Alternative Insight

A Tale of Two Stimuli
China and the United States Stimulate their economies


After frantically scrambling to find means to halt the economic downturns, the international community evaluates the effectiveness of stimulus plans. The focus is on the two protagonists most shaping the new world economy, China and the United States, the producer and the consumer. Both nations have committed huge resources and accumulated massive deficits in order to resurrect their economies. Their stimulus plans are not much different, but their results, at least in the beginning of recovery, showed a marked difference.

Other nations notice the marked difference in the initial successes of the stimulus plans. Success always breeds imitation and a tendency to emulate can change the direction of the world economy. If this is true, a new world economic order is eventual. From comparisons of the effectiveness of stimulus plans, China will lead that new order.

The Stimulus Plans
The United States
thrust to stimulate a rapidly falling economy, initially relied on bailouts, massive loans and investments to all parts of the financial industry - money centered banks, mortgage lenders, investment brokers and insurance institutions. The rescue plans prevented bankruptcies and succeeded in stabilizing the financial structure. In some cases, such as Fannie Mae, Freddie Mac and AIG, public ownership was transferred to government ownership. Bailouts extended to automobile companies were insufficient to prevent bankruptcy. Chrysler emerged with a new private ownership and GM found itself under government control and supervision.

Maintaining low interest rates and generating massive deficit spending, estimated to reach $9 trillion in ten years, accompanied the initial stimulus plan. An almost $1 trillion bill to relieve the economic crisis replaces consumer debt and spending with public debt and spending. President Obama's plan focuses on creating jobs by attacking problems, such as energy shortages, global warming, environment improvement and decaying infrastructure.

China's thrust to revive its economy followed a similar pattern. Its stimulus package also included huge government investments, social welfare projects, infrastructure improvements, and investment in technology with solar energy highlighted. However, China added tax reform and a kicker that promoted industrial restructuring. Its intended infrastructure projects were mostly 'shovel ready,' having already been on the drawing board.

A relatively large budget effort of $585.5 billion directed its stimulus package and resulted in a $139 billion fiscal deficit for 2009, high for China.

Successes and failures
The U.S.
quick response to collapse of the financial and auto industries stabilized those industries. Budgeted projects were slow to develop and the two principal reasons for the stimulus plan; increase in consumer spending and decrease in unemployment, have been slow to materialize.

Gross Domestic Product (GDP) dropped from $14,498 billion ending in June 2008 to $14,143 billion for the year ending in June 2009. Exports of goods decreased from $648.513 billion for the first six months of 2008 to $495.417 billion for the first six months of 2009.

Several of the budgeted projects were questionable. Decreasing energy shortages, halting global warming and improving the environment are all worthwhile endeavors, but will these projects provide a route to sustained economic recovery?

The plan considered improving schools. School improvement is always a major necessity, but will their improvement revitalize the economy and was this the time for accomplishing the task?

Although adding more computers and other technologies to school systems are welcome, how will products whose labor content is mostly foreign, which have minimum short term domestic production, and will mainly profit U.S. corporations with foreign factories contribute to permanently revive U.S. industries and renovate export industries?

Construction of improved infrastructure will definitely create jobs and have a multiplier effect that eventually generates more jobs. But isn't all of this temporary? After a time, maybe a few years, the facilities will be standing and the jobs will end. What happens afterwards? The money in the system will initially be spent as usual and, due to reliance on imports, slowly gravitate out of the system and to foreign capitals.

Another proposal - doubling clean energy - seems like much, but doubling barely nothing, actually isn't much. Besides clean energy is a solution to carbon emissions rather than economic decline. Sure, it will establish new industries, but these industries (solar, wind power, geothermal) must be heavily subsidized and still are not accepted as being economically viable. Everyone wants clean energy and investment in alternative energy sources, but was it advisable to do it in 2009? Is investment in industries, which are not recognized as economically viable, worthwhile when the entire economic system has a doubtful viability?

The repeated assertions that investing in alternative energy will reduce reliance on foreign imports of petroleum, make automobiles more efficient, and create jobs are baffling. The alternative energy sources (solar, wind, geothermal) can only be used to generate electricity and will not replace significant petroleum usage. According to U.S. Department of Energy statistics, petroleum usage accounts for less than 2% of electrical generation. The alternative energy sources will only replace coal power, which the U.S. has in great supply. These new energy sources won't be able to replace gasoline to drive automobiles, and dependence on foreign oil sources will not decrease by much. Replacing the output of the coal industry by a new energy industry only transfers jobs from the coal industry to the newer industries. This might increase newer but not more jobs, nor will it prevent job losses.

Two of the subsidies had little purpose:
The $4500 rebate for trading in clunkers brought some gas guzzlers off the road but made an infinitesimal improvement in the environment and hardly much decrease in oil usage. Being an artificial scheme, it gave a false signal that auto recovery was underway. Why should the U.S. populace subsidize a relatively few buyers and support the sales and profits of the automobile industry? Is that what the capitalist system is about?

The postponement of IRA withdrawals denied the government tax revenue. It subsidized the purchase of securities and might have contributed to the increase in stock prices. Rather than finding use in consumer spending, the IRAs remain locked in investment portfolios.

Another defect - U.S. government loans to corporations have been used to finance their overseas production, creating jobs in foreign nations and not in the U.S. The loans have rescued financial organizations from their poorly conceived investments.

General Motors entered a $293 million joint venture with the Chinese state-owned carmaker FAW to make light trucks and vans, which will be sold in China.
General Motors also used government loans to increase production at its facility in Brazil.
AIG used a substantial portion of the funds given to it in order to pay for guarantees of credit default swaps to foreign (Societie General, Credit Agricola, Deutsche bank) and domestic (Goldman Sachs, Merrill Lynch) investment banks at full contract price.

China's s stimulus plan has shown some instant successes. July 2009 already showed a GDP growth of 7.9% and Goldman Sachs predicts that growth will reach 9.4% and 11.9% in 2010. Although commentators offer different figures, the most accepted figure has China’s retail sales increasing 15% in the year ended July 2009 and urban investment increasing 33%. Considering that exports fell 23% in a year ended in July 2009, the increase in GDP indicated the Chinese economy is flexible and can readily switch from reliance on exports to domestic consumption.

Despite the increase in GDP, the fall in exports has generated factory closings and unemployment. Although unemployment figures are not available, infrastructure projects, most of which had already been planned to be implemented, continue their frantic pace with government support and are a safety valve for the unemployment.

Facility in loosening the credit markets has most propelled China's apparent economic recovery. Being a state controlled banking system, the government doesn't have to plead with banks to lend - it just does that. An excessive amount of loans has stimulated many aspects of the economy and brought one notable failure - loans have financed stock purchases and caused stock market speculation. After a spectacular ninety percent run up in the Shanghai index, government retreat in its lending polices has brought a marked decrease in new loans and a reverse in the stock market.

China's recovery and United States faltering
Evidently, China did doing something right and the U.S. dtd not have its act together at that time. Much improvement occured after 2009.

The principal reason for China's dynamic recovery is more due to its past policies. Whereas the Bush administration built up huge current account and fiscal deficits during prosperous times, the Chinese administration wisely enabled huge current account and fiscal surpluses. Came bad times and the U.S. was forced to augment deficits grow while China's deficit spending only offset previous surpluses.

China's banking system is given principal praise for rescuing the economy. From "The Secrets of China’s Economy: The Government Owns the Banks rather than the Reverse by Ellen Brown, Global Research, August 18, 2009."

How can China’s stimulus plan be working so well, when ours is barely working at all? The answer may be simple: China has not let its banking system run roughshod over its productive economy. Chinese banks work for the people rather than the reverse. So says Samah El-Shahat, a presenter for Al Jazeera English who has a doctorate in economics from the University of London. In an August 10 article titled “China Puts People Before Banks,” she writes:

“China is the one leading economy where the divide – the disconnect between its financial sector and the world normal Chinese people and their businesses inhabit – doesn't exist. Both worlds are booming again and this is due to the way the government handled its banks. China hasn't allowed its banking sector to become so powerful, so influential, and so big that it can call the shots or highjack the bailout. In simple terms, the government preferred to answer to its people and put their interests first before that of any vested interest or group. And that is why Chinese banks are lending to the people and their businesses in record numbers.”

Success due to bank control is only one part of a larger picture of control. Directly or indirectly the Chinese government controls most aspects of the Chinese socio-economic system; wages, investment, allocation of resources, infrastructure construction and domestic prices. China has learned how to enter the World Trade organization and use the organization for its own purposes. By keeping wages low and sweeping dollars into its accounts, the Chinese government has kept its export prices and its currency low and competitive.

Competing with China is difficult and defeating. Adopting their mode of operation might be attractive to others.

alternative insight
september, 2009
slight update September 2014

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