Why China and the U.S. Should Swap Stimulus Packages

Why China and the U.S. Should Swap Stimulus Packages

The U.S. and China have proved that opposites do indeed attract — even economically speaking. China is thrifty to a fault; the U.S. reveled in spending money it didn’t have. China was more than happy to send America its excess savings, in the form of investments in U.S. government debt, because that kept interest rates down, which kept consumers spending, which kept the Chinese exporters producing.

This was transpacific yin and yang, and it all worked fine — until it stopped working almost entirely, late last year. Now both economies are flailing while leaders try to mitigate the worst effects of a frightening global recession. And the odd thing is, the two countries’ salvage efforts are pretty much polar opposites as well.

Consider: almost half of China’s $585 billion economic-stimulus program, announced last November to much fanfare, is earmarked for infrastructure spending on railroads, highways and power grids. Another 25% will go to reconstruct entire towns in Sichuan province that were devastated by last year’s earthquake. These are “shovel-ready” infrastructure projects, and financial markets rallied on March 4 partly due to expectations — unfounded, as it turned out — that Chinese Premier Wen Jiabao would unveil a second round of stimulus measures on March 5 during the opening of China’s annual National Party Congress in Beijing.

Contrast China’s economic rescue effort with the stimulus package recently signed into law by President Barack Obama. In the U.S., despite all the talk about shovel-ready construction projects, only about $100 billion of the $787 billion in stimulus spending will go toward new infrastructure this year. Another $282 billion goes to tax cuts or rebates, much of which, as economist Nouriel Roubini argues, will most likely be saved, not spent. A big chunk of the rest of the package will go, via the states, toward social services: increased unemployment benefits, more money for food stamps and for health-care spending for the poor and the elderly.

In other words, Washington is providing lots of funding for “social safety net” programs — precisely the kind of programs that poor and unemployed Chinese really need and the government barely provides. Meanwhile, China is throwing money at infrastructure projects to a degree that the U.S. — with its creaky bridges, potholed roads, crumbling schools and obsolete airports — hasn’t seen in decades. There is some infrastructure spending in the U.S. plan, to be sure, but not enough, many economists believe, to deliver a real jolt to a moribund economy.

Maybe the two countries should swap stimulus packages. Every economist worth his or her salt agrees that the global economy needs to be rebalanced so that the U.S. becomes a bit more like China and China becomes a bit more like the U.S. .

China needs to balance export-led growth with a stronger domestic economy grounded by greater consumer spending. Two things need to happen: real incomes need to grow for all Chinese consumers . And consumers have to feel secure enough to spend more of what they make, rather than hoard it.

Right now, the Chinese hang on to their earnings because they feel they must. Nobody has their back if they get sick or lose their job. Beijing spends only 5% of GDP on health care, pensions, unemployment benefits and other social services. That is a depressingly low figure, even for a relatively poor developing country. I recently interviewed a migrant worker from Sichuan province who several months ago broke his arm in an industrial accident. He’s back home now, without a job, without unemployment benefits, and has no access to health care to treat his arm, which still pains him “to the point that I can’t work,” he told me. He now lives with his parents — peasants who work the fields for about $80 a month.

To their credit, President Hu Jintao and Premier Wen have talked about the importance of expanding China’s safety net and boosting rural incomes. But the global economic crisis may force them to move more quickly on these fronts. China’s unemployment rate could reach 14% before the crisis is over, according to one recent study, even with all the infrastructure spending Beijing is throwing at the problem. Wen himself said Thursday that if the economy doesn’t grow 8% this year , the country risks politically destabilizing social unrest.

The China Development Research Foundation, a think tank that advises the government, just issued a report calling on Beijing to spend 2.6 trillion renminbi on social programs by 2012. Lu Mai, the secretary-general of the foundation, notes that the government has started down this road with a new plan to drastically expand health coverage in rural China, where some 800 million of China’s 1.3 billion people live. That’s a step forward. But China will need to spend more to expand its safety net, as Lu says, and it needs to hurry. If only it could import Barack Obama’s economic-recovery act. It might work better here than it does at home.
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