Saturday, April 18, 2015

The Real Keynesians are the Chinese

(* Editor's note: Most of the comments and links below are excerpts from readers at Mark Thoma's blog.)

The Real Keynesians were the Chinese. Not only did they invest massively in infrastructure, they have strongly emphasized increasing domestic consumption as well. As a result, they have experienced strong economic growth ... China's official policy now is to increase domestic consumption in order not to be as dependent on exports as it has been hitherto. Obviously China is far behind the U.S., but our policy, unlike China's, has not been to increase consumption as the late great economist, John Maynard Keynes, had advocated:

"Moreover, I should readily concede that the wisest course is to advance on both fronts at once. Whilst aiming at a socially controlled rate of investment with a view to a progressive decline in the marginal efficiency of capital, I should support at the same time all sorts of policies for increasing the propensity to consume. For it is unlikely that full employment can be maintained, whatever we may do about investment, with the existing propensity to consume. There is room, therefore, for both policies to operate together; — to promote investment and, at the same time, to promote consumption, not merely to the level which with the existing propensity to consume would correspond to the increased investment, but to a higher level still." — Keynes, The General Theory, p. 325

John Maynard Keynes - TIME magazine

No other country (developed or developing) has come close to the per capita GDP growth that China has experienced since 2007 — though the experience was a continuation of per capita growth that averaged 8.7% annually in the 37 years since 1977.

The Wall Street Journal: "Richard C. Levin, president of Yale — and also a professor of economics — said an early mistake during the recession was not targeting more stimulus funds to job creation. He contrasted America’s meager pace of growth in gross domestic product in the past few years with China’s often double-digit pace, noting that after the crisis hit, Washington allocated roughly 2% of GDP to job creation while Beijing directed 15% of GDP to that goal."

Chinese growth in both GDP and per capita GDP have averaged 9.7% and 8.7% yearly since 1977, which is evidently unique among countries since 1800. Since 1800 there have been 3 countries with the largest GDP internationally: the United Kingdom (until the 1840s), the United States from that time on — until China in 2014. The Chinese development model, with an emphasis on infrastructure formation and the application of Keynesian job creation measures in the wake of the international recession, resulted in the Chinese GDP passing the GDP of the United States.

The links below are to graphs from the St. Louis Federal Reserve comparing U.S. GDP, productivity and prices to other countries.

GDP figures for China do not include Hong Kong, which is part of China. Chinese GDP, not including Hong Kong, was about $200 billion higher in 2014 than GDP in the United States. Here is the GDP data from the IMF. The image below are figures from the IMF link.

Chinese GDP compared to U.S. GDP from IMF data

Infrastructure spending in the U.S. is historically at its lowest level ever. Scroll down this page to see the before-and-after picture of the growth of Shanghai, China from 1987 and 2013. Below are some awesome pictures at of Hong Kong (Click on the images to see their full size at Wiki, which opens in a new window.)

Democrats want to raise taxes on the very wealthy and repatriate over $2 trillion in corporate profits from overseas to help pay for infrastructure spending; but the Republicans want things to stay just as they there (except, they also want lower taxes for the very rich.)

What would John Maynard Keynes say about Chinese infrastructure today?


  1. UPDATE:

    I just saw former Treasury Secretary Henry M. Paulson Jr. being interviewed on CNN about his new book "Dealing With China: An Insider Unmasks the New Economic Superpower" -- and found these articles with a Google search....

    My question: Did U.S. corporations (seeking cheaper labor) enable China to become our global competitor by investing so much in China?

  2. China's economy is now slowing sharply and jobs are streaming to nearby countries with much lower wages. Vietnam, Cambodia, Laos, and Myanmar are reminiscent of China in the 1990's -becoming the new low cost manufacturing hubs. Moreover, China's population is aging and the labor face has started to shrink as it's one child policy (introduced in the 70's) starts to hit home.

    1. Thanks! I also did a post last year about this:

      Jobs now Outsourced from China to Cambodia