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Yesterday, the Deep End featured an argument against Keynesian stimulus from Maurice Glasman – the ‘Blue Labour’ guru. Today, we travel to China for another reason why simply turning on the fiscal taps is unlikely to get us out of our economic funk.

In an article for Newsweek – available here on the Daily Beast website – Minxin Pei makes the point that even in a country that doesn’t rely on the confidence of the international bond markets, stimulus hasn’t exactly worked out: 

  • "A significant part of the problem with the Chinese economy today originated in Beijing’s outsized stimulus package in 2009–2010. In response to the global financial crisis in late 2008, the Chinese government stimulated the economy with 4 trillion yuan ($600 billion) in fiscal spending and about 12 trillion yuan ($1.9 trillion) in new bank lending. Altogether, the injection of 16 trillion yuan into the economy, equivalent to 35 percent of GDP over two years, lifted the Chinese economy and earned Beijing plaudits around the world at the time. But most of the money went into fixed- asset investments and real estate, fueling a property bubble, causing inflation, and creating a mountain of bad loans in the banks. In the meantime, Chinese households did not benefit. Their consumption level has barely budged." 

Thus even though Chinese Government could ‘afford’ its stimulus (i.e. screw the cash out of ordinary Chinese savers), that doesn’t stop the harm done by the misallocation of so much extra spending: 

  • "Because of the botched stimulus package four years ago, China today faces an excruciating choice. It can certainly make the same mistake again by using a combination of fiscal spending and government-directed loans to inflate growth through more investments. Such a strategy would provide enormous relief to state-owned enterprises (SOEs), local governments, and well-connected real-estate developers sitting on unsold property. SOEs can use the free money from Beijing to expand their empires, local governments can build more white elephants, and real-estate developers can roll over old debts and avoid liquidation… Another option is to risk more bold and market-friendly measures… 
  • "Which path will Beijing take?… The second option is economically sensible but politically infeasible since it essentially asks the party to share its wealth with the people. The slogan in front of the party’s headquarters in Beijing may still claim "Serve the people," but everyone knows that the party serves itself first and foremost." 

One might ask what options our own Labour Party would take if it were in a position to pursue a policy of stimulus. Let us generously assume that it could get hold of the money without undermining confidence in the British economy, thereby allowing Chancellor Balls a number of choices:

Would he invest the cash on long-overdue upgrades to our national infrastructure? Or how about some carefully targeted tax cuts? Or, perhaps, some further funding for welfare-to-work reform or even a new wave of free schools?

Or would the money just go into propping-up failure in our public services, with the allocation of every last penny directed by the public sector unions.

Given Labour record in such things, what do you think?

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