0%;”>The test of economic analysis
Finally, the test of any theoretical position must be how fact it explains and predicts the facts of the unfolding economic process. The analysis set out in this blog over the last two years has consistently analysed developments in the US and Chinese economics in terms of the trends in fixed investment – the theoretical reasons for this framework have also been set out. This angle of approach has been confirmed in both the case of the US and that of China – as shown in the data above. Failure to analyse the core of the situation via China’s ability to raise fixed investment, and the US’s inability to do so, or even primarily concentrating on trends in consumption, in contrast led to analysis which was proved erroneous by developments both in China and the US.
Michael Pettis of Beijing University, for example, stated at the outset of the financial crisis that: ”I continue to stand by my comment… that the US would be the first major economy out of the crisis and China one of the last.’ In reality, as author of this blog argued, the exact opposite would occur: ‘China will be the first major economy out of the crisis and it will emerge from it before the US.’ The facts clearly confirm that China was the first economy out of the crisis, that it emerged from it before the US, and the analysis that the US would be the first major economy out of the crisis and China one of the last was in error.
Stephen Roach, then Chairman of Morgan Stanley Asia, similarly focussing on consumption rather than trends in investment, argued in his book The Next Asia that it was impossible for China to achieve its 8% growth target for 2009 and that he was ceasing to be an optimist on China’s economy. This analysis was clearly not confirmed by events – China not only met but surpassed its 8% growth target and China and a number of other Asian economies have been able to far outperform developed ones.
Other writers with a different analysis to this blog were evidently confirmed in their prediction that China’s stimulus package would be a success – Jim O’Neill, of Goldman Sachs being a well known example. O’Neill, as with Stephen Roach, however saw the core of the crisis in the US as being deleveraging of the US consumer sector and therefore focused on a perspective of decline
of the US consumer which has not in fact occured – as shown above. Such an analysis, therefore, did not concentrate on the key factor in the US recession, which lay in the fixed investment fall.
The differences in analysis which explain the different prognoses that have been tested over the last two years clearly have continuing different practical conclusions. If the core of the problems in the US economy continues to be in fixed investment then it is unlikely purely indirect measures to influence this, such as a new round of quantitative easing (QE2) and the budget deficit, will be as effective as China’s direct intervention to maintain investment. Not only has China’s economy outperformed the US in the last three years but it will continue to do so – not only due to rapid growth in China but to slow growth in the US.
Only if the US were to turn to a programme of direct state intervention to boost to new investment, as urged by Richard Duncan and others, would there be likely to be a short term revival and increase in investment qualitatively equivalent to that which appeared in China’s stimulus package. However the strengthening of political trends such as the ‘Tea Party’, and the consolidation of right wing Republican control of the House of Representatives, make any such programme unlikely. The US economy will therefore continue to be hobbled, in comparison to China, by anti-statist ideology. The US economy will therefore continue to be strongly outperformed by China’s and the success of China’s stimulus package will stand in contrast to the failure of the measures which have been utilised to attempt to kick start the US economy.
Analysis of the success of China’s stimulus package, and the comparative failure of those in the US, will therefore continue to be of central importance in both practical economic policy making and discussion of economic theory.
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This article orginally appeared on the blog Key Trends in Globalisation.
1. Attempts to point to issues in China such as asset bubbles in property prices and inflationary pressures in food prices simplly do not quantitatively compare to the fundamental fact – the stagnation of US GDP and the thirty per cent increase in China’s GDP over a three year period.T Walkerhttps://firstname.lastname@example.org