Aretha Franklin: A Change Is Gonna Come: For the Weekend

This is, I think, both right and wrong. China has an... interesting property-rights system—your property is secure not through title deeds and such but through networks that link you to party and government officials. It's hard to argue that it does not work. It is easy to argue that it shouldn't work. But it does work, and this does, I think, have something to do with China's stabilization policy success. China has Keynesian demand management—and is willing to use it. China has interest rate tools, but they are in general effective at boosting only exports and construction. And China has effective financial repression, with which it appears to do a lot to manage banking and investment and thus the flow of aggregate demand. I have not seen a good analysis of how China's credit-based stabilization policy really works. I would like to see one. But fiscal policy and monetary policy ought—away from the zero lower bound at least, be powerful enough tools to do the job, and in all likelihood better tools to do the job: Noah Smith: China Invents a Different Way to Run an Economy: "The nation has avoided a recession for a quarter-century. Few countries can make the same claim...

...In the U.S. and other developed countries, there are three basic philosophies of macroeconomic stabilization.... Keynesianism, which centers around fiscal stimulus, mainly in the form of increased government spending.... Monetarism, which holds that getting economies out of recession is the job of the central bank, which can lower interest rates.... [Liquidationism holds] that recessions are a healthy and normal phenomenon... promoted... during the Great Depression, and enjoyed a resurgence of interest in the 1980s, eventually even winning a Nobel for one of its leading proponents.... It’s possible that there’s something else out there — a good way to stabilize the economy other than fiscal or monetary policy. And it’s possible China may have been the one to hit upon this alternative.

For the last quarter-century, growth in China has been remarkably stable. Though there have been ups and downs, the country has never recorded a recession in that time. During that period, real gross domestic product growth has never fallen lower than 6 percent.... Most fast-developing countries stumble at some point.... How did China accomplish this feat? Monetary policy was certainly used as a stabilization tool, but its interest rate moves haven’t been particularly dramatic. China did make use of fiscal policy in the Great Recession, running a deficit of about 7 percent of GDP in 2009. But the stimulus was over quickly.... In addition to spending more, China also directed banks to lend lots more money.... That lending was often wasteful and probably hurt productivity, but saving the economy from going off a cliff could easily have been worth it, especially since a deep recession might have threatened the country’s political stability. In the years since the crisis, China has again and again turned to credit policy to stabilize its economy—encouraging banks to lend more when there’s a risk of recession, and clamping down on credit when real estate bubbles threaten to spin out of control....

Many economists would see this approach as hopelessly ad hoc, haphazard and interventionist.... And yet, it seems to have carried China successfully through several crises, while always averting the catastrophic financial crash that outside observers have been warning about for years. Is there a lesson for developed economies here?... Macroeconomists should think about credit policy as an important supplement to the traditional fiscal and monetary tools of recession-fighting.