Download Macroeconomics

Macroeconomics
Econ 274
Monetary Policy, Fiscal Policy, and all that
• LR context: since 2010 demographics a drag on growth
• Visibility obscured by SR changes
• Will get worse
• Already talked about: Solow: ΔK↓ ΔL↓ ΔTFP↓
• Stability
• Weak institutions  weak tools
• Add large structural changes  things will go wrong: when not whether
• Political economy
• Urban bias  how keep residents happy enough?
• Urban bias  how to keep rural unhappiness from spilling over?
GDP growth
Don’t belittle 4% growth
• Rule of 70/72
 GDP doubles in 17 years
GDP rises 4.8x in 40 years
• Big qualitative changes remain
• Room for mistakes
• Wasted investment regrettable not disastrous
Implications: potential to reduce relative
poverty
• Central government fiscal balance OK
• Offset by horrid local government position Shephard traces
• So Center has room to nationalize Local
Misallocation consequent to
• Financial repression
• Lots of low profitability investments
• Immature financial system
• Lending to narrow base
• Non-regulated players
• Latest issue explosion of (fraud-based) P2P finance
• Asset prices built on shaky foundations
• Not great for housing in the long run
• There WILL be crises
Macroeconomic Management
• Monetary policy doesn’t work well
• Real rates low
• Many borrowers not sensitive to interest rates
• In the US housing and automotive NOT corporate investment
• In China policy lending, TBTF firms, local government
• So quantitative controls are only option
• But don’t work well in a marketized system
Fiscal policy
• Huge investment splurge from early 2009
• Fiscal stimulus worked: no recession
• Hard to repeat
• Don’t need more roads, cities or factories
• Investment will tend to fall, not rise!!
• “Accelerator” negative feedback effect on GDP growth
• Only option: transfers
• Commensurate with hukou reform
• But not good SHORT RUN tool
Agriculture
• headline issue is land grabs
• definition fuzzy, but 100,000+ “mass incidents” a year
• 2011 Wukan 烏坎 protests an extreme case: violent
• long-run issue is unfavorable elasticities
• agricultural output increases quickly
• demand doesn’t
• hence farm incomes lag growth
Japan’s solution
• Subsidize
• ditto the EU
• Lesson for China:
• DON’T!!
Elasticity Dilemma
• output per unit of land is high and elastic
• availability of
• commercial seeds, fertilizer, herbicides, and pesticides
• trucking/wholesale/storage services
• output responds strongly to price
Elasticity Dilemma
• output per unit of land is high and elastic
• availability of
• commercial seeds, fertilizer, herbicides, and pesticides
• trucking/wholesale/storage services
• output responds strongly to price
Elasticity Dilemma
• demand is income & price inelastic
• consumers eat better, not more
• farm incomes thus lag urban incomes
Japan
Rice Supply vs Apparent Consumption
15,000
140.0
米 demand
14,000
130.0
13,000
120.0
12,000
110.0
11,000
100.0
10,000
90.0
9,000
80.0
8,000
70.0
7,000
60.0
6,000
50.0
5,000
40.0
Consumption kg/person
1,000 Metric Tons
米 supply
Japanese Expenditure Shares
% of total expenditures
Share Food (Engel Coefficient)
70%
60%
50%
40%
30%
20%
10%
0%
Bread
Rice
Chinese Urban Rice Consumption
Already ½ Peak!
Rural Consumption Now Also Dropping
Agriculture: solution?!
• Labor outflow from the agrarian sector
• in 2010 Census “floating” population 210 million
• current US population is 320 million
• now more than half of Chinese live off the farm
• formal economics: move left along output curve, leading to higher income per labor
input
• Japan went through a similar transition
• despite labor outflow
• rural incomes under constant pressure
Production Function: Farm Output vs Labor Input
labor income is slope of curve
Wage
25
0.25
20
0.20
15
0.15
10
0.10
5
0.05
0.00
0
1 2 3 4 5 6 7 8 9 10111213141516 171819202122 2324252627282930313233 343536373839 404142434445 4647484950
Labor Input
Income per Worker
Total Output
Output
Fewer farmers, larger farms?
• lack of clean ownership rights
• affects ALL farmers
• 1950 land to the tiller policy
• plus additional redistribution
• previous Qing 请 system of muddy rights to land
• complicated layers of title and tax obligations
• current situation similar: land is not “free & clear”
• Japan’s 1948-9 land reform never reversed
• farm consolidation still challenging 70 years later!
Fewer farmers, larger farms?
• Today about 20% of farmers rent in land
• no other developing country has anything like that!
• the normal land tenure issues exist
• those renting land invest less in maintenance
• offset by less expensive fertilizer and other inputs
Fewer farmers, larger farms?
• Eventually rural incomes and urban incomes will even out
• Eventually is not an answer farmers want to hear!
Fewer farmers, larger farms?
• Government response
• rural taxation has been totally abolished
• almost 80% of farmers receive cash subsidies
• ≈ US$35 per acre so while small at household level, not trivial
• Costly!!
• long-run price distortions
• unreasonable focus on grain
• drives up urban wages, while keeping food prices high
• fiscal implications: expensive!
Key Puzzle
• Why subsidize agriculture in an authoritarian system?
• Possible answer: Urban Bias
• China in fact has a representative government
• but one that is not subject to general elections, only internal Party ones
• threats to continued Party rule are urban
• Tiananmen II: unemployed college grads?
• peasants can’t unite, and divided they fall
• but in the long run CCP leadership may believe a rural political base will be
more stable, and are “buying votes” in advance of political restructuring
Micro-macro Balances
• The slowing economy highlights the low share of consumption in the
economy
• With:
• China’s too big for net exports to drive growth
• the rest of the world just isn’t large enough
• and manufacturing productivity is rising, too!
• Investment facing diminishing returns
• so consumers need to step things up
• my bottom line: that won’t happen without transfers
•  Agricultural subsidies but also pensions, healthcare
Savings-Investment Balances
• Y = C + I + G + X – M and C = Y – T – S gives
• (S – I) + (T – G) = (X – M)
• Claim
• S-I: ++ (big surplus)
• T-G: - (small deficit)
• government spending a lot, but deficit small
• off balance sheet activities – local government – however are huge
• Hence X-M: + (small trade surplus   intl capital outflows)
• from which Chinese citizens do not benefit
• increased level not sustainable given size in global economy
Intl side: trade surplus small
Growth: reiteration / Smitka prediction
• Inevitable growth slowdown
• Investment “I” will fall
• but demographic change is slow
• household savings remain high
• corporate retained earnings high as “I” slows
• plus SOEs don’t pay dividends to the State
• X-M limited to near 0
• so 0 = S-I++ + T-G  T-G--
• government “borrower of last resort” with big deficit
Chinese Consumption and Labor Income by Age
Consumption
Labor Income
1.20
1.00
0.80
China’s Population is
Middle-aged: Lots of
Savings!!
0.60
0.40
0.20
0.00
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91
Japan’s example
• Charts of falling growth
• Evolving S-I
• Decline in I
• Big rise corporate S
• Household S decline once population ages
• Government (dis)saving
• ROW (intl trade) surplus
• Japan is smaller than China so can run larger surplus relative to its GDP
-1%
-2%
-3%
-4%
2015/ 1- 3.
2013/ 1- 3.
2011/ 1- 3.
2009/ 1- 3.
2007/ 1- 3.
2005/ 1- 3.
2003/ 1- 3.
2001/ 1- 3.
1999/ 1- 3.
1997/ 1- 3.
1995/ 1- 3.
1993/ 1- 3.
1991/ 1- 3.
1989/ 1- 3.
1987/ 1- 3.
1985/ 1- 3.
1983/ 1- 3.
1981/ 1- 3.
1979/ 1- 3.
1977/ 1- 3.
1975/ 1- 3.
1973/ 1- 3.
1971/ 1- 3.
1969/ 1- 3.
1967/ 1- 3.
1965/ 1- 3.
1963/ 1- 3.
1961/ 1- 3.
1959/ 1- 3.
1957/ 1- 3.
1955/ 1- 3.
Real GDP Growth Rates
Year over previous year
16%
15%
14%
13%
12%
11%
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
Private Net Savings Deficits & Surpluses
Net HOUSEHOLD and CORPORATE Savings
14.0%
13.0%
12.0%
11.0%
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
-1.0%
-2.0%
-3.0%
-4.0%
-5.0%
-6.0%
-7.0%
-8.0%
-9.0%
-10.0%
Notes: Calendar years, SNA68 1955 through 1979, SNA93 for 1980-1994, SNA98 for 1994-2013
Net lending = (savings / retained earnings + net transfers) less (net investment + land + inventory acquisition)
Household sector includes unincorporate enterprises and non-profits. Corporate sector includes both financial and non-financial firms.
Private Net Savings Deficits & Surpluses
Net Household and Corporate Savings
14.0%
13.0%
12.0%
11.0%
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
-1.0%
-2.0%
-3.0%
-4.0%
-5.0%
-6.0%
Private Savings Deficit: Japan was the largest client of the World
Bank and had one emergency loan from the IMF ca. 1961
-7.0%
-8.0%
-9.0%
-10.0%
Notes: Calendar years, SNA68 1955 through 1979, SNA93 for 1980-1994, SNA98 for 1994-2013
Net lending = (savings / retained earnings + net transfers) less (net investment + land + inventory acquisition)
Household sector includes unincorporate enterprises and non-profits. Corporate sector includes both financial and non-financial firms.
Private Net Savings Deficits & Surpluses
Net HOUSEHOLD and CORPORATE Savings
14.0%
13.0%
12.0%
11.0%
Bubble
Private Savings Surplus
Corporate Sector Savings > Investing Since 1994
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
-1.0%
-2.0%
-3.0%
-4.0%
-5.0%
-6.0%
-7.0%
-8.0%
-9.0%
-10.0%
Notes: Calendar years, SNA68 1955 through 1979, SNA93 for 1980-1994, SNA98 for 1994-2013
Net lending = (savings / retained earnings + net transfers) less (net investment + land + inventory acquisition)
Household sector includes unincorporate enterprises and non-profits. Corporate sector includes both financial and non-financial firms.
Private & Government Savings & Current Account
Private Savings
Govt
ROW Net lending
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
-2.0%
-4.0%
-6.0%
-8.0%
-10.0%
-12.0%
(S – I) + (T – G) = (X – M):
(private savings) + (government savings) = Net Trade = ROW Net Lending
that shows up as a trade surplus – feasible given China’s size???
Error
China’s Future??
• Demographic transition puts bulk of population in high savings portion of
life cycle
• From investment-led growth
• To consumption-led growth
• Financed by ?? government social programs ??
• Retirement must be pay as you go – PayGo
• Chinese government as insurance company
• shift from providing public goods (urbanization, roads, railroads)
• to the providing old age security
• Chinese system not (yet) centralized
• decentralized to cities – not a national system
• but local governments lack fiscal resources
• hukou 户口 reform is really about the current inability of local government to levy taxes!