Why China is flirting with deflation as the west battles rising prices: Beijing policymakers fear low investment and consumer spending will hamper the economy's post-Covid recovery - Joe Leahy in Beijing and Andy Lin in Hong Kong on the Financial Times - date

While central banks in developed countries wrestle with stubbornly high inflation, China has the opposite problem — the world's second-largest economy is flirting with deflation.

Developed economies were hit particularly hard by soaring energy and food prices as Russia launched its full-scale invasion of Ukraine last year, but price controls on energy in China shielded it from the worst of those fluctuations. Instead, the country is at risk of deflation because of low consumer demand and private investment as the economy emerges from draconian zero-Covid controls, economists said.

Like other countries, China sought to counter the pandemic's negative economic effects by keeping montetary and fiscal policy accomodative. In 2020, the government issued bonds worth Rmb1tn ($140bn - 525bn﷼), ran a fiscal deficit of 3.6% of GDP, and cut policy interest rates by 30 basis points. In 2022, it channelled another Rmb1.4tn in "quasi-fiscal funding" through state banks, according to Citi research. It also allowed greater local government bond issuances and cut rates by another 20bp.

Beijing's fiscal stimulus, however, was mostly channelled to areas such as infrastructure spending and businesses in the form of tax reductions, cuts to compulsory social security payments on salaries and other measures aimed at preventing job losses.

The US, by contrast, launched a much grander fiscal and monetary stimulus plan, with American consumers receiving part of the bounty in direct payments and jobless benefits.

AK: I've been digging into trade policy in the United States. Y'all probably remember, back in 2018, former President Donald Trump launched a trade war with China, eventually slapping tariffs on more than $300 billion worth of imports. Fast-forward, and we are 2 1/2 years into the Biden presidency, and those tariffs are still in place. I wanted to understand why.

DD: This should be loaded with equipment right now. Well, part of the reason that hasn't happened is that we're spending our time finding alternative sources to China.

AK: That's because MISCO imports a lot of its parts from China. And Digre - not China - gets a bill from the U.S. government to pay the import tariffs. He's on the hook whether or not he sells the speakers.

DD: We pay a tariff on every part of this speaker except for the magnet, and there's like 14 different parts that make up a speaker - all have a 25% tariff.

AK: The 25% tariff on all these little parts adds up, but the strange thing is, when Digre imports a speaker fully made in China, he only faces a 7.5% tariff.

DD: In many cases, what that meant is that more of our product is being built in China now than before the tariffs.

AK: What is the distinction that you see between how you and the previous administration relate to China in the context of the tariffs?

KT: What we do share is a diagnosis that the U.S.-China trade relationship is out of balance. But I think that there are a lot of significant distinctions between our approaches.

RL: They have literally done nothing but follow our policy. They haven't put any new tariffs on. They have done nothing but follow our policy, yet they criticize the way we arrived at the policy.

AK: Back in 2017, the Commerce Department found that China was dumping plywood into the U.S., selling it at unfairly low prices.

GP: They immediately tried to circumvent [the tariffs] by moving their products - even some of their manufacturing - to other countries, such as Vietnam and Indonesia.

AK: Across the economy, imports on tariffed Chinese goods have gone down. But that doesn't mean American manufacturers are getting all the benefits. Imports from Vietnam have more than doubled since the tariffs went into effect. Dan Digre says he's also turned to Vietnam.

DD: Vietnam is developing a loudspeaker industry. It's developing parts suppliers. But it's very new. You know, these supply chains just don't move on a dime, right?

AK: He's also shifted to Indonesia for some other components, but he still relying on China a lot. Plus, he's in that tricky situation. He's paying a 25% tariff for parts from China, but only a 7.5% tariff on a fully made Chinese speaker. So he is now an American manufacturer making a majority of his speakers in China.

We find that transitions from out-of-pocket to government-predominant health financing systems resulted in greater immunization coverage, and improved health system outcomes (life expectancy, under-5 mortality and incidence of catastrophic health expenditure) than social-health-insurance-predominant HFS. For the few outcomes where this was not the case, social health insurance and government-predominant HFS showed similar results.

In this paper, social health insurance financing refers to health expenditures channelled via SHI agencies that require a contribution to access services, irrespective of whether the contribution is subsidized by the government or not.

This paper uses novel micro-data on natural resources and administrative health data in Brazil to study how economic booms in minerals affect health at birth. 1: Overall, mining activities generate more economic opportunities, but only following economic booms in metallic minerals.

2: municipalities with higher historical endowments of mineral resources experience an increase in premature births and births with low APGAR scores after an increase in international prices of minerals.

Both the human capital approach and the friction cost approach underestimate the true potential productivity costs associated with nocturia by around 16%. We propose a generalized GE/partial equilibrium multiplier to approximate the GE effect for other health conditions.

Suppose you own a company that sells tables. You get hit by a pandemic, and the government provides massive fiscal and monetary (are those not the same thing?) stimulus, and people want to buy more tables. Can you increase supply? Not really, since you don't want to train more workers or buy more table-making equipment for a temporary surge of demand for tables. People are ordering more tables than you can make, and your orders are backlogged. So you... increase your prices to have less, but happier, customers. Politicians start screaming that the high-profit margins prove that this inflation is really “greedflation” driven by monopoly power

Democrats have gaslit themselves about inflation - I'm referring of course to left-wing Democrats' take on the current inflation situation.

To the extent that this blaming corporate greed for everything is just rhetoric to pass the time while the Federal Reserve does its work, I don't mind at all. But Elizabeth Warren introduced a bill last week she calls the “Price Gouging Prevention Act of 2022,” which is more serious business. [...] You can get out from under the charge of price gouging if you can prove that you only raised prices because the price of your inputs went up. This suggests to me that Democrats perhaps got a bit high on their own supply last year in attributing various inflation phenomena to “supply chain problems.”

There were specific problems in the supply chain for automobiles, but in general, people just bought a ton of durable goods last year. If we'd actually had a negative shock to global supply chains, then nominal prices would have gone up but inflation-adjusted consumption would have gone down. What actually happened, though, was people bought more durable goods than ever in inflation-adjusted terms. The problem in the supply chain was people ordering tons of stuff.

At the end of the day, though, only a very stupid person would think companies suddenly became greedy in 2021 after years of being non-greedy. [...] Greed is a constant. But the cause of this particular inflation was a surge in demand, not a surge in greed.

But what happens when demand soars and you don't raise prices? Well, you sell out of stuff. And if people started regularly going to the store and finding that all kinds of things were sold out, they'd start panic buying whatever wasn't sold out in order to stockpile (the prices would be low after all). And the panic buying would just lead to more shortages. Then to fix things, you'd need a real government rationing system — so much bacon per week, so many eggs, etc. And then you'd have illicit trade in ration coupons, a black market, the whole deal.

a surge in spending means a surge in output because all kinds of idle resources are brought online to capture the rising spending. But we do not currently have much in the way of idle resources. The unemployment rate is very low. The ports and freight trucks are crowded.

Back in 2008-2012, the country could have used a lot more unorthodox economic thinking. Protectionist trade policy might have been beneficial. Large-scale debt cancellation definitely would have been beneficial. Deficits didn't matter. We were plagued by a shortfall of demand, and all kinds of wild populist schemes could have helped people a lot.

But the current inflationary situation calls for the kind of tedious neoliberal thinking that has become painfully unfashionable these days. Fiscal austerity would be helpful. The Federal Reserve raising interest rates is helpful. And most of all, over the medium-term, supply-side reforms that raise economic efficiency would be helpful. So freer trade is good. Expanding legal immigration is good. This stuff the White House did last fall on housing is good, but if we could listen to Brian Schatz and go even more YIMBY that would be better.

The free-market policy package, often known as the neoliberal policy package, emphasizes lower inflation, greater capital mobility and greater job insecurity (euphemistically called greater labour market flexibility), essentially because it is mainly geared towards the interests of the holders of financial assets. Inflation control is emphasized because many financial assets have nominally fixed rates of return, so inflation reduces their real returns. Greater capital mobility is promoted because the main source of the ability for the holders of financial assets to reap higher returns than the holders of other (physical and human) assets is their ability to move around their assets more quickly (see Thing 22).

With only a few exceptions, [almost] all of today's rich countries, including Britain and the US - the supposed homes of free trade and free market - have become rich through the combinations of protectionism, subsidies and other policies that today they advise the developing countries not to adopt.

However dramatic it may look, [China] is not the main explanation for de-industrialization in the rich countries. China's exports did not make a real impact until the late 1990s, but the de-industrialization process [← moving towards a demand for services] had already started in the 1970s in most rich countries. Most estimates show that the rise of China as the new workshop of the world can explain only around 20 per cent of de-industrialization in the rich countries that has happened so far.

It looks as if we are spending ever higher shares of our income on services not because we are consuming ever more services in absolute terms but mainly because services are becoming ever more expensive in relative terms, while goods get cheaper.

As the economy becomes dominated by the service sector, where productivity growth is slower, productivity growth for the whole economy will slow down. [...] Of course, a country can plug the hole through foreign borrowing for a while, but eventually it will have to lower the value of its currency, thereby reducing its ability to import and thus its living standard.

Furthermore, Americans work considerably longer than Europeans. Per hour worked, [Americans'] command over goods and services is smaller than that of several European countries.

Between the late nineteenth and early twentieth centuries, the worst fears of liberals were realized, and most countries in Europe and the so-called 'Western offshoots' (the US, Canada, Australia and New Zealand) extended suffrage to the poor (naturally only to the males). However, the dreaded over-taxation of the rich and the resulting destruction of capitalism did not happen. In the decades that followed the introduction of universal male suffrage, taxation on the rich and social spending did not increase by much. So, the poor were not that impatient after all.

Moreover, when the dreaded over-taxation of the rich started in earnest, it did not destroy capitalism. In fact, it made it even stronger. Following the Second World War, there was a rapid growth in progressive taxation and social welfare spending in most of the rich capitalist countries. Despite this (or rather partly because of this - see Thing 21), the period between 1950 and 1973 saw the highest-ever growth rates in these countries - known as the 'Golden Age of Capitalism'. [...] Since then, these countries have never managed to grow faster than that.

despite rising inequality since the 1980s, investment as a ratio of national output has fallen in all G7 economies (the US, Japan, Germany, the UK, Italy, France and Canada) and in most developing countries (see Things 2 and 6).

In addition, greater income equality may promote social peace by reducing industrial strikes and crime, which may in turn encourage investment, as it reduces the danger of disruption to the production process and thus to the process of generating wealth. Many scholars believe that such a mechanism was at work during the Golden Age of Capitalism, when low income inequality coexisted with rapid growth.

If giving more to the rich is going to benefit the rest of the society, the rich have to be made to deliver higher investment and thus higher growth through policy measures (e.g., tax cuts for the rich individuals and corporations, conditional on investment), and then share the fruits of such growth through a mechanism such as the welfare state.

By flexing their economic muscle, the managerial classes have gained enormous influence over the political sphere, including the supposedly centre-left parties such as Britain's New Labour and America's Democratic Party. Especially in the US, many private sector CEOs end up running government departments. Most importantly, they have used their economic and political influence to spread the free-market ideology that says that whatever exists must be there because it is the most efficient.

Markets weed out inefficient practices, but only when no one has sufficient power to manipulate them. Moreover, even if they are eventually weeded out, one-sided managerial compensation packages impose huge costs on the rest of the economy while they last. The workers [are] constantly squeezed through downward pressure on wages, casualization of employment and permanent downsizing, so that the managers can generate enough extra profits to distribute to the shareholders and keep them from raising issues with high executive pay (for more on this, see Thing 2). Having to maximize dividends to keep the shareholders quiet, investment is minimized, weakening the company's long-term productive capabilities. When combined with excessive managerial pay, this puts the American and British firms at a disadvantage in international competition, eventually costing the workers their jobs. Finally, when things go wrong on a large scale, as in the 2008 financial crisis, taxpayers are forced to bail out the failed companies, while the managers who created the failure get off almost scot-free and handsomely rewarded.

in the rich countries, enterprises cooperate with each other a lot more than do their counterparts in poor countries, even if they operate in similar industries. For example, the dairy sectors in countries such as Denmark, the Netherlands and Germany have become what they are today only because their farmers organized themselves, with state help, into cooperatives and jointly invested in processing facilities (e.g., creaming machines) and overseas marketing. In contrast, the dairy sectors in the Balkan countries have failed to develop despite quite a large amount of microcredit channelled into them, because all their dairy farmers tried to make it on their own.

If effective entrepreneurship ever was a purely individual thing, it has stopped being so at least for the last century. The collective ability to build and manage effective organizations and institutions is now far more important than the drives or even the talents of a nation's individual members in determining its prosperity (see Thing 17).

Undeterred by the LTCM débâcle, Scholes went on to set up another hedge fund in 1999, Platinum Grove Asset Management (PGAM). The new backers, one can only surmise, thought that the Merton-Scholes model must have failed back in 1998 due to a totally unpredictable sui generis event - the Russian crisis. After all, wasn't it still the best asset-pricing model available in the history of humanity, approved by the Nobel committee?

There is a saying in Korea that even a monkey can fall from a tree. Yes, we all make mistakes, and one failure - even if it is a gigantic one like LTCM - we can accept as a mistake. But the same mistake twice? Then you know that the first mistake was not really a mistake. Merton and Scholes did not know what they were doing.

When Nobel Prize-winners in economics, especially those who got the prize for their work on asset pricing, cannot read the financial market, how can we run the world according to an economic principle that assumes people always know what they are doing and therefore should be left alone?

But where do we go from there? Is it possible to think about regulating the market when we are not even smart enough to leave it alone? The answer is yes. Actually it is more than that. Very often, we need regulation exactly because we are not smart enough. [...] when you think about it, this is exactly what we do all the time. Most of us create routines in our life so that we don't have to make too many decisions too often. [...] studying chess masters, Simon realized that they use rules of thumb (heuristics) to focus on a small number of possible moves, in order to reduce the number of scenarios that need to be analysed, even though the excluded moves may have brought better results.

Simon's theory shows that many regulations work not because the government necessarily knows better than the regulated but because they limit the complexity of the activities, which enables the regulated to make better decisions.

So many complex financial instruments were created that even financial experts themselves did not fully understand them, unless they specialized in them - and sometimes not even then (see Thing 22). The top decision- makers of the financial firms certainly did not grasp much of what their businesses were doing. Nor could the regulatory authorities fully figure out what was going on. As discussed above, now we are seeing a flood of confessions - some voluntary, others forced - from the key decision-makers.

If we are going to avoid similar financial crises in the future, we need to restrict severely freedom of action in the financial market. Financial instruments need to be banned unless we fully understand their workings and their effects on the rest of the financial sector and, moreover, the rest of the economy. This will mean banning many of the complex financial derivatives whose workings and impacts have been shown to be beyond the comprehension of even the supposed experts.

You may think I am too extreme. However, this is what we do all the time with other products - drugs, cars, electrical products, and many others. When a company invents a new drug, for example, it cannot be sold immediately. The effects of a drug, and the human body's reaction to it, are complex. So the drug needs to be tested rigorously before we can be sure that it has enough beneficial effects that clearly overwhelm the side-effects and allow it to be sold. There is nothing exceptional about proposing to ascertain the safety of financial products before they can be sold.

Card and Krueger's meta-analysis of the employment effects of minimum wages challenged existing theory. Unfortunately, their meta-analysis confused publication selection with the absence of a genuine empirical effect. We apply recently developed meta-analysis methods to 64 US minimum-wage studies and corroborate that Card and Krueger's findings were nevertheless correct. The minimum-wage effects literature is contaminated by publication selection bias, which we estimate to be slightly larger than the average reported minimum-wage effect. Once corrected, little or no evidence of a negative association between minimum wages and employment remains.