chairperson during the crisis and aftermath?

Brookings
China’s trilemma—and a possible solution
Ben Bernanke

ht Mark Thoma at Economist's View