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China in decline? New US narrative is geared towards 2024 election
James K. Galbraith
Published: 3:45pm, 18 Aug, 2023
People walk through a shopping district in Beijing on July 25. Some economists argue that China’s economic woes are rooted in the population’s high savings rate. Photo: EPA-EFE
Three recent articles in The New York Times have signalled a “new” narrative about China. Once a threat by dint of its inexorable rise, now it poses a threat because it is in decline.
US President Joe Biden set the terms of this new narrative. As The New York Times’ Michael D. Shear reports, the White House now worries that “China’s struggles with high unemployment and an aging workforce make the country ‘a ticking time bomb’ at the heart of the world economy”. Biden warned, “When bad folks have problems, they do bad things”, but he did not explain how, exactly, unemployment and an ageing population turn China into a threat.
Shear gives another reason for China’s new-found decline: “the president has moved aggressively to contain China’s rise and to restrict its ability to benefit militarily from the use of technologies developed in the United States”. Given the scope of Biden’s new semiconductor restrictions, he might have added “and non-militarily as well”.
Meanwhile, Peter S. Goodman, an economics reporter, points to a “slew of developments” supporting the new narrative. These include declining Chinese exports and imports, falling prices “on a range of goods, from food to apartments,” a housing slump, and a real-estate default that has produced losses of US$7.6 billion (a sizeable event, but nothing close to the typical US bank bailout). In responding, Goodman writes, “Chinese authorities are limited in their options … given mounting debts now estimated at 282 percent of national output”.
According to Goodman, China’s difficulties stem from deeper problems such as a high savings rate, vast deposits in the banking system, a new wariness about real estate, and, consequently, a growing need “to boost domestic demand”. He and his sources agree that the proper cure is stimulus – meaning more consumption and less investment.
Moreover, Goodman cites MIT economist Yasheng Huang, who notes that exports plus imports in China total 40 per cent of gross domestic product, much of which comprises final assembly and re-exports of imported components. But while Huang appears to have left Goodman with the impression that reducing this “pass-through” trade would have a big effect, the fact is that the effect would be quite small, since imports are a subtraction from GDP. China is losing merely the value-added, a fraction of the overall product value.
A container ship at Yangshan deep water port in Shanghai on July 21. China’s declining imports and exports have elicited concern in some quarters. Photo: NurPhoto / Getty Images
Finally, Nobel laureate Paul Krugman rounds out the paper’s coverage of China’s “stumble” by offering an economist’s “systemic” view. According to Krugman, China previously grew “largely by catching up to Western technology”, but now it faces the problem of too much saving, too much investment, and too little consumption. It therefore needs “fundamental reforms” to “put more income in the hands of families, so that rising consumption can take the place of unsustainable investment”.
There is nothing new about Krugman’s key point about savings. Western economists were already pushing that line 30 years ago, when I became chief technical adviser for macroeconomic reform to China’s State Planning Commission. “Invest less! Consume more!” – the mantra made no sense to me then, and it still doesn’t today.
Should China have more cars but worse roads and fewer gas stations? Does it need more televisions, but fewer apartments to put them in? Does the population need more food and clothing, even though it was already mostly well-fed and decently dressed three decades ago?
True, Chinese families save prodigiously for education, healthcare and old age. But they can do that because they have incomes, which come in large part from jobs in the public and private investment sectors.
Chinese workers are paid for building factories, homes, rail lines, roads and other public works. The typical (statistically average) Chinese family is not income-constrained. If it were, it would not be able to save as much as it does.
Moreover, if China were to run out of investment projects, incomes would fall, savings would slow, and consumption as a share of income would necessarily rise. But this decline of savings would make Chinese families less secure, deepening today’s slowdown.
No wonder the government has taken pains to keep investment flowing through major programmes like the Belt and Road Initiative. Even after China itself is fully built (or overbuilt), it still will have plenty to do in Central Asia, Africa and Latin America.
Yes, China’s economy is slowing. It will be hard to scale anything to match the cities and transport networks that are already in place, or the campaign to eliminate extreme poverty. China’s main tasks now lie elsewhere: in education and healthcare, in matching skills to jobs, in providing for the elderly, and in curbing carbon dioxide emissions. They will be pursued in Chinese fashion: step by step, over time.
So, what is the new narrative really about? It is not so much about China as it is about the West. It is about our lead in technologies, our free-market system, and our ability to wield power and to keep all challengers at bay. It is about reinforcing what Westerners like to believe: the inevitable triumph of capitalism and democracy.
Above all, it is about our American leaders winning out against “bad folks” who may do “bad things”. It’s a narrative that’s made-to-measure for the 2024 election campaign.
James K. Galbraith
James K. Galbraith, a former executive director of the Joint Economic Committee, is Professor of Government and Chair in Government/Business Relations at the Lyndon B. Johnson School of Public Affairs at the University of Texas at Austin. He is the author of Inequality: What Everyone Needs to Know, and Welcome to the Poisoned Chalice: The Destruction of Greece and the Future of Europe.
- The White House and American news media are wringing their hands over China’s economic slowdown, which is construed as posing a threat
- The argument that China should focus on consumption instead of investment is as fallacious now as it was 30 years ago, and serves to bolster a Western sense of superiority
James K. Galbraith
Published: 3:45pm, 18 Aug, 2023
People walk through a shopping district in Beijing on July 25. Some economists argue that China’s economic woes are rooted in the population’s high savings rate. Photo: EPA-EFE
Three recent articles in The New York Times have signalled a “new” narrative about China. Once a threat by dint of its inexorable rise, now it poses a threat because it is in decline.
US President Joe Biden set the terms of this new narrative. As The New York Times’ Michael D. Shear reports, the White House now worries that “China’s struggles with high unemployment and an aging workforce make the country ‘a ticking time bomb’ at the heart of the world economy”. Biden warned, “When bad folks have problems, they do bad things”, but he did not explain how, exactly, unemployment and an ageing population turn China into a threat.
Shear gives another reason for China’s new-found decline: “the president has moved aggressively to contain China’s rise and to restrict its ability to benefit militarily from the use of technologies developed in the United States”. Given the scope of Biden’s new semiconductor restrictions, he might have added “and non-militarily as well”.
Meanwhile, Peter S. Goodman, an economics reporter, points to a “slew of developments” supporting the new narrative. These include declining Chinese exports and imports, falling prices “on a range of goods, from food to apartments,” a housing slump, and a real-estate default that has produced losses of US$7.6 billion (a sizeable event, but nothing close to the typical US bank bailout). In responding, Goodman writes, “Chinese authorities are limited in their options … given mounting debts now estimated at 282 percent of national output”.
According to Goodman, China’s difficulties stem from deeper problems such as a high savings rate, vast deposits in the banking system, a new wariness about real estate, and, consequently, a growing need “to boost domestic demand”. He and his sources agree that the proper cure is stimulus – meaning more consumption and less investment.
Moreover, Goodman cites MIT economist Yasheng Huang, who notes that exports plus imports in China total 40 per cent of gross domestic product, much of which comprises final assembly and re-exports of imported components. But while Huang appears to have left Goodman with the impression that reducing this “pass-through” trade would have a big effect, the fact is that the effect would be quite small, since imports are a subtraction from GDP. China is losing merely the value-added, a fraction of the overall product value.
A container ship at Yangshan deep water port in Shanghai on July 21. China’s declining imports and exports have elicited concern in some quarters. Photo: NurPhoto / Getty Images
Finally, Nobel laureate Paul Krugman rounds out the paper’s coverage of China’s “stumble” by offering an economist’s “systemic” view. According to Krugman, China previously grew “largely by catching up to Western technology”, but now it faces the problem of too much saving, too much investment, and too little consumption. It therefore needs “fundamental reforms” to “put more income in the hands of families, so that rising consumption can take the place of unsustainable investment”.
There is nothing new about Krugman’s key point about savings. Western economists were already pushing that line 30 years ago, when I became chief technical adviser for macroeconomic reform to China’s State Planning Commission. “Invest less! Consume more!” – the mantra made no sense to me then, and it still doesn’t today.
Should China have more cars but worse roads and fewer gas stations? Does it need more televisions, but fewer apartments to put them in? Does the population need more food and clothing, even though it was already mostly well-fed and decently dressed three decades ago?
True, Chinese families save prodigiously for education, healthcare and old age. But they can do that because they have incomes, which come in large part from jobs in the public and private investment sectors.
Chinese workers are paid for building factories, homes, rail lines, roads and other public works. The typical (statistically average) Chinese family is not income-constrained. If it were, it would not be able to save as much as it does.
Moreover, if China were to run out of investment projects, incomes would fall, savings would slow, and consumption as a share of income would necessarily rise. But this decline of savings would make Chinese families less secure, deepening today’s slowdown.
No wonder the government has taken pains to keep investment flowing through major programmes like the Belt and Road Initiative. Even after China itself is fully built (or overbuilt), it still will have plenty to do in Central Asia, Africa and Latin America.
Yes, China’s economy is slowing. It will be hard to scale anything to match the cities and transport networks that are already in place, or the campaign to eliminate extreme poverty. China’s main tasks now lie elsewhere: in education and healthcare, in matching skills to jobs, in providing for the elderly, and in curbing carbon dioxide emissions. They will be pursued in Chinese fashion: step by step, over time.
So, what is the new narrative really about? It is not so much about China as it is about the West. It is about our lead in technologies, our free-market system, and our ability to wield power and to keep all challengers at bay. It is about reinforcing what Westerners like to believe: the inevitable triumph of capitalism and democracy.
Above all, it is about our American leaders winning out against “bad folks” who may do “bad things”. It’s a narrative that’s made-to-measure for the 2024 election campaign.
James K. Galbraith
James K. Galbraith, a former executive director of the Joint Economic Committee, is Professor of Government and Chair in Government/Business Relations at the Lyndon B. Johnson School of Public Affairs at the University of Texas at Austin. He is the author of Inequality: What Everyone Needs to Know, and Welcome to the Poisoned Chalice: The Destruction of Greece and the Future of Europe.
