Tom Pepinsky

Category: Economics

  • Cowen on Keynesians on China

    Internet debates on economic policy, economic thought, and current events are frustrating. Today’s exhibition: Tyler Cowen on Keynesians on China.

    Cowen, of Marginal Revolution fame, recently published a timely essay at the New York Times on how different schools of economic thought interpret the coming economic slowdown in China. Keynesians, he writes,

    would argue that Beijing has the tools to stoke aggregate demand. It could, for example, adjust interest rates and bank reserve requirements, instruct state-owned banks to maintain lending, or deploy some of its $3 trillion in foreign exchange reserves. The government also appears to have many shovel-ready construction and infrastructure projects that could help the economy glide to a soft landing and then bounce back.

    Austrians, on the other hand, would probably suggest that

    there is no way for China to make good on enough of its oversubsidized investments. At first, they create lots of jobs and revenue, but as the business cycle proceeds, new marginal investments become less valuable and more prone to allocation by corruption. The giddy booms of earlier times wear off, and suddenly not every decision seems wise. The combination can lead to an economic crackup — not because aggregate demand is too low, but because the economy has been producing the wrong mix of goods and services.

    There is an interesting point in this essay about Austrian economics perhaps being more applicable in China than in the developed West. But this is overshadowed by Cowen’s subtle bait-and-switch. Keynesians probably believe that Beijing has the tools to stoke aggregate demand, yes. But most sensible Keynesians (and certainly those who Cowen has in mind) also probably believe that stoking aggregate demand is itself not enough to avoid the coming “economic crackup,” for most of the very reasons that Cowen has attributed to the Austrians. Don’t take it me. Get it right from the source from Nouriel Roubini or Paul Krugman.

    Maybe these Keynesians would be more optimistic about China’s ability to “bounce back” this if they weren’t so busy observing that the very tools that the Chinese need to employ are made impossible by financial repression, massive corruption, and opaque decision making. But that’s an altogether different conclusion.

    Perhaps these Keynesians are focusing merely on the Chinese economy’s ability to avoid a crisis in the short term by stoking aggregate demand, without passing judgment about whether the specific tools employed would be sustainable over the long term. That too is a different conclusion. And after all, we actually know what would happened had China stoked aggregate demand in 2008-09. They did. It worked. In the short term.

    Cowen seems convinced that there is some fundamental reason why Austrians can see the reasons for coming ruin in China, but Keynesians cannot, even though he admits that “economists of all stripes agree that China may be in for a spill.” But this does not survive even a cursory reading of Keynesian policies, or of their contemporary advocates diagnoses of China’s problem. It’s a mistake to turn this into a battle between the Keynesians and the Austrians. If China cracks up, it’s not a victory for the Austrians and a defeat for the Keynesians. And similarly, if China doesn’t, both the Keynesians and the Austrians have some explaining to do.

  • Malaysia and the Perfect Storm

    Let’s say that you’re a pessimist about global growth prospects. If so, you’re not alone: Q2 GDP growth in the U.S. is weak, the U.K. is in a double-dip recession, and there’s no end to the Eurozone crisis in sight. Growth in China is softening too, and the rest of the BRICs aren’t registering the growth that we have come to expect over the past five years. If you also think that global financial markets remain fragile, then you’d be right to worry about a perfect storm in the global economy.

    This is bad news all around for the big economies. But we should also pay attention to how global economic conditions will affect small open economies. By definition, these are economies that are dependent on trade and investment, and which therefore have harnessed themselves to the global economy as a basic engine for growth and development. This gives them access to markets for their exports and to investment, but by the same token, it makes them vulnerable to whatever ups and downs the global economy experiences.

    Malaysia is a classic example of a small open economy. And a new report (unfortunately behind a paywall) from Roubini Global Economics argues that Malaysia is not only the Asian country whose economy is most vulnerable to a perfect storm, but also the country which is perhaps least able to do anything about it. Take note of the following:

    • Malaysia’s bank claims to the U.S. or the Eurozone are almost 30% of GDP (highest in Asia)
    • Malaysia’s exports to China, the Eurozone, and the U.S. are over 20% of  GDP (2nd highest in Asia)
    • Malaysia has room for monetary easing, but deficits are already pretty high—and there’s an election coming too, meaning that we can expect that the government is already primed to spend

    Take all of this together, and we have cause to worry about Malaysia’s economy over the next year. This may have political consequences too. I have recently argued that in 2008-10, emerging economies like Malaysia were able to escape the worst of the political turmoil that frequently accompanies global economic crises because they were able to explain to their citizens that their own economic troubles were not their own fault. Lula put it best: “this is a crisis that was caused by white people with blue eyes.” I don’t think that this will continue to work, in Malaysia or anywhere else.