Is China a Case for Stimulus?

Is China an example of fiscal stimulus successfully maintaining a growing economy? Tyler Cowen and Matt Yglesias offer contrasting opinons.  (A link to Cowens which also links Yglesias' blog is here.)  Cowen argues that the spending has been riddled with malinvestments and influenced by corruption so helps demonstrate an important problem with massive stimulus programs. Yglesias counters with the argument that no sector has lower productivity than the unemployment sector, so that even malinvestments are better than no investments.  He also states that no one in China is debating whether the typical household is better off than it was four years ago.

But Yglesias is ignoring a couple of points in my view. First, it is a short-run view only.  Just as I can live well by running up debt, eventually it has to stop. The same is true for nations.  Second, and relatedly, if we asked the typical American household in 2006 or early 2007 whether they were better off than four years earlier, most would have said they were better off.  Unemployment was relatively low, housing prices were high and rising, the stock market was booming, and the consumer was seen as the engine of strong economic growth. But that all came crashing down once house prices collapsed.  Given the overbuilding of office buildings and apartments in China, it is difficult to believe that a similar crash won't happen there.

A final thing to consider is the political situation in China.  The autocratic central government is very concerned about social stability.  Maintaining growth and increased GDP is crucial to prevent social unrest.  But the measures being used to maintain growth may cause even more social unrest if and when the whole thing falls apart. 

Pieces from Today's Wall Street Journal

Several pieces in today's Wall Street Journal that are of interest.  The first is a long article on the Greek crisis.  I was in Germany two years ago to teach a short course on public policy. Greece was in the news so I included a part of the course on the Greek situation.  Last year I taught the course again and, once again, Greece was in the news so I discussed it again.  I will be there shortly and it appears Greece can be an illustratation again.  This article is likely to be one of the handouts for the class.

There are also two op-ed pieces.  The first looks at how President Roosevelt changed his policy in light of the war in Europe. He quit bashing big business and asked for help from big business to help gear up for the war effort.  The second is by economist Robert Barro concerning stimulus spending. He counters the claim by Keynesians such as Krugman that the problem in Europe is austerity and that massive fiscal stimulus is needed.  He argues that there is a short-run stimulative effect of an increase in government deficits but that it turns negative after a few quarters.  If he is correct, it could generate the same kind of problems the stop-go monetary policy we had in the 70s.  The stimulus in money supply would reduce unemployment shortly, but after awhile the unemployment went back up and was accompanied by ever higher inflation rates.  We could have bouts of stimulus that fails over time at everthing except generating higher debt levels.