Has Government Intervention Been Good for China?
By Wenqing Zhang and Yannai Shmerer.
In Tyler Cowen’s August 2012 New York Times article, he describes the current issues with China’s economy and two differing economic views on what kind of economic fluctuations China may see in the near future. The two views he presents are that of Keynesian economists (those who follow the economic thought of John Maynard Keynes) and the Austrian field of economic thought created by Ludwig von Mises and Friedrich Hayak. Cowen explains that Keynesian economics are based on the idea that government activity helps create a certain level of stability within an economy while Austrian thought says that government intrusion often only complicates matters and does little in the way of creating stability.
The argument essentially boils down to whether or not governmental policy is beneficial or detrimental to economies. However, there isn’t one correct answer to this argument because every country’s economy is uniquely intricate and each possesses its own driving factors. The driving factor for China’s economy during the last half century (during which China has seen phenomenal growth) has been investment. Investment comes in several different forms, but the two that have helped China become a massive economic powerhouse have been government subsidies for certain businesses and subsidies for building infrastructure. These two forms of subsidies have enabled massive economic growth for China, but as Cowen points out, the return on these “over subsidized investments” becomes smaller and smaller, and China’s economy will slowly grind to a halt.
Keynesian economists argue that the Chinese government has the tools to fix this looming issue, by adjusting interest rates, changing state lending levels, etc. However, Austrian thought says that this will only create more havoc, and is not really a solution but a temporary fix if anything. It’s a similar argument that those against Ben Bernanke’s quantitative easing use. On the flip side, Austrian economists don’t really offer their own solution, merely an explanation of what they believe will happen if the current trend continues.
There is a common belief that the more balanced an economy is, the less likely it is to see massive highs and lows in its output. If one sector struggles for some reason, there are other sectors to keep the economy out of trouble. It seems that China’s economy is way too focused on one sector and it needs to branch out and branch out quickly. Perhaps an investment in social programs would help stimulate the soon-to-be-stagnant economy and keep consumption at a reasonable level. Except, the only issue there is the Chinese government’s notorious relationship with its people.
Discussion (2) | September 30th, 2012 Categories: Government Policy
