China‘s newly announced $586 billion stimulus package is almost certainly overkill for the country’s needs because China’s domestic demand expansion this year is too strong to warrant spending this much money anytime soon.
But it offers a much-needed lesson to the U.S. government about how large an effective stimulus package might have to be.
China’s stimulus arrives just in time to set a powerful example before this weekend’s G-20 meeting, at which national leaders will discuss solutions to the looming global economic slump.
China’s package amounts to 14 percent of its likely gross domestic product (GDP) for 2008. For the United States, this share of GDP translates into a $2 trillion program. The comparison shows how small the amounts under consideration in Congress really are when compared with what it takes to counter a potentially dangerous recession.
After all, President Franklin Roosevelt failed to pull America out of the Great Depression in the 1930s because he and his Congresses worried about the budget. It took deficit spending worth 80 percent of GDP over five years during World War II to do the job.
House Speaker Nancy Pelosi, California Democrat, is in discussions with the White House for a $100 billion stimulus package now, with an additional package to come in January. She also is looking for a $60 billion tax cut this fall.
But these add up to only a little over 1 percent of U.S. GDP in immediate stimulus. President Bush reportedly is unwilling to support even a package of this reduced scale directed mostly at infrastructure spending.
The important lesson for American policymakers is that, given the scale (and potential damage) of the coming recession, an adequate stimulus program would need to amount to a 10 percent to 20 percent share of GDP. Ten percent of the U.S. GDP is $1.4 trillion.
Given the political obstacles to passing an adequate stimulus package all at once, however, Congress is more likely to accomplish the task piecemeal, in $100 billion parcels.
One parcel could go directly to state governments. A second tranche could be used for roads, bridges and port reconstruction and expansion.
A third could fully fund Trade Adjustment Assistance with nontrade-related extensions. A fourth could restructure troubled mortgages. A fifth could expand benefits for the armed services and veterans.
A sixth could go for education, pre-K through college. And a seventh could be directed to Social Security supplements.
Then there are alternative energy investments, technology transfers to fight global warming, and initial payments to smooth the transition to a new health care system.
Depending on the size of these packages, you could get to a trillion dollars pretty quickly and possibly at an acceptable political price. It may be the only way America can match China’s boldness.
Some economists interpret China’s stimulus announcement as a sign that its economy is in more trouble than previously thought. Not so. China’s recently announced GDP and other statistics for the first nine months of the year show annual growth slowed to 9 percent in the third quarter - all because of weakening exports.
But analysts ignore information that China’s domestic demand accelerated to 13 percent in the second and third quarters after correcting for inflation.
The full nine-month statistics don’t reveal this because China’s first quarter was so weak. Without the surge in domestic demand already under way in China, the growth slowing would be more severe.
The risk from its stimulus for China is a repeat of 2003-04, when a large stimulus package intended to combat the economic impact of the SARS epidemic turned out to be unnecessary. The resulting inflation took several years to bring under control, and then reappeared in 2007.
This time, China plans to phase in spending so there’s plenty of time to ease up in the event that the proposed sums turn out to be excessive.
The overall lesson from China’s stimulus is that it is going into the real economy, not into the balance sheets of troubled financial institutions.
While financial bailouts might provide life support for firms with an arguably important future role to play, America is entering the phase of this crisis in which the real economy needs substantial direct stimulus, and the country needs to think big - like China.
• Albert Keidel is a senior associate at the Carnegie Endowment for International Peace.