China's resilience is an economic gut check for America
Nobel Laureate Michael Spence talks about lessons from China, austerity vs. stimulus, long-term investment in a politically divided democracy, and prospects for economic growth.
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Gardels: With a nearly 9 percent annualized growth rate, Germany has picked up as the bright spot, a saver and strong exporter among the indebted consumer democracies of the West.Skip to next paragraph
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Yet, some say this so-called “German miracle” is really “the Chinese miracle” since their dramatic recovery is mostly due to high-end exports to China.
Are we seeing a “German miracle” from which rest of the West could learn? Or is it mainly due to a kind of “reverse coupling” where China is pulling Germany out of the doldrums?
Spence: Germany is doing well for two related reasons. First, the export sector is very healthy. And that is the result of the fact that over the past decade Germany has gone through a major restructuring of its economy in which workers traded some income for more job security, greater flexibility of hiring and firing was allowed, and work-sharing (kurzarbeit) instead of layoffs during the downturn has enabled key companies to retain skilled workers so they can get back on track quickly as demand rises. All of these reforms have put German companies in a more competitive position.
Second, as we’ve discussed, major emerging markets from China to Brazil have not only restored growth but are sustaining it. Germany’s export sector is in a strong position to take advantage of that.
So, the “German miracle” is what has enabled that country to benefit from the “Chinese miracle.”
Austerity vs. stimulus
Gardels: Where do you come down on the global debate between whether it is time to cut back and move toward austerity vs. continuing stimulus spending by governments?
Spence: There are such large differences among countries that it is hard to come down on any one position. There is a difficult balance between maintaining enough support to avoid a deflationary downward spiral on the one hand, and the longer-term costs of high debts and deficits on the other.
It is not surprising there is lively debate about this because there are good arguments on both sides.
As far as the United States is concerned, I would be on the conservative side at the moment. On the fiscal stimulus side, we’ve done about as much as we can do. I’m very much in favor of extending long-term unemployment benefits because they are essential to protect people while at the same time providing a stimulus. If you are going to spend limited resources, this is a good place to do it.
But, beyond that, the US is in for a period of painful restructuring of balance sheets to deleverage decades of overspending by borrowing. That will take time to work through. I don’t think you can accelerate the recovery by further government spending. It just won’t yield much benefit.
America has clearly not yet come to terms with the fact that a healthy long-term future depends on suffering short-term pain. As much as we might wish it, there is no painless recovery after such a long bout of overleveraging.
That pain must involve both tax increases, partly to increase public-sector investment in infrastructure that has been way too low, and budget cuts in some government services to help further finance those same infrastructure investments. Tax cuts, only if they stimulate job creation, must also surely be part of the mix.
What worries me most is that as we – so far unsuccessfully – try to gather the political consensus to take decisive action, opportunities for the younger generation are shrinking. They are going to pay a high price in the short and medium term.
Does democracy = instant gratification?
Gardels: Fifty years ago, California made the kind of massive public investments – in a world-class university system, a vast road grid and canals to bring water from north to south – that China is making today, from the world’s fastest trains to the cutting edge of clean-energy technologies.
Yet, as we speak, California, like the US as a whole, is mired in debt and political gridlock.
In your final Commission report, you write with China in mind that “Experience suggests that strong, technocratic teams focused on long-term growth can provide some institutional memory and continuity of policy” – in short, effective government. “Leadership,” your report says, “requires patience, a long planning horizon and an unwavering focus on the goal of inclusive growth.”