China Going Keynesian

This is big news:

SHANGHAI — China on Sunday announced a huge economic stimulus package aimed at bolstering its weakening economy and perhaps helping fight the effects of a global economic slowdown…The package, announced by the State Council Sunday evening, is the largest economic stimulus effort ever undertaken by the Chinese government and would amount to about 7 percent of the country’s gross domestic product during each of the next two years.

Robert Reich is calling for the same thing in the US.

China’s growth rate is going to take a big hit this year.  The 10-11% growth rates are going to be culled to about 5-7% and they clearly understand what is going on–worldwide recession. What Reich calls calls a mini-depression.  And hoarding will take place without big outlays (while Bush, Hoover-like dithers about) on the scale the Chinese have going for them.

As Yglesias points out:

It’s worth noting that ability to do this is one of the things that responsible budgeting gets you. During boom times, China amassed budget surpluses and built up reserves. Now, during a downturn, they’re able to respond with a huge spending initiative at a time when (a) such spending is needed to keep the economy going, and (b) the downturn makes it cheaper than it would otherwise be to complete such projects.

Unfortunately, in the United States the rules governing state and local budget practices essentially ensure that the reverse will be done. During boom times, tax revenues rise and governors respond by combining tax cuts with spending hikes and watch their popularity soar. During a downturn, revenues fall and balance budget requirements force them to reduce services, scale back planned projects, and raise taxes, all of which has the impact of making recessions worse than they otherwise might be and ensuring that infrastructure projects are undertaken at the time when it’s most expensive to build them.

Alternatively we could start an unnecessary war and cut taxes for the rich.

Advertisements

R. Reich on What to Do

Robert Reich with a worth-the-read post (cross-posted at NyTimes) on the question of deficit shackles.  As it becomes clearer and clearer by the day that Obama is going to be president (minus the “dead girl/live boy in the bed” scenario) then Obama has to think what to do.

He like Clinton will inherit a massive deficit and a recession simultaneously. Famously in the Bob v. Bob throwdown of the Clinton administration (Reich v. Rubin), the Rubinites won, and Clinton moved to ease the deficit (which by the end became a surplus) and not a la Reich put in massive investments in infrastructure, health care, etc.

So will this happen all over again?  Obama did pick the Rubinite Jason Furman as his Econ Advisor?

Reich makes what I think is a good case that this time around he needs to be more, uh, Reichian.

In 1993, the upswing out of the recession was already in gear.  (The recession was still in but the light was at the end of the tunnel). This time, the recession is just now getting into full swing and will really hit next year.  We are nowhere near bottoming out yet on the recession.

As Krugman points out, fixing the financial industry mess will not solve the recession either.

iow, perhaps a neo-Keynesian deficit spending period is in order:

Under these circumstances, deficit spending is not unwelcome. Indeed, as spender of last resort, the government will probably have to run deficits to keep the economy going anywhere near capacity, a lesson the nation learned on a large scale when mobilization for World War II finally lifted us out of the Great Depression.

Finally, not all deficits are equal. As every family knows, going into debt in order to send a child to college is fundamentally different from going into debt to take an ocean cruise. Deficits that finance investments in the nation’s future productivity are not the same as deficits that maintain the current standard of living.

While I have serious misgivings about the whole nationalization/neo-Keynesianism, the infrastructure has to be rebuilt.  That simply can not be bypassed again.  There is no way to have a functioning, growing economy in the global order with such derelict infrastructure.  And I mean both physical infrastructure and regulatory infrastructure.

Otherwise, John Robb is right, and the nation-state will collapse into near total anarchy as the middle class is (in Marx’s terms) immerisated.