Nothing is so permanent as a temporary government program

The title of today’s blogpost is a line by Milton Friedman, of course.

This chart, from Andrew Batson’s blogpost, caught my eye:

Quite a few things to note over here:

  1. The difference between the three lines, which is in and of itself interesting
  2. The persistence of augmented net borrowing (including unofficial local government borrowing)
  3. China is, in a sense, still recovering from the fiscal excesses of 2008

Here’s Andrew on the third point:

China’s political system therefore does not have a good track record of being able to take away the punch bowl in good economic times in order to be able to share out more punch in the bad times. The dubious legacy of the 2008 stimulus means that China now needs fiscal consolidation to get long-term debt dynamics under control–at exactly the moment that it once again faces a shortage of aggregate demand.

The context, of course, is that China is struggling to recover from the pandemic. There’s lots of reasons this is happening:

There are several reasons to be gloomy about China’s economic prospects, from America’s export controls on advanced semiconductors and skittish foreign investors, to President Xi Jinping’s crackdown on big tech firms. But the main culprit for the recent weakness is property, which before the pandemic was a crucial source of growth across the economy. Activity slowed, first as the government sought to rein in heavily indebted developers, and then more recently as sales have stayed weak. Between January and May, for instance, real-estate investment fell by 7.2%, compared with the same period a year ago. The danger is that the property bust now becomes an enduring malaise.

…but given what happened in 2008 (and since), a fiscal stimulus seems to be off the table where China is concerned.

Fiscal profligacy is not, in other words, a good idea. Don’t get me wrong: I am not saying fiscal expenditure is a bad idea. In fact, in a country like India, it is unavoidable, and for a variety of reasons. But the answers to the questions:

  1. How much to spend?
  2. Where to spend?
  3. When to spend?

…are always important in the context of fiscal policy.

Note that this is not a comment about India and her fiscal policy both during and after the pandemic. It is simply a reminder that fiscal policy is extremely difficult to get right in terms of when to start, what the magnitude should be, and when to stop.

For example:

When Japan’s asset-price bubble burst at the end of 1989, growth slowed dramatically. Firms and households, burdened by debt, paid off their liabilities rather than spending on goods and services. Together with a shrinking workforce, this meant that Japan’s gdp growth lagged behind the rest of the rich world.
Part of the problem was that policymakers were too slow to respond. It was not until 1999 that the Bank of Japan cut its benchmark rate to zero; the government directed stimulus towards investment, rather than consumption.
The bust turned into decades of stagnation. Unfortunately, China looks as if it may repeat the same mistake. The government remains fond of directing stimulus to investment, rather than towards handouts.

To spend the right amount, to start at the right time, to end at the right time, and to make sure one spends it right where it’s needed – it’s easy for a blogger to say that this matters. It is easy to point out where a country has gone wrong with the benefit of hindsight. But to actually do it when it is needed the most, that’s a whole other challenge.

Some might say it is all but impossible, but if you are a serious student of the Indian economy, you’re going to have to admit it is unavoidable.

Macro is hard.

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