As for China, money or debt can no longer be used to fund infrastructure because the resulting increases (in money or debt) will not be matched by increases in real GDP. Beijing should, however, be able to create money or debt with no ill effects if the proceeds were used to reverse income inequality by increasing the incomes of the poor and middle classes.I rather doubt that China cannot find productive infrastructure for public investment, and I think they will continue to do so with a multiplier that is positive enough to justify the investment, especially in rural areas that lack modern infrastructure. However, the Chinese plan has been to encourage urbanization as much more efficient, and that will continue, along with mechanizing agriculture in the rural areas. The former peasants will mostly become city-dwellers, as has happened in the West.
But the fact is that the Chinese leadership has already declared that the period of investment dominance is over. The task now is to increase the consumption/investment ratio toward levels more normal for a developed economy. This "restructuring" (they call it that) will take some time.
This will involve increasing domestic consumption (aggregate demand in GDP terms), which implies a redirection of production from the export market toward the domestic market (aggregate supply). This requires fiscal stimulus in order to augment domestic purchasing power by providing spendable funds, e.g., for welfare programs.
China Financial Markets
MMT Heaven and MMT Hell for Chinese Investment and US Fiscal Spending
MMT Heaven and MMT Hell for Chinese Investment and US Fiscal Spending
Michael Pettis | Professor of Finance at Peking University’s Guanghua School of Management
Well Pettis’s take on debts and deficits is an improvement on the inane drivel we’ve had from Rogoff, Reinhart and other idiots at Harvard over the years. Plus it’s an improvement on the equally inane drivel coming from the Brookings Institution recently. But even Pettis does not get it quite right.
ReplyDeletePettis attaches a large amount of importance to whether deficit spending is directed at productive investments or not. He seems to argue that an increase in productive investments increases the economy’s ability to service the debt, whereas unproductive spending does not.
The answer to that is that in an ideal MMT world THERE ARE NO debt servicing costs because interest on the debt is always zero!! And even where interest on the debt is at it’s current level, it is approximately equal to inflation, thus the REAL or INFLATION ADJUSTED interest on the debt is around zero.
I skimmed Pettis's article, and it seemed like it could/should be pared down considerably. And part of the problem is that he doesn't seem to understand the subject (modern monetary systems) very well. This seems to be a common problem with regard to discussion of MMT.
ReplyDeleteI see MMT as a description of how modern monetary systems work, plus one policy recommendation (government job guarantee as a form of automatic fiscal stabilizer, building upon existing fiscal stabilizers including welfare programs and progressive taxation). What Pettis seems to do is try to translate MMT into his academic understanding of economics and go from there. But the main benefit of MMT is in providing a clearer framework for discussion of how modern monetary systems actually work.