**Abstract**: The evaluation of stimulus policies should be conducted within a specific macroeconomic context. The same stimulus policy may yield vastly different outcomes in different macroeconomic environments. Therefore, the decision to implement policy stimulation should be contingent upon the macroeconomic environment and cannot be generalized. The true constraints of stimulus policies lie in the supply capacity of the macroeconomy, and the targets should reflect whether the supply constraints are tightening, such as inflation and the balance of payments. Stimulate demand when inflation is below the target value and there is a surplus in the balance of payments, and withdraw when inflation is above the target value and there is a deficit. Stimulating the economy is not a "drinking poison to quench thirst" approach, but a necessary strategy for stabilizing the economy under the premise of economic structural imbalance. Stimulus policies are merely technical means for the government to regulate the macroeconomy. It is not appropriate to oppose these technical, situation-dependent measures with the long-term major policies that our country must adhere to. Otherwise, it would be self-imposed restrictions, increasing the difficulty of government regulation of economic operations.
At present, there is no significant disagreement among various parties on the assessment of China's economic situation, with a general consensus that there is a clear pressure of demand contraction and downward growth, with non-negligible risks. However, on the issue of whether China needs to use stimulus policies to support economic growth, opinions vary, with both赞成 and opposing voices. There is a lack of consensus on several issues, including the effectiveness of stimulus policies, their sustainability, and the cost-benefit situation in the short and long term. Due to the lack of consensus, stimulus policies face significant resistance and are often forced out by economic pressure, like "squeezing toothpaste," which often lags behind changes in the situation, greatly reducing the effectiveness of the policies.
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To facilitate better government regulation of macroeconomic operations and enhance the leading nature and effectiveness of policies, it is necessary to conduct an in-depth analysis of the costs and benefits of stimulus policies, to thoroughly address the doubts about policy stimulation, and thus build consensus. This article attempts to use macro thinking to deeply analyze the constraints of stimulus policies, discuss key issues such as policy effectiveness and sustainability, to clarify the pros and cons of stimulus policies.
1. Evaluating macro policies requires macro thinking
Assessing the pros and cons of macro policies cannot be generalized by discussing policies in isolation, but must be placed within a specific macroeconomic context. The same macro policy may have completely different effects in different macroeconomic environments. A policy that is more beneficial than harmful in one macro environment may be more harmful than beneficial in another. This is because macro policies have complex feedback transmission mechanisms when implemented in the economy, leading to a chain of diffusion effects. The feedback transmission conditions of policies may vary greatly in different macro environments, resulting in different outcomes for the same policy. Evaluating whether a policy should be implemented without considering the macro environment can easily lead to the error of marking the boat to seek the sword.
The above principle is not complex, but it can be obscured by personal experiences from micro life, which can blind one to the bigger picture. Everyone lives within the macroeconomy and has some understanding of economic operations from their own perspective. However, these micro-level understandings, even when they become "common sense" shared by many, may not fully grasp the operation of the macroeconomy. Using micro thinking derived from personal experience to understand the macroeconomy and evaluate macro policies (whether stimulative or contractionary) can easily lead to biases and misunderstandings.
Nobel laureate in Economics Paul Krugman wrote an article in 2014 titled "Successful Businessmen Don't Understand Macroeconomics," which well illustrates this issue. There is a passage in the article that says: "Nations are not companies. National economic policies, even in a small country, need to consider certain types of feedback that are often irrelevant in business life. For example, even the largest company will only sell a small part of its products to its own employees, yet even the smallest country, most goods and services are mainly sold domestically."
Krugman here criticizes the mistaken idea of understanding the macroeconomy as a micro enterprise. Microeconomic agents (whether businesses or individuals) live in an exogenous economic environment that they cannot control and can only passively accept. Even a large enterprise, its business activities can be ignored in the entire macroeconomy. Therefore, microeconomic agents, when making decisions, neither will nor should consider the impact of their actions on the economic environment. As a result, businesses will regard their income as an exogenous variable that is not controlled by themselves but determined by the economic environment in which the business is located. Businesses, therefore, need to live within their means, determining their expenditures based on their income. This is true for businesses, and even more so for individuals who are far smaller in scale than businesses.
Many people like to talk about policy space when discussing macro policies, believing that policies should have room for maneuver and should not use up all the "ammunition." This reflects the micro thinking of treating the macroeconomy as a business. The underlying implication is that the policy "ammunition" is given, there is only so much, and using a little lessens it, so it must be used sparingly; if the "ammunition" is used up, the policy will be difficult to continue, and it may even cause problems. Although this statement sounds in line with common sense, it is a misunderstanding of the operation of the macroeconomy.
As Krugman said, "Even in the smallest country, most goods and services are mainly sold domestically." This means that for a macroeconomic entity, its expenditures are roughly its income, expenditures affect income, and there is a feedback effect between expenditures and income. Therefore, when discussing the macro policies of a country, it is necessary to know that the macro environment in which this country is located is largely determined by the country itself and is an endogenous variable that can be regulated by the country's macro policies. As the decision-maker of macro policies, the government must understand that its expenditures are related to private income. Changes in government spending will affect the vibrancy of the private economy and, in turn, trigger changes in government revenue—for the government, its revenue is "endogenous," affected by the government itself; this forms a sharp contrast with micro businesses and individuals who regard income as "exogenously given" (not affected by businesses and individuals).So, the logic of "living within one's means" that makes sense for microeconomic agents can become problematic when applied to macroeconomic policies. When the macroeconomy falls into a state of sluggish demand, if the government adheres to the principle of living within its means and reduces fiscal spending due to a decline in fiscal revenue, then private income and expenditure will further decrease, which in turn will exacerbate the pressure on fiscal revenue. In this way, the pressure of economic contraction will continue to be transmitted and amplified between expenditure and income, making the macroeconomy even more difficult. Faced with a situation of insufficient demand in the macroeconomy, the government cannot live within its means; instead, it must engage in counter-cyclical regulation, increasing private income through the expansion of fiscal spending, driving private expenditure, and thereby breaking the vicious cycle of economic contraction. For those who only understand the operation of microeconomics (even if they are successful businessmen), such a correct policy response is counterintuitive, even counter to common sense. This is precisely why Krugman says, "successful businessmen do not understand macroeconomics."
By thinking about stimulus policies with a macroeconomic mindset, one can discover that the same policy may have different effects in different macroeconomic environments. Let's take fiscal spending policy as an example again.
In a macroeconomic environment characterized by insufficient demand and excess supply, there will be involuntary unemployment in the economy. At this time, the expansion of fiscal spending (the government spending more money to purchase goods and services) can allow unemployed workers to find jobs. Once these workers have jobs and income, their expenditure will also increase accordingly, allowing more unemployed people to find jobs and earn income. At this point, fiscal stimulus will "drive" the income and expenditure of the private sector, exerting a "multiplier effect," alleviating the pressure of insufficient economic demand, and driving the economy towards improvement. Conversely, more active private economic activities will also bring more fiscal revenue, making fiscal stimulus policies more sustainable.
However, in a macroeconomic environment with excess demand and insufficient supply, fiscal stimulus policies will have different consequences. At this time, the economy should have already reached full employment, and workers should already be working at full capacity. If fiscal spending further expands at this time, in order to meet the government's purchasing needs, workers can only put down the work they originally planned to do and instead work to meet the increased demand for goods and services from fiscal stimulus. At this time, the total amount of work and income in the private sector will not significantly increase due to fiscal stimulus, but only the content of the work will change—from work that corresponded to private demand before, to work that now corresponds to the work stimulated by fiscal policy. At this time, fiscal stimulus will "crowd out" rather than "drive" private demand, and will not significantly expand total demand, and thus will not make economic activities more active. Correspondingly, the fiscal revenue obtained by the government is also difficult to significantly increase. Therefore, in this situation, fiscal stimulus will not make the economy better but will instead burden the government with a greater debt burden, with more disadvantages than advantages.
Obviously, in the two macroeconomic environments of insufficient demand and excess demand, fiscal stimulus policies are acceptable in the former situation and unacceptable in the latter. This example illustrates that it is meaningless to generally say whether stimulus policies are good or bad, and whether they should or should not be implemented, without considering the specific macroeconomic environment.
Of course, there should still be a minority who oppose stimulus policies in general. It is not necessary to rely on macroeconomic thinking to see that stimulus policies will have a positive effect in the short term when the economy is sluggish. Many people are more concerned about the sustainability of stimulus policies. Many believe that although stimulus policies have a positive effect in the short term, they will make the economy pay a greater price in the long term. In other words, many people worry that stimulus policies will not be worth the cost in the long run, with more disadvantages than advantages. Many people oppose policies that will increase debt (such as expanding fiscal deficits and increasing credit supply) mainly due to this concern. The analysis of the sustainability of stimulus policies is the focus of the following discussion. This discussion needs to start with the demand-side attributes of stimulus policies.
2. Stimulus policies are demand-side policies
Any economic activity is the result of the combined effects of supply and demand factors, and macroeconomic operation is no exception. Therefore, the constraints on macroeconomic growth can be on the supply side or the demand side. Correspondingly, macroeconomic policies that promote economic growth can act on the supply side of the economy (and are called supply-side policies) or on the demand side (demand-side policies). Among the two aspects of supply and demand, it is usually only demand that can be quickly stimulated by policy, so when people talk about stimulus policies, they generally refer to demand-side policies.
The supply capacity of an economy is mainly based on input factors (labor and capital) and technology level, which are difficult to expand rapidly in the short term. Whether it is the increase of labor and capital or the progress of technology level, it can only be gradually achieved through continuous accumulation, and cannot be significantly improved in the short term due to the role of macroeconomic policies. So even if the economy is constrained by insufficient supply, there is rarely any talk of stimulating supply. It's not that everyone is unwilling to stimulate production capacity, but because production capacity really cannot be stimulated in the short term. If someone can now stimulate the production capacity of the bottleneck high-end chip through macroeconomic policies, there should be no opposition at home. Therefore, supply-side macroeconomic policies are more structural policies, creating a good environment for the expansion of input factors and technological progress in a targeted manner to promote their natural development.
When the economy is in a state of insufficient demand, macroeconomic policies can stimulate demand in the short term. To understand why demand can be so magically expanded in the short term due to policy, it is first necessary to know that "demand" in the macroeconomy is "effective demand" (effective demand) supported by purchasing power and manifested as purchasing activities in the market, rather than just the expenditure desires of various economic entities. The total output of a country is its total income, which is also its total purchasing power. Therefore, a country always has enough purchasing power to buy its total output. However, these purchasing powers will flow to different economic entities according to the country's income distribution structure, combined with the expenditure desires of different economic entities, and ultimately form the total effective demand of this country. If there are problems with the income distribution structure, the effective demand formed by the combination of expenditure desires and purchasing power may be completely lower than the country's total supply capacity, resulting in a situation of insufficient demand.In the article "Insufficient Domestic Demand is a Problem of Income Distribution," written on August 29, 2023, the author argued that the insufficiency of domestic demand in our country stems from the irrational income distribution between the two major sectors of residents and enterprises, with the root cause being the low proportion of residents' income in the national total income, leading to a mismatch between domestic purchasing power and expenditure willingness—consumers lack purchasing power, and enterprises lack expenditure willingness. Under such circumstances, macro policies can optimize the matching of purchasing power and expenditure willingness, and effective demand can be quickly stimulated.
Therefore, "insufficient effective demand" is the theoretical basis for stimulus policies. In 1936, the founder of macroeconomics, Keynes, published the classic work "The General Theory of Employment, Interest, and Money." The third chapter of this book is titled "The Principle of Effective Demand." It includes the following passage:
"People view [classical] economists as utopian figures. These individuals leave the world to cultivate their own gardens and tell people: as long as we let nature take its course, everything in the world will develop in the best possible way. I believe they think this way because they have overlooked the fact that 'insufficient effective demand' can hinder the prosperity of the entire economy... If we assume that the economic operation of society is indeed as described by classical theory, then it would mean that the difficulties we face in our research do not exist."
The "Great Depression" that broke out in 1929 educated Keynes and many of his contemporaries about the potential dangers and harmfulness of "insufficient effective demand," and on this basis, they proposed a macro policy framework for demand management. Today's macroeconomics is based on Keynes' insights.
If the economy is in the optimal state as imagined by optimists (the market is in an efficient state), then purchasing power and expenditure willingness will have the most effective combination, allowing effective demand to match supply capacity. At this time, demand-side stimulus policies are neither necessary nor effective. The reason they are unnecessary is that the economy does not have a problem with insufficient effective demand at this time; the reason they are ineffective is that effective demand is constrained by purchasing power and cannot expand further—at this point, the analysis in the following text will gradually become clear.
However, the real world is not always in the ideal optimal state, and situations of insufficient effective demand occur from time to time. At this time, demand-side stimulus policies, as a means of correcting market inefficiencies, have their feasibility and necessity. In the case of insufficient effective demand, the government, as a buyer in the real economy, can always create effective demand by expanding its fiscal expenditure to make up for the lack of private expenditure willingness; monetary policy can increase the scale of financial intermediation in the financial market, allowing more purchasing power to flow to economic entities with higher expenditure willingness, thereby more effectively combining purchasing power and expenditure willingness, and thus boosting effective demand. Such fiscal and monetary policies can stimulate demand and economic growth in the short term, making the macroeconomic situation better.
3. The real constraint of stimulus policies lies in supply capacity
For a country, the real constraint of demand-side stimulus policies is the country's supply capacity. This may contradict the intuition many people get from micro experience. If you ask where the constraint of a country's demand-side stimulus policies is, many people might say money—but this is only a one-sided view from a micro perspective. For a microeconomic entity (whether it is a business or a resident), when the money in hand is spent, it is spent, and of course, there is no money to make more purchases. However, for a country, its own currency is created by the country itself (money is created out of thin air by the country's financial system), and if it is really not enough, it can print more. Therefore, the quantity of money is not the real constraint of stimulus policies.
The constraint of demand-side stimulus policies lies in supply capacity—when stimulus policies cause the country's domestic demand (domestic consumption plus investment) to exceed the country's supply capacity, the stimulus policies encounter a tight constraint and cannot continue to be used. This is because when domestic demand exceeds domestic supply capacity, it will lead to demand-driven inflation, causing prices to continue to rise rapidly, thereby causing macroeconomic chaos.
Of course, at this time, the country can rely on imports to make up for the lack of domestic supply to avoid inflation. Although this can suppress domestic inflation, it will inevitably lead to a trade deficit, causing the country's foreign debt to continue to rise. After all, other countries cannot give away their goods to the country for free, and trade deficits must be exchanged for the country's foreign debt. Foreign debt must be repaid with international hard currency (usually the US dollar). Except for the United States, other countries cannot print their own US dollars when they run out. If a country lacks sufficient international hard currency to repay its foreign debt, it will trigger an international payment crisis, causing the domestic currency to depreciate significantly and the domestic economy to suffer a heavy blow. The Asian financial crisis that broke out in 1997 is an international payment crisis that Southeast Asian countries encountered, and its serious consequences are well known.Therefore, as long as a country's demand exceeds its supply capacity, there will inevitably be rising inflation or a deterioration in the balance of payments (trade deficit). Either of these consequences can destabilize the macroeconomy and trigger a crisis. On this path of economic instability, demand-side stimulus policies naturally cannot be used anymore.
Thus, to determine whether macroeconomic stimulus policies have hit a bottleneck, the key is to look at the two indicators of inflation and trade surplus. When inflation rises and there is a trade deficit, it indicates that domestic supply is insufficient and demand is excessive. Stimulus policies at this time will further increase inflation and external debt pressure, causing the macroeconomy to become more unstable. On the contrary, when inflation is low (or deflation) and there is a trade surplus, it means that domestic supply is excessive and demand is insufficient. At this time, stimulus policies are not only feasible but also very necessary.
A country's supply capacity is a constraint on demand-side stimulus policies and naturally also constrains fiscal and monetary policies as means of demand stimulation. Let's first look at fiscal policy. A more proactive fiscal policy is always manifested as an expansion of fiscal deficits - this may come from an increase in fiscal expenditures or it may be due to a deliberate reduction in fiscal revenue (such as tax cuts). Fiscal deficits need to be made up by the country issuing government bonds. In other words, if a country's fiscal revenue exceeds expenditures, the government has to borrow money to pay for the excess.
When a country is in a state of overcapacity and insufficient effective demand, it must be that the domestic economy has not fully spent out its total income (purchasing power), and some purchasing power has settled down. At this time, the total purchasing power of the whole society has not been fully transformed into purchasing behavior, resulting in effective demand being less than (the total production capacity that can generate total purchasing power). In this case, fiscal borrowing to expand deficits is essentially spending out the settled purchasing power in society through fiscal means, transforming it into effective demand, thereby driving the utilization of idle capacity and allowing involuntary unemployed people to find jobs. Therefore, at this time, fiscal policy can alleviate the pressure of insufficient demand in the economy and improve the economic situation.
Of course, fiscal deficits will increase government debt. However, in countries with overcapacity, there is already excessive savings formed due to unreasonable income distribution (settled purchasing power that has not been transformed into purchasing behavior). At this time, the expansion of government debt is a correction to domestic excessive savings, and what is formed is also "internal debt" (creditors are domestic), and there will be no problem with the continuation of government debt. We can even say that the increase in government debt under these circumstances is like Zhou Yu hitting Huang Gai, one is willing to fight (the government is willing to borrow more debt), and one is willing to endure (the private sector is willing to lend money to the government), and it can be sustained.
However, if a country is in a state of insufficient supply and excessive demand, for two reasons, deficit finance will be difficult to continue. First, the expansion of fiscal expenditure will more obviously drive the rise of inflation, making inflation out of control. Second, at this time, the private sector has fully transformed its purchasing power into expenditure, and there is no excessive savings settled. As a result, the government can only borrow foreign debt from foreigners. For a country, foreign debt that needs to be repaid with international hard currency is a tight constraint, and if it owes too much, the country will trigger an international payment crisis. Therefore, under the condition of insufficient capacity, stimulative fiscal policy will destabilize the economy and is therefore difficult to sustain.
Let's look at monetary policy next. Monetary expansion is manifested in the faster growth of the total amount of money. But first, it is important to clarify that in the modern monetary system, although a country's financial system can create "nominal money" out of nothing, the "real purchasing power" of nominal money cannot be created by the financial system (including the central bank), but can only be determined by the operation of the real economy. In other words, although a country's financial system can print money, whether the printed money can buy things is not determined by the country's financial system.
In the article "The Fallacy of Excessive Money Printing Can Be Laid to Rest," published on September 15, 2021, the author discussed that the real reason for the continuous faster growth of our country's nominal money supply than the nominal GDP growth rate, and the continuous rise of the M2/GDP ratio, is our country's high savings rate - our country's real economy continues to accumulate a large amount of savings in the form of bank deposits (belonging to the monetary口径) in the financial system, leading to our country's nominal money growth rate will be long-term faster than the nominal GDP growth rate.
In countries with oversupply and insufficient demand, the real purchasing power corresponding to the stock of nominal money has not been fully transformed into expenditure behavior, resulting in effective demand supported by money being less than the country's supply capacity. At this time, issuing more money can boost the expenditure of those economic entities with limited purchasing power, thereby expanding effective demand and utilizing the idle capacity in the economy. Moreover, in this case, because the purchasing power of the stock of money has not been fully utilized, the issued money will not bring higher inflation, and loose monetary policy can be sustained.
On the contrary, in countries with insufficient supply and excessive demand, the stock of nominal money must have been fully transformed into effective demand in the economy (so demand will be excessive). At this time, if more money is issued, the purchasing behavior brought by this additional money will make the problem of supply not meeting demand in the economy more serious, thereby further increasing inflation and destabilizing the economy.It is evident that both fiscal and monetary policies can only stimulate the economy when it is in a state of supply surplus. At such times, stimulus policies can alleviate the demand bottleneck faced by economic growth, allowing for an expansion of economic output and an improvement in the economic situation. Moreover, during these periods, stimulus policies do not lead to negative effects such as inflation instability or a deterioration in the balance of payments. However, when the economy suffers from insufficient capacity, demand-side stimulus policies can exacerbate the pressure of supply not meeting demand, leading to a worsening of inflation or balance of payments conditions, thus outweighing the benefits.
4. The sustainability of stimulus policies depends on the macroeconomic environment
Understanding that the true constraint of stimulus policies lies in the national supply capacity, we can now discuss the sustainability of these policies. To determine whether stimulus policies are sustainable, we essentially look at two points: First, whether the beneficial effects of stimulus policies on the economy can be sustained or will quickly become ineffective (similar to how the human body may develop drug resistance under continuous medication, rendering the drugs ineffective); Second, whether the costs required for stimulus policies will soon become unbearable, making the stimulus policies not worth the expense.
Both of these points depend on the macroeconomic environment in which the stimulus policies are implemented. When the economy is in a state of insufficient supply and excessive demand, the tight constraint on economic operations is on the supply side, which cannot be relaxed by demand-side stimulus policies. At this time, stimulus policies not only fail to improve the economy but also bring about the costs of rising inflation and deteriorating balance of payments, making the drawbacks outweigh the benefits, let alone sustainability.
However, when the economy is in a state of surplus supply and insufficient demand, stimulus policies can expand economic output, increase employment, and will not incur excessive costs in terms of inflation and balance of payments. It is worth noting that at this time, stimulus policies may indeed lead to an increase in government debt and a faster growth rate of money supply, but these consequences do not threaten the sustainability of stimulus policies.
Those lacking in macroeconomic thinking may mistakenly compare a country to a micro enterprise, worrying that more debt and money will eventually make stimulus policies pay a price (such as debt crises and inflation and uncontrollable asset prices). However, the laws of macroeconomic operation cannot be grasped solely based on microeconomic experience. In a macroeconomic environment of surplus supply, government debt (mainly domestic debt) and money issuance are both sustainable. In the article "The Need for a Comprehensive Correction of the Perception of Our Country's Debt," published on June 28, 2023, the author provided a detailed analysis of the sustainability of our country's debt, which will not be repeated here.
Speaking of concerns about the sustainability of stimulus policies, the overall consideration is only one aspect. Many also worry that this special type of stimulus policy focused on investment is difficult to sustain. Domestic demand consists of two parts: consumption and investment. Macro policies aimed at stimulating domestic demand can only choose one of these two as the focus. Consumption is a function of consumers' current income and even more so a function of their expectations of future income. Even if stimulus policies can increase consumers' income in the short term, it is difficult to effectively improve consumers' expectations of future income, so consumption is not sensitive to stimulus policies. Compared to consumption, investment is more sensitive to stimulus policies and is therefore the more common "lever" chosen by stimulus policies. Since the "subprime crisis" in 2008, our country's stimulus policies have mainly targeted investment, and this is the reason.
After a long period of high-intensity investment, the return on investment for our entire society has significantly decreased, and high-return investment projects are increasingly difficult to find. The combination of a high investment share of GDP and a continuous decline in the return on investment has led many people to have increasing doubts about how far this model of stimulating investment to drive growth can go.
But does a low return on investment necessarily mean that the investment-driven model cannot be sustained? For micro enterprises, this is mostly the case. This is because enterprises face exogenously given, uncontrollable funding costs. If an enterprise's return on investment falls to a level lower than the cost of funds, the enterprise will struggle to repay the funds borrowed for investment and will face the risk of debt default. However, macroeconomics may not be the same. When the return on investment in the macroeconomy is very low, the requirements of savers in the economy for the return on investment (determining the cost of funds in the economy) may be even lower.
In the article "The Upper, Middle, and Lower Strategies for China's Economy, and the Need to Avoid Slipping into the Unfavorable Situation of the Lower Strategy," published on March 28, 2024, the author discussed that when there is an oversupply of investment in society, the most effective way to invest is actually to reduce investment and consume the income originally intended for investment. To achieve this, income needs to be transferred from the enterprise sector, which invests, to the consumer sector. However, in our country, due to the poor channels for enterprises to distribute dividends to the consumer sector, the transfer of income from enterprises to consumers is hindered. As a result, the income of the enterprise sector will rigidly remain within the enterprise sector and will not automatically flow to consumers and turn into consumption due to the decline in the return on investment. Under these circumstances, our country's enterprise sector is a saver that is not sensitive to the return on savings—because, with few dividends to consumers, the income of the enterprise sector, apart from being turned into savings and investment, has no other出路. This is the main cause of our country's surplus savings, surplus investment, and even surplus supply.Thus, although the return on domestic investment in our country is indeed not high, not investing will not automatically channel income to consumers to become consumption, but can only become purchasing power that settles in the economy (becoming excessive savings), exacerbating the problem of insufficient effective demand. In other words, in a macro environment with insufficient demand, if someone believes that making low-return investments is a waste of national income and therefore unsustainable, they must also understand that not doing so (making low-return investments) at this time will not lead to a more effective use of national income, but will instead allow income to settle and create greater waste, leading the economy to eventually fall into a recession and crisis brought about by insufficient demand, making economic operations even more unsustainable. Therefore, in the current economic pattern of our country, which is caused by the income distribution structure and leads to insufficient demand, high investment is not only sustainable but also a necessary condition for the economy to remain stable.
Keynes once proposed in Chapter 10 of his book "The General Theory of Employment, Interest, and Money" the suggestion of hiring people to "dig holes" in the ground to create demand and stimulate the economy. "Digging holes" on the ground, of course, does not talk about any return on investment, but it is an effective policy response when the economy is in a state of insufficient demand. People who do not understand the operation of the macro economy may sneer at Keynes's "digging holes" theory from their own micro experience. However, those with a macro mindset can see the wisdom in the "digging holes" theory that goes against (micro) intuition. By applying this wisdom, one can discover the rationality and sustainability of the current high investment in our country.
Finally, let's talk about the side effects of stimulus policies. Everything has two sides, with advantages and disadvantages. Especially in the current complex situation where various contradictions in our country's economy are intertwined, no macro policy can be all good and no bad. Stimulus policies will also bring various side effects. But what's important is to look at the positive and negative effects together and comprehensively assess the pros and cons of stimulus policies. In practice, the side effects of stimulus policies can also be controlled by optimizing policy operations. When the economy is in a state of oversupply and insufficient demand, the benefits of stimulus policies outweigh the drawbacks. Denying stimulus policies because of some side effects is no different from abandoning food because of choking.
5. Stimulus policies are not contradictory to structural reforms
Many people also believe that stimulus policies will delay or even hinder economic structural reforms, so they oppose stimulus policies. In recent years, the main focus of our country's stimulus policies has been on infrastructure investment and real estate investment, the two traditional engines of economic growth. Some people worry that allocating resources to these two areas may not only solidify our country's traditional growth model driven by investment, but also occupy the resources needed for economic transformation, thus hindering the reform of our country's economic structure. However, this worry is unfounded.
The view that opposes stimulus policies by setting them against structural reforms is a false dichotomy and reverses the cause and effect: stimulus policies are the result of economic structural problems, not the cause - it is precisely because the economy has unreasonable structures that stimulus policies are needed to stabilize the economy; not the other way around, because stimulus policies are used, so the economic structure is unreasonable.
When talking about the economic structure of our country, there are two aspects of demand and supply. On the demand side, the structural problem of our country is mainly insufficient consumption leading to insufficient domestic demand. On the supply side, the structural problem of our country is mainly that the industrial structure is not yet optimized, and there are key supply bottlenecks in some industries. The current pressure of demand contraction and growth deceleration faced by our country's economy mainly comes from the structural problems on the demand side of our country. And the structural problems on the demand side are areas that can be offset by stimulus policies.
In the article "The Upper, Middle, and Lower Strategies of China's Economy, Avoid Falling into the Disadvantageous Situation of the Lower Strategy", the author has already analyzed in detail that because the proportion of residents' total income in the economy is low, our country has long-term economic structural problems of insufficient consumption and domestic demand. Faced with this situation, the "upper strategy" is to adjust the income distribution structure, increase the proportion of residents' income and consumption in the economy, thus unblocking the blockages in the domestic circulation of our country's economy, and fundamentally resolving the problem of insufficient domestic demand.
Before the reform of the income distribution structure has made substantial progress, our country's "middle strategy" is to use stimulus policies to stimulate domestic demand. The focus of stimulus policies can only be on consumption and investment, which make up domestic demand. In investment, it can only be chosen among the three major components of infrastructure investment, real estate investment, and manufacturing investment. From the perspective of policy effects, infrastructure investment and real estate investment are the best choices for the focus of stimulus policies. This is because stimulating manufacturing investment will directly lead to capacity expansion, increasing the pressure of oversupply and insufficient demand; on the other hand, consumption is limited by residents' consumption and is difficult to stimulate in the short term.
Faced with the structural problems on the demand side of our country, the "upper strategy" of adjusting income distribution and the "middle strategy" of stimulating investment are not contradictory. It is precisely because the "upper strategy" is not advancing enough that the "middle strategy" is needed to stabilize demand and economic growth. Moreover, in the current economic environment with insufficient domestic demand, stimulus policies will not "occupy" the resources needed for economic transformation, but will instead "drive" private expenditure - without stimulus policies, more resources in the economy will be idle and wasted. Not taking the "upper strategy" and "middle strategy", but only hoping that the unreasonable parts of the economic demand side structure will automatically disappear due to slow growth, is an unrealistic wishful thinking.Facing the structural issues of our country's supply side, while stimulus policies cannot replace structural reforms, they can create a stable macroeconomic environment, thereby providing strong support for the transformation and upgrading of industries. The development of industrial structure mainly relies on enterprises' spontaneous investment and research and development. Without a stable macroeconomic environment, enterprises will reduce investment and cut R&D expenditures due to the lack of stable confidence and good expectations. It is hard to imagine that when enterprises are struggling on the brink of bankruptcy on a large scale, the economic industrial structure can be rapidly transformed and upgraded. Therefore, when the economy grows weakly due to insufficient demand, stabilizing economic growth through stimulus policies can increase the income and confidence of various economic entities, which is conducive to the advancement of supply-side structural reforms. The idea that economic slowdown and crises can force supply-side structural reforms is more likely to lead to depression in various industries, thereby delaying or even hindering the transformation and upgrading of our country's supply side.
Therefore, stimulus policies and structural reforms are not contradictory. Moreover, in practice, stimulus policies and structural reforms can be combined. For example, when the government's stimulus policies are in effect, they can focus more on consumption, on the one hand, increasing consumers' income, and on the other hand, resolving the supply bottlenecks that constrain consumption. For instance, when stimulating infrastructure investment, more effort can be directed towards the "new infrastructure" bottlenecks that constrain China's economic development. Additionally, when stimulating real estate investment, a more price-elastic land supply system can be adopted to better match the supply of land and housing with the direction of population flow, playing a role in stabilizing growth through real estate investment and truly enhancing the people's sense of gain in housing. The belief that stimulus policies will hinder structural reforms, and even the idea that structural reforms can be automatically achieved without stimulus, is harmful to the economy.
6. Stimulating the economy is not "drinking poison to quench thirst."
After fully elaborating on the logic of the pros and cons of stimulus policies, let's now refute a popular misunderstanding about stimulus policies, that is, comparing stimulus policies to "poisonous wine," saying that stimulating the economy is "drinking poison to quench thirst." The subtext behind this misunderstanding is that even if stimulus policies are effective in the short term, they will inevitably bring serious consequences in the long term. The discussion on the sustainability of stimulus policies in Section 4 of this paper has actually revealed the one-sidedness of this view. Here, we are prepared to analyze and refute this misunderstanding from a historical perspective.
Opposition to stimulus policies has long existed in the history of economic development. Hayek (Nobel laureate in Economics in 1974) wrote the following in the third lecture "The Role of the Price Mechanism in the Credit Cycle" of his 1935 book "Prices and Production (Second Edition)":
"If demand is artificially created by increasing the money supply, it must mean that some available resources are directed in the wrong direction, and the inevitable continuous adjustment is once again obstructed. Even if idle resources are accelerated by stimulation, they will sow the seeds for new disturbances and new crises. Therefore, if we want to permanently 'mobilize' all available resources, the only way is not to take artificial stimulation—whether in a crisis or after a crisis—but to let time complete a lasting treatment... We may be able to avoid an economic crisis by timely expansion, but once a crisis occurs, we cannot get rid of it until it disappears on its own."
Hayek believed that stimulus policies might be able to avoid economic crises in the short term, but they would also hinder the market's adjustment mechanism from functioning, thus sowing the seeds for new crises. Therefore, the correct response of the government to an economic crisis is to do nothing and wait for the market to return to normal after a period of self-correction and treatment.
Undoubtedly, Hayek is the "utopian" figure in Keynes's eyes, believing that the market will spontaneously return to an effective state, and any interference with this spontaneous recovery process (such as adopting stimulus policies) will only delay the economic repair and even sow the seeds for new crises.
However, as early as 1923, Keynes wrote the following sharply contrasting words in his book "A Tract on Monetary Reform":
"But the long term is a misleading guide to current affairs. In the long term we are all dead. In the season of storms, if economists only tell us that the sea will return to calm after the storm, then they have set their tasks too easy and too useless."Here, the "long run" that Keynes speaks of represents an idealized assumption of economists who firmly believe in the market (such as Smith, Ricardo, Hayek) about the operation of the economy — that is, the economy will return to the most efficient state under the spontaneous role of the market in the long run. The "short run" before the market returns to efficiency — regardless of how many ups and downs and sufferings it contains — is a process we cannot intervene in and must patiently wait for.
However, both in theory and in practice, the assumption that the market will spontaneously return to an efficient state has been proven false. Even in Western developed countries where Western economics originated, few people fully believe in the effectiveness of the market. The current consensus among economists is that the market may deviate from an efficient state for a considerable period of time; and when the market deviates from an efficient state, macroeconomic policy needs to take action — when there is insufficient economic demand, policy stimulation is needed; when there is excessive demand, policy regulation is needed. In this sense, most people believe that Keynes is right, and we spend most of our time living in the "short run" where the market deviates from an efficient state, and we must take action, rather than using the idealized "long run" as a guide for action.
In our country, the idealized "long run" envisioned by Hayek is neither a reality nor the direction of China's characteristic market economy. The operation of our country's market is different from the effective state assumed by Western economics. This is certainly because our country still has institutional and mechanism constraints that hinder the operation of the market and to some extent hinder the play of market forces. But more importantly, China's characteristic market economy itself is an organic combination of "China's characteristic effective market" and "active government," and there is a fundamental difference between the "China's characteristic effective market" and the idealized effective market assumed by Western economics.
When we praise our country's government for its advantage of "concentrating efforts to do big things," we must see that this advantage is based on the government's strong guidance over the market and the dependence of the market on the government that accompanies this "government guidance." If the market has already reached the optimal state as assumed by Western economics, any intervention in the market can only deviate from the optimal, and there would be no talk of an "active government." The effective market envisioned by Hayek is by no means our country's reality, nor is it the goal that China's characteristic market economy should pursue.
Naturally, using the market fundamentalism inherited from Hayek to oppose stimulus policies by comparing them to "poisonous wine" is both inconsistent with China's economic reality and not in line with the direction of China's characteristic market economy. In China's macroeconomic practice, stimulus policies are not only a compensation for the ineffectiveness or failure of the market but also a part of China's characteristic effective market. They should be implemented according to changes in the economic situation, and should be taken when necessary, rather than being constrained by the fallacious argument of "drinking poison to quench thirst."
7. Stimulate when there is insufficient demand
From the above analysis, we can see that the evaluation of stimulus policies should be conducted in a specific macroeconomic context. The same stimulus policy may have completely different effects in different macroeconomic environments. Therefore, whether to implement policy stimulation depends on the macroeconomic environment and cannot be generalized — not stimulating when it should be stimulated is wrong, just as stimulating when it should not be stimulated is also wrong.
The continuity of stimulus policies also depends on the macroeconomic environment. The real constraint of stimulus policies lies in the supply capacity of the macroeconomy. As long as the supply capacity constraint is not tightened (economic demand is insufficient, and supply capacity is abundant), stimulus policies can not only continue to produce positive effects that are conducive to economic growth but also continue to obtain the necessary resources for implementation, and there is no problem with continuity. Therefore, stimulus policies should target inflation and international balance of payments that reflect whether the supply constraint is tightened. Stimulate demand when inflation is below the target value and there is a surplus in the international balance of payments, and exit when inflation is above the target value and there is a deficit in the international balance of payments.
When considering whether to adopt stimulus policies, it is essential to start from the actual situation of the economy and not be disturbed by the fallacious argument of "drinking poison to quench thirst." Discussing stimulus policies with unrealistic generalizations, and simply saying that stimulus policies are good or bad, is not conducive to the high-quality development of China's economy. In fact, expansionary stimulus policies as well as contractionary regulatory policies are merely technical means for the government to regulate the macroeconomy, each with its applicable and inapplicable economic environment. It is not appropriate to arbitrarily dismiss some means, nor to oppose or contrast these technical, situation-dependent means with China's long-term major policies. Otherwise, it will lead to self-imposed limitations and artificially increase the difficulty of government regulation of economic operations.
In September 2014, against the backdrop of increasing economic downward pressure, the market had high expectations for interest rate cuts. At that time, there was an opposing voice against interest rate cuts, viewing the market's expectations for interest rate cuts as a lack of trust in reform. On September 17, 2014, People's Daily published an article titled "People's Finance Review: Interest Rate Cuts Are Not the Opposite of Reform," refuting the erroneous view that technical decisions like interest rate cuts are opposed to major policies like reform.The article states: "There is no necessary connection between market expectations for interest rate cuts and trust in reforms. China's economic 'new normal' is inherently a respect for the laws of economic development. It is a widely accepted consensus to adopt flexible monetary policies at different stages, and whether to cut interest rates or reserve requirements should depend on the actual situation of economic operations. In the future, while not changing the general direction of monetary policy, the possibility of targeted interest rate cuts or targeted reserve requirement reductions still exists."
The article also says: "Do not politicize the interpretation of economic policies; when the economic situation changes, policies should be adjusted in a timely and moderate manner... Interest rate cuts and hikes are discretionary policy choices, do not 'over-emphasize' them. 'Over-emphasizing' can hijack policy choices, and missing the window of opportunity will lead to regret."
Ten years have passed, and the viewpoints of this commentary on People's Daily still hold true. Our country's construction of a socialist market economy and the direction towards high-quality development are undoubtedly certain. Stimulus policies, as one of the tools for the government to regulate the macroeconomy, do not contradict the general direction of our country's economic development. What is needed is to use this tool in a timely and moderate manner according to the changes in the economic situation. In the current situation where the pressure of demand contraction in our country's economy is relatively large, stimulus policies should be used when necessary.