WEBVTT - Michael Pettis on Persistent Imbalances in Post-Pandemic China 0:00:10.680 --> 0:00:14.200 Hello, and welcome to another episode of the All Thoughts podcast. 0:00:14.320 --> 0:00:18.880 I'm Tracy Allaway and I'm Joe. Wasn't so Joe. It 0:00:18.960 --> 0:00:22.400 has to be said that there are many irony's to 0:00:22.480 --> 0:00:25.279 come out of the coronavirus crisis, but one of the 0:00:25.320 --> 0:00:28.479 big ones has to do with the fact that the 0:00:28.560 --> 0:00:34.479 outbreak started in China in early and yet China have 0:00:34.560 --> 0:00:38.839 the best performing economy that year. Yeah. I think it 0:00:38.960 --> 0:00:45.040 was the only major economy that actually um grew overall 0:00:45.240 --> 0:00:49.120 in which is pretty extraordinary. And I don't really know 0:00:49.159 --> 0:00:51.479 if it's if it's true or if it will be 0:00:51.560 --> 0:00:54.360 durably true, but I do think there's this sort of 0:00:54.480 --> 0:00:58.800 meme out there that like China one in some way 0:00:58.840 --> 0:01:00.920 that it came out ahead. I don't actually, I'm not. 0:01:01.120 --> 0:01:03.720 I have a getting necessarily been convinced of it. But 0:01:03.840 --> 0:01:06.800 because of China's growth and the quick rebound and it's 0:01:06.840 --> 0:01:09.720 successful suppression of the virus, that is like a thing 0:01:09.800 --> 0:01:13.640 people say. Yeah, so China's GDP grew I think it 0:01:13.720 --> 0:01:17.720 was two point three percent last year, which means it 0:01:17.800 --> 0:01:21.280 was the only major economy as as you mentioned, to 0:01:21.680 --> 0:01:25.200 escape contraction, which is pretty amazing. And then of course 0:01:25.800 --> 0:01:30.000 people have been pitching China's experience in as sort of 0:01:30.080 --> 0:01:33.760 like proof of the benefits of a command economy. When 0:01:33.800 --> 0:01:37.360 you have something like an outbreak in a country with 0:01:37.520 --> 0:01:41.920 a very strong government, you can control the population, you 0:01:41.959 --> 0:01:45.280 can put in place restrictions and things that are ultimately 0:01:45.280 --> 0:01:48.320 going to make it easier to to fight the virus, 0:01:48.400 --> 0:01:50.440 and of course you can pull a bunch of lovers 0:01:50.920 --> 0:01:55.000 to boost economic activity as well. So most people have 0:01:55.040 --> 0:01:58.200 been talking about what an exceptional year it was for 0:01:58.320 --> 0:02:01.480 China's sort of proofs of their economic model might be 0:02:01.520 --> 0:02:05.800 more resilient than some people think. But there are people 0:02:05.840 --> 0:02:10.040 out there who think that actually wasn't as good a 0:02:10.080 --> 0:02:13.200 year for China as it's been portrayed, and that if anything, 0:02:13.760 --> 0:02:18.400 China is coming out of in a more vulnerable position. Yeah, 0:02:18.440 --> 0:02:21.120 I don't think there's you know, it seems too early 0:02:21.200 --> 0:02:24.839 to know, right, So yes, it grew. Um, I'm I'm 0:02:24.840 --> 0:02:27.120 thinking back to our episode with Dan Wong from a 0:02:27.160 --> 0:02:30.000 few weeks ago where he said like his lessons from 0:02:30.760 --> 0:02:33.880 were a that on some level the government is more 0:02:34.480 --> 0:02:37.360 tough and brutal than he appreciated, but also in his 0:02:37.480 --> 0:02:41.640 view that the there's a can do spirit to Chinese 0:02:41.639 --> 0:02:44.520 business and the economy that he thinks is unmaged elsewhere. 0:02:45.080 --> 0:02:47.800 But I still think that, you know, regardless of what 0:02:47.880 --> 0:02:51.880 the situation is right now, we it's very much a 0:02:52.040 --> 0:02:55.040 jump ball open question of what the long term economic 0:02:55.240 --> 0:03:00.360 ramifications are going to be from this extraordinary past once 0:03:00.400 --> 0:03:04.519 basically right. Of course, time will ultimately tell, but given 0:03:04.560 --> 0:03:07.680 that we are coming up to the one year anniversary 0:03:08.000 --> 0:03:10.280 of Earth, by the time we release this episode will 0:03:10.280 --> 0:03:12.400 probably be in the midst of the one year anniversary 0:03:12.800 --> 0:03:16.600 of the big market sell off and the virus really 0:03:16.760 --> 0:03:19.560 um sort of expanding in the rest of the world. 0:03:19.760 --> 0:03:24.280 I think the China experience is worth discussing um, and 0:03:24.320 --> 0:03:27.000 of course we can talk about whether or not the 0:03:27.040 --> 0:03:30.680 strength that we saw a exists and be will continue 0:03:30.680 --> 0:03:34.320 into one. So I'm happy to say we have the 0:03:34.360 --> 0:03:38.080 perfect person on to talk about this, someone who has 0:03:38.120 --> 0:03:42.560 been on all thoughts before. It's Michael Pettis, finance professor 0:03:42.720 --> 0:03:45.720 over at Paking University and a senior fellow at the 0:03:45.800 --> 0:03:50.160 Carnegie Chinghwa Center. Everyone enjoys his thoughts on China. He's 0:03:50.200 --> 0:03:52.520 probably one of the best China commentators out there, so 0:03:52.600 --> 0:03:55.600 we're really grateful to have them on the program again, Michael, 0:03:55.800 --> 0:03:59.280 thanks for coming on. Thank you so great to be back. 0:03:59.640 --> 0:04:02.200 So did we get that right? China had two point 0:04:02.200 --> 0:04:07.320 three GDP growth in Lots of commentators described that as 0:04:07.960 --> 0:04:12.880 proof of Chinese exceptionalism, proof of the economic model. But 0:04:13.560 --> 0:04:17.400 you've written that you saw it slightly differently. What was 0:04:17.520 --> 0:04:22.480 China's year like for you? How strong was the economy? Actually? Well, 0:04:22.520 --> 0:04:25.640 the first point that I make pretty often and probably 0:04:25.920 --> 0:04:29.960 the last time we spoke, is that GDP in China 0:04:30.040 --> 0:04:32.760 means something very different than it means in other countries. 0:04:32.839 --> 0:04:37.000 GDP and China is an input and in other countries 0:04:37.040 --> 0:04:41.120 it's a measure of output, and that makes it non comparable. 0:04:41.240 --> 0:04:44.920 What what happened last year in China is that there 0:04:44.920 --> 0:04:49.320 are basically two types of growth that Beijing focuses on. 0:04:49.520 --> 0:04:53.760 There is what you know, what we call high quality growth, 0:04:53.800 --> 0:04:57.400 which is really the growth in consumption, the growth in 0:04:57.600 --> 0:05:00.680 business investment, which is closely tie to the growth and 0:05:00.720 --> 0:05:05.640 consumption and growth in exports. And then there is the 0:05:05.720 --> 0:05:10.200 growth that everyone recognizes is low quality growth, which Beijing 0:05:10.279 --> 0:05:14.320 has has pledged to reduce, and that's the growth that 0:05:14.400 --> 0:05:20.600 arises from increases in public sector infrastructure spending, much of 0:05:20.640 --> 0:05:25.359 which is really nonproductive and in real estate development. And 0:05:25.400 --> 0:05:28.600 it's not a big secret that China has one of 0:05:28.640 --> 0:05:32.800 the fastest growing debt ratio's debt burdens in the world, 0:05:33.320 --> 0:05:37.719 mostly generated by this investment in in in public sector 0:05:37.760 --> 0:05:42.960 infrastructure and real estate development. So um, what matters is 0:05:43.080 --> 0:05:47.920 how growth developed last year, and and it's no big surprise, 0:05:48.040 --> 0:05:51.799 is no big secret that you know, the quality growth, 0:05:52.000 --> 0:05:56.880 that is, consumption and business investment were down quite substantially. 0:05:57.480 --> 0:06:01.600 Exports were up, but collectively they were net down. And 0:06:01.640 --> 0:06:05.760 the only reason China had two point three percent real 0:06:05.839 --> 0:06:10.000 GDP growth is because of a seven percent surge in 0:06:10.080 --> 0:06:13.159 real estate development. And uh, I forget the number, but 0:06:13.320 --> 0:06:16.200 more than more than three or four percent growth in 0:06:16.279 --> 0:06:19.839 public sector infrastructure spending. And you can see that in 0:06:20.080 --> 0:06:26.600 you know, the soaring steel prices, copper prices, sales of machinery, etcetera, etcetera. Now, 0:06:26.760 --> 0:06:29.520 if this stuff was good growth, there wouldn't be a 0:06:29.520 --> 0:06:32.440 big debate about trying to restrain it. You know, if 0:06:32.240 --> 0:06:35.000 if you spend a hundred dollars to build the bridge 0:06:35.000 --> 0:06:37.279 and it makes you a hundred and fifty dollars richer, 0:06:37.760 --> 0:06:40.440 there shouldn't be any debate about whether or not you 0:06:40.440 --> 0:06:42.560 should build the bridge. The fact that there is such 0:06:42.560 --> 0:06:44.920 a bridge as a recognition that it's really not worth 0:06:44.960 --> 0:06:48.160 a hundred dollars. It's worth less than that. And that's 0:06:48.240 --> 0:06:51.719 the growth that was generated. That's what took China from 0:06:51.720 --> 0:06:54.920 a negative growth rate to a positive growth rate. And 0:06:54.960 --> 0:06:59.279 the coral corollary of that, of course, is that China's 0:06:59.400 --> 0:07:04.760 debt to GDP ratio went up twenty five percentage points 0:07:04.960 --> 0:07:07.520 last year. The year before that was pretty bad, it 0:07:07.600 --> 0:07:10.920 went up six percentage points. So that really gives you 0:07:10.960 --> 0:07:15.400 an idea of how China generated growth this year. You 0:07:15.400 --> 0:07:18.600 could argue that that was a great accomplishment, but you 0:07:18.640 --> 0:07:21.480 could also argue that it left the economy warsaw not 0:07:21.640 --> 0:07:26.280 better off. You know, on this question of um disaggregating 0:07:26.360 --> 0:07:29.920 high quality growth and low quality growth. I mean, one 0:07:29.960 --> 0:07:32.360 of the things that you know, since I've been following 0:07:32.600 --> 0:07:36.360 markets and economics for a little over a decade now professionally, 0:07:36.400 --> 0:07:40.000 I remember like two thousand nine, two thousand ten, and 0:07:40.040 --> 0:07:42.960 they posted those videos on YouTube of the so called 0:07:44.120 --> 0:07:48.360 ghost cities or you know, all these apartment towers that 0:07:48.400 --> 0:07:51.120 were completely unoccupied, like oh, look at all this wasteful spending, 0:07:51.240 --> 0:07:53.480 or there would be like a train station but no 0:07:53.600 --> 0:07:56.560 city around it, and then it seems like years later 0:07:57.440 --> 0:08:00.200 those cities did actually end up becoming occupied and those 0:08:00.240 --> 0:08:02.120 train stations that seem like they were in the middle 0:08:02.120 --> 0:08:05.960 of nowhere looked like, uh, actually people are using them. 0:08:06.040 --> 0:08:08.880 So a is that true that a lot of what 0:08:09.000 --> 0:08:14.880 was characterized as malinvestment did become productive investment and be 0:08:15.120 --> 0:08:19.320 how can one identify in real time that what you 0:08:19.440 --> 0:08:24.280 characterize as bad growth or mediocre growth um low quality 0:08:24.320 --> 0:08:28.800 growth is in fact going to be um unproductive public investment. 0:08:29.560 --> 0:08:32.480 The the answer to your first question is that China 0:08:32.559 --> 0:08:35.280 is a huge country. It's really really I don't like 0:08:35.360 --> 0:08:38.800 to use specific examples because you can prove anything you want. 0:08:39.280 --> 0:08:43.240 There's certainly are areas that were considered to be overbuilt 0:08:43.280 --> 0:08:46.680 that filled up. There are even more areas that have 0:08:46.800 --> 0:08:49.559 never really filled up. If you go to ken Jin, 0:08:49.760 --> 0:08:53.640 for example, Uh, they decided that they wanted to become 0:08:54.080 --> 0:08:57.240 one of the leading financial centers of China. There's about 0:08:57.280 --> 0:08:59.960 ten cities that want to do that. And the way 0:09:00.200 --> 0:09:03.920 you become a leading financial center, according to Changin, is 0:09:03.960 --> 0:09:08.600 you build an entire Manhattan worth of office buildings on 0:09:08.640 --> 0:09:12.040 the outskirts of the city, and they did that. That 0:09:12.200 --> 0:09:14.840 area is quite visited, but it is visited by tourists. 0:09:14.880 --> 0:09:18.640 Nobody actually lives there, and it's really spectaculor. You've got 0:09:18.640 --> 0:09:22.800 all these beautiful buildings, just thousands of them. They're all empty, 0:09:22.880 --> 0:09:25.200 so you can you know, it's easy for you to 0:09:25.240 --> 0:09:28.880 find examples or counter examples. That's why I look at 0:09:28.920 --> 0:09:33.839 the aggregate numbers, and China has had the highest investment 0:09:33.880 --> 0:09:38.080 growth rate in history for forty years and the highest 0:09:38.200 --> 0:09:42.520 investment share of GDP of any country in history, ten 0:09:42.600 --> 0:09:47.400 percentage points higher than number two, which was South Korea 0:09:47.520 --> 0:09:49.560 for a brief period, but China has had it for 0:09:49.600 --> 0:09:52.800 thirty or forty years, and that alan should worry you. 0:09:52.880 --> 0:09:57.600 But more importantly is the debt trajectory, because when you 0:09:57.720 --> 0:10:02.360 borrow money to fund invest stament, if the investment is productive, 0:10:02.800 --> 0:10:06.480 by definition, your debt to GDP ratio can't go up, 0:10:06.520 --> 0:10:09.520 because while your debt goes up, your GDP should be 0:10:09.559 --> 0:10:13.520 going up at least as quickly. Chinese debt rose very 0:10:13.600 --> 0:10:17.240 quickly in the nine nineties, but nobody noticed it because 0:10:17.360 --> 0:10:20.840 g d P rose even more quickly it was only 0:10:21.320 --> 0:10:26.439 during some period around the first decade of the century 0:10:26.520 --> 0:10:30.280 where suddenly the growth in debt picked up and accelerated 0:10:30.360 --> 0:10:35.080 were while the growth and GDP slowed down. Because most 0:10:35.120 --> 0:10:38.400 of the debt goes to fund investment that cannot possibly 0:10:38.480 --> 0:10:42.440 happen if the if the investment is productive. You know, 0:10:42.559 --> 0:10:46.320 in theory, if you invest in in kindergartens, you don't 0:10:46.320 --> 0:10:48.960 get the results for another twenty or thirty years. But 0:10:49.080 --> 0:10:52.080 that's a tiny part of the investment. Most of it 0:10:52.120 --> 0:10:55.360 is bridges and subways and things like that, and we 0:10:55.440 --> 0:10:58.440 haven't seen the benefits yet. So in my mind, there's 0:10:58.480 --> 0:11:02.320 no question that much of this investment is misallocated. But 0:11:02.840 --> 0:11:06.960 what I think doesn't matter. Clearly Beijing is very worried 0:11:06.960 --> 0:11:09.600 about this. This is why they're having this huge debate 0:11:10.080 --> 0:11:14.000 about how much growth they need. If the growth was good, 0:11:14.120 --> 0:11:16.240 you shouldn't debate it. If you can get eight percent, 0:11:16.280 --> 0:11:18.400 get eight percent. If you can get ten percent, get 0:11:18.440 --> 0:11:22.360 ten percent. But they're not trying to get eight percent 0:11:22.440 --> 0:11:24.560 or ten percent, which they easily could they have the 0:11:24.559 --> 0:11:28.880 debt capacity, because clearly they don't believe in that growth, 0:11:28.920 --> 0:11:30.959 and that's why you have all of this talk about 0:11:31.000 --> 0:11:35.679 rebalancing and dual circulation. This is a clear recognition that 0:11:35.720 --> 0:11:38.280 there is a serious problem with the quality of growth. 0:11:39.559 --> 0:11:41.920 Could you dive into that a little bit more so? 0:11:42.559 --> 0:11:46.520 Beijing is obviously looking at a trade off between economic 0:11:46.559 --> 0:11:51.080 growth and more debt accumulation. How are they thinking about 0:11:51.080 --> 0:11:54.680 that and what are the political calculations that you see 0:11:54.679 --> 0:11:56.720 them making at the moment. Well, in a couple of 0:11:56.760 --> 0:12:02.240 weeks will start the famous two Sessions. Typically that's when 0:12:02.240 --> 0:12:05.120 they set out the plans for the year and for 0:12:05.120 --> 0:12:08.440 for people like you and me. The most important part 0:12:08.440 --> 0:12:11.640 of the two sessions is that they announced the GDP 0:12:11.800 --> 0:12:14.960 growth target for the year most or as we know 0:12:15.160 --> 0:12:17.920 by December, what the GDP growth target is. Last year 0:12:18.320 --> 0:12:22.200 there wasn't one, and this year there probably won't be 0:12:22.240 --> 0:12:25.440 a GDP growth target. But it's clear that there is 0:12:25.480 --> 0:12:29.200 a ferocious debate about growth versus debt. So you have 0:12:29.360 --> 0:12:32.240 one group of people saying it is really important to 0:12:32.320 --> 0:12:35.079 keep the growth rate as as high as possible, by 0:12:35.080 --> 0:12:37.400 which you know a lot of people are saying GDP 0:12:37.520 --> 0:12:40.720 growth this year in China will be eight to I 0:12:40.760 --> 0:12:43.320 don't think that's the case. I think they're more likely 0:12:43.360 --> 0:12:47.160 to go either between six and seven percent of the 0:12:47.200 --> 0:12:50.719 debt guys have the upper hand, or seven and eight 0:12:50.760 --> 0:12:53.400 percent of the growth guys have the upper hand. But 0:12:53.480 --> 0:12:57.880 either way, that's the nature of the debate that we're hearing. 0:12:58.520 --> 0:13:02.120 On the one hand, you have the politicos, the provincial leaders, 0:13:02.200 --> 0:13:05.320 and you know, some of the military and foreign affairs 0:13:05.320 --> 0:13:07.640 guys saying we need to keep growth rates as high 0:13:07.720 --> 0:13:12.640 as possible. On the other hand, there's almost unanimity among academics, 0:13:13.000 --> 0:13:16.160 m the Central Bank, people in the Ministry of Finance 0:13:16.240 --> 0:13:21.280 and the banking regulators, almost unanimity not complete, saying that no, 0:13:21.520 --> 0:13:24.760 we absolutely have to get debt under control. And so 0:13:24.840 --> 0:13:27.920 that's really what the discussion is going to be. Uh. 0:13:28.240 --> 0:13:30.680 But it's very hard to do. You cannot get debt 0:13:30.720 --> 0:13:33.960 under control, in my opinion, unless you're willing to accept 0:13:34.040 --> 0:13:37.319 growth rates of two to three percent or maybe even lower. 0:13:37.800 --> 0:13:41.640 And I don't think even the hardest core debt warriors 0:13:42.200 --> 0:13:45.680 are willing to UH to see growth drop that quickly. So, 0:13:45.920 --> 0:13:49.720 you know, thinking back pre virus, and I think I 0:13:49.720 --> 0:13:52.240 don't remember when we had you on before, but it's 0:13:52.240 --> 0:13:54.439 been a consistent theme of your work, and we should, 0:13:54.440 --> 0:13:57.680 of course mentioned the book that you published this last 0:13:57.760 --> 0:14:01.720 year with Matt Klein Trade war are class wars, which 0:14:01.880 --> 0:14:06.439 seemed very timely. But this idea that Chinese growth has 0:14:06.440 --> 0:14:09.559 sort of come expense, come at the expense of household 0:14:09.559 --> 0:14:14.320 buying power, that it's so heavily focused on investment, not 0:14:14.440 --> 0:14:19.320 much consumption. Chinese households are forced to or the facto, 0:14:19.520 --> 0:14:21.760 forced to save a lot. You know, when when the 0:14:21.800 --> 0:14:23.960 when the crisis hit, it made me wonder, It's like, well, 0:14:24.080 --> 0:14:26.280 is this going to change? Is there going to be 0:14:26.360 --> 0:14:28.920 an increase in the social safety net so that households 0:14:28.920 --> 0:14:31.400 don't have to spend more, Will there be more public 0:14:31.440 --> 0:14:35.080 health spending? And will that infrastructure get built out also 0:14:35.200 --> 0:14:38.800 sort of allowing consumers to spend more. It seemed like 0:14:39.280 --> 0:14:42.880 that could be a catalyst for some meaningful change along 0:14:42.880 --> 0:14:46.920 that dimension. And I'm curious, you know, in the short term, yes, okay, 0:14:47.280 --> 0:14:50.360 lots of the growth has been um, you know, government 0:14:50.680 --> 0:14:54.800 spending on infrastructure. But is there any shift afoot in 0:14:54.840 --> 0:14:57.560 this sort of rebalancing of the economy that you've been 0:14:57.560 --> 0:15:01.520 talking about for years. There's certainly a lot more a 0:15:02.400 --> 0:15:05.960 focus on it, and it's become very fashionable now for 0:15:06.320 --> 0:15:10.240 local government officials to make one announcement after another that 0:15:10.280 --> 0:15:14.720 they're boosting consumption or upgrading consumption was the was the 0:15:14.760 --> 0:15:19.960 fashionable phrase. But the problem is that we we know 0:15:20.120 --> 0:15:23.680 why the consumption share of g d P in China 0:15:23.960 --> 0:15:28.920 is so low. It's it's just arithmetic. Households, ordinary households. 0:15:29.480 --> 0:15:34.000 They retain the lowest share of GDP of any country 0:15:34.040 --> 0:15:38.359 probably in history. And as a result, since most consumption 0:15:38.480 --> 0:15:42.760 is household consumption, if you have a low household consumption share, 0:15:42.920 --> 0:15:46.480 that low household income share, then you're gonna have a 0:15:46.520 --> 0:15:51.240 low household consumption share. So how do you resolve that problem? Well, 0:15:51.480 --> 0:15:54.160 there's really only two weeks, and again this is just arithmetic. 0:15:54.240 --> 0:15:56.520 You can you can keep shops open later at night, 0:15:56.560 --> 0:15:59.520 which they're proposing to do. You can, you know, make 0:15:59.560 --> 0:16:05.440 shopping malls more more beautiful, and you can improve online delivery, etcetera, etcetera. 0:16:05.760 --> 0:16:08.760 But none of that has an impact on on on 0:16:08.880 --> 0:16:13.040 consumption because basically the way you consume is you have 0:16:13.360 --> 0:16:17.040 a an income, and out of that income, you serve 0:16:17.080 --> 0:16:20.240 a certain you save a certain amount, and then you know, 0:16:20.320 --> 0:16:23.200 the rest is your consumption budget. If you spend more 0:16:23.240 --> 0:16:25.320 money late at night, you're going to spend less money 0:16:25.320 --> 0:16:28.440 in the day. There's only two ways to get you 0:16:28.520 --> 0:16:31.960 to consume a bigger share of GDP. One way is 0:16:32.000 --> 0:16:35.280 to encourage lots of consumer debt, and that happened in 0:16:35.320 --> 0:16:38.320 the last five or six years, a household debt surge 0:16:39.320 --> 0:16:41.720 to buy some measures higher than it is in the 0:16:41.840 --> 0:16:45.280 US UM And then the other way is to increase 0:16:45.320 --> 0:16:47.880 the household income share, and that's what you're talking about, 0:16:48.000 --> 0:16:52.440 by strengthening, strengthening the social safety net, raising wages, you know, 0:16:52.480 --> 0:16:57.120 all of these various measures. But the problem is that 0:16:57.240 --> 0:17:01.000 if I increase your share of GDP, by definition, I 0:17:01.040 --> 0:17:04.040 have to reduce somebody else's share. And that's the part 0:17:04.119 --> 0:17:08.800 that's never discussed um but we know basically, again it's 0:17:08.840 --> 0:17:14.680 just arithmetic. You have to reduce the share retained by 0:17:14.760 --> 0:17:18.359 um UH, local governments and the local elites in order 0:17:18.400 --> 0:17:22.800 to increase the share retained by ordinary households. You can 0:17:22.840 --> 0:17:25.240 also do it by screwing the business sector, but they 0:17:25.240 --> 0:17:27.280 don't want to do that because the business sector is 0:17:27.320 --> 0:17:30.359 the best part of the economy. But this is politically 0:17:30.400 --> 0:17:33.440 really tough to do. And again it's something new. We've 0:17:33.480 --> 0:17:37.320 known this for a while. It's just politically extremely difficult 0:17:37.640 --> 0:17:41.320 to manage these transfers, and that's what they have to resolve. 0:17:57.280 --> 0:18:00.760 So in a year like where we saw the government 0:18:00.880 --> 0:18:05.119 ramp up spending in nonproductive parts of the economy, and 0:18:05.160 --> 0:18:09.600 we also saw Chinese manufacturing really come roaring back, partly 0:18:09.640 --> 0:18:13.040 because or mostly because the US and the rest of 0:18:13.080 --> 0:18:15.959 the world we're buying lots of things like face masks 0:18:15.960 --> 0:18:21.880 and computers. How much of that rebalancing that China has 0:18:21.920 --> 0:18:24.560 been trying to do for so long now, you know, 0:18:24.800 --> 0:18:28.080 moving more of its economy towards consumption, how much of 0:18:28.080 --> 0:18:33.400 that actually got undone in and how difficult is it 0:18:33.440 --> 0:18:40.880 going to be to kind of um reverse that dynamic. Well, first, Tracy, 0:18:40.960 --> 0:18:43.240 let me tell you I'm a little bit skeptical about 0:18:43.400 --> 0:18:47.120 the traditional argument for the surge in China's trade surplus. 0:18:47.160 --> 0:18:50.239 I don't think it was because people bought lots of 0:18:50.320 --> 0:18:54.080 masks and and things like that, because had that been 0:18:54.119 --> 0:19:00.320 the story, the increase in Chinese export earnings would really 0:19:00.320 --> 0:19:04.040 have led to an increase in Chinese imports, and it didn't. 0:19:04.080 --> 0:19:08.560 Imports were actually down. So my view is a little 0:19:08.560 --> 0:19:12.080 bit different. If you look at how China responded to 0:19:12.160 --> 0:19:14.720 COVID nineteen, not just China, there were a few other 0:19:14.760 --> 0:19:17.560 countries in Asia that did the same thing. It was 0:19:17.680 --> 0:19:20.800 very different from the way the US and Europe responded. 0:19:20.840 --> 0:19:24.360 In the US and Europe, this was treated mainly as 0:19:24.400 --> 0:19:28.160 a demand side problem, and most of the policy responses 0:19:28.160 --> 0:19:33.200 were aimed at boosting demand and basically by distributing income 0:19:33.240 --> 0:19:36.119 to households. So what you see in Europe and in 0:19:36.160 --> 0:19:41.520 the US is that the proxy for consumption recovered quite strongly. 0:19:42.160 --> 0:19:46.400 The proxy for industrial production was still negative for the year. 0:19:47.440 --> 0:19:50.280 But in China the response was very different. There was 0:19:50.520 --> 0:19:54.320 very little demand side boost, basically nothing. It was all 0:19:54.400 --> 0:20:01.639 supply side boost, cutting taxes on corporates, improving logistics, subsidizing manufacturing, etcetera. 0:20:02.240 --> 0:20:07.679 So last year industrial production recovered very strongly. It was positive. 0:20:08.560 --> 0:20:11.960 The proxy for consumption was negative. I think don't quote 0:20:11.960 --> 0:20:13.359 me on this, but I think it was five or 0:20:13.400 --> 0:20:17.440 six percent negative. So there's only you know, there's only 0:20:17.520 --> 0:20:19.280 one way, or there's only a couple of ways you 0:20:19.320 --> 0:20:24.480 can resolve it. If your industrial production recovers much more 0:20:24.600 --> 0:20:29.680 strongly than your consumption, then the only ways to resolve 0:20:29.720 --> 0:20:33.480 it is either with a significant increase in investment, which 0:20:33.520 --> 0:20:37.400 we saw or if the rest of the world has 0:20:37.480 --> 0:20:40.600 the opposite reaction, you can also resolve it with a 0:20:40.680 --> 0:20:45.399 significant increase in your trade surplus. And that's what happened 0:20:45.400 --> 0:20:51.320 in China. Exports surged, imports actually dropped last year, which 0:20:51.320 --> 0:20:55.479 shouldn't happen when exports surge, but the result was China 0:20:55.640 --> 0:20:58.960 is now running some of the biggest monthly trade surplus 0:20:59.080 --> 0:21:01.800 is that it has in its history. Now this is 0:21:01.800 --> 0:21:06.320 a problem because the reason the US and Europe boosted 0:21:06.359 --> 0:21:09.080 the demand side is of course they want that increase 0:21:09.119 --> 0:21:12.639 in demand to feed into a boost in supply side 0:21:12.640 --> 0:21:15.639 and employment at home, and part of it did, but 0:21:15.760 --> 0:21:18.240 part of it leaked abroad to Asia, and I know 0:21:18.880 --> 0:21:21.560 some of our friends at Treasury are looking at this 0:21:21.800 --> 0:21:25.359 very very closely. Now. I don't know how how long 0:21:25.440 --> 0:21:28.359 it can go on that China can run these huge 0:21:28.480 --> 0:21:32.000 trade surpluses, but I would guess that this is going 0:21:32.040 --> 0:21:36.560 to create increasing tensions during the year, which means that 0:21:36.680 --> 0:21:39.239 China has to find a different way of resolving this, 0:21:39.440 --> 0:21:43.040 either more investment, which it doesn't want to do, or 0:21:43.440 --> 0:21:46.920 much more pressure on rebalancing income, which, as I said, 0:21:47.040 --> 0:21:50.439 is is easy to explain but politically really hard to 0:21:50.480 --> 0:21:55.280 pull off. I'm glad you brought in the international tension 0:21:55.320 --> 0:21:58.480 because I was, you know, curious your take. It seems 0:21:58.560 --> 0:22:01.600 like the US is really in the middle of a 0:22:01.680 --> 0:22:07.240 pretty serious ideological policy pivot in terms of its appreciation 0:22:07.320 --> 0:22:10.159 of the power of fiscal stimulus. And of course, we 0:22:10.200 --> 0:22:12.840 saw one of the biggest fiscal packages of all time 0:22:13.520 --> 0:22:17.480 with the Cares Act basically a year ago. We saw 0:22:17.520 --> 0:22:20.080 another round of checks go out. At the end of 0:22:21.320 --> 0:22:23.879 it looks like we're going to get yet another pretty 0:22:23.880 --> 0:22:28.640 substantial stimulus, perhaps almost as much as two trillion, again, 0:22:28.680 --> 0:22:31.840 lots of checks, and we might get another spending plan 0:22:32.080 --> 0:22:37.359 even after that later in if Biden can push forward 0:22:37.400 --> 0:22:40.120 the Build Back Better plan, which would presumably be more 0:22:40.480 --> 0:22:44.159 long term and um infrastructure based. But you know, you 0:22:44.480 --> 0:22:48.320 mentioned this idea of the fiscal stimulus leaking and ultimately 0:22:48.400 --> 0:22:54.080 turning into incomfort for China, and I'm curious, a how 0:22:54.160 --> 0:22:56.919 you see that emerging as we get further rounds of stimulus, 0:22:56.960 --> 0:23:00.440 and be just in your view, how US policy makers 0:23:00.720 --> 0:23:04.480 should be thinking about using fiscal firepower in the most 0:23:04.480 --> 0:23:07.760 effective way such that it actually has uh, it's uh, 0:23:07.880 --> 0:23:12.480 it's desired goal of making the U s economy more Robot, Well, 0:23:12.520 --> 0:23:15.119 I think you're You're right, Joe. In the seventies we 0:23:15.240 --> 0:23:18.679 decided that fiscal policy doesn't work. It's all monetary. And 0:23:18.720 --> 0:23:21.640 I think now we're you know, we're reversing. We're figuring 0:23:21.720 --> 0:23:24.440 that the monetary policy no longer works, it's got to 0:23:24.480 --> 0:23:27.560 be fiscal and I think that makes a lot of sense. 0:23:28.040 --> 0:23:29.800 It seems to me that there are a couple of 0:23:29.840 --> 0:23:32.720 things that the US can do um that are that 0:23:32.720 --> 0:23:35.600 that that would be quite positive for US growth. First 0:23:35.600 --> 0:23:37.399 of all, if you believe that there is a demand 0:23:37.480 --> 0:23:41.439 side problem and that the reason businesses aren't investing is 0:23:41.440 --> 0:23:43.399 not because the cost of capital is too high, but 0:23:43.440 --> 0:23:46.600 because there's no demand, then it seems to me that 0:23:46.640 --> 0:23:50.520 if you can create demand, for example, by increasing the 0:23:50.560 --> 0:23:55.520 income of ordinary households, then businesses will begin to invest 0:23:56.040 --> 0:23:59.520 and the cost of of of those transfers to the 0:23:59.520 --> 0:24:04.399 households sector becomes self liquidating because while we increase, either 0:24:04.440 --> 0:24:09.159 through debt or monetary creation, the income of the household sector, 0:24:09.240 --> 0:24:13.359 there's no inflationary or debt impact because the supply side 0:24:13.400 --> 0:24:17.560 will automatically adjust. Americans will produce more stuff, or they'll 0:24:17.560 --> 0:24:20.400 produce the same amount of stuff with less household debt 0:24:21.040 --> 0:24:24.040 um so there will be no net cost to the US. 0:24:24.080 --> 0:24:28.360 It's a self liquidating process the other self liquidating process 0:24:28.359 --> 0:24:31.040 in my opinion, and I know there's some controversy about this. 0:24:31.800 --> 0:24:34.639 I'm surprised that there is. But the US has really 0:24:34.680 --> 0:24:39.560 bad infrastructure. It has enormous opportunities to upgrade the infrastructure, 0:24:39.600 --> 0:24:42.280 in which case, again, if you fund it by debt 0:24:42.400 --> 0:24:44.600 or if you fund it by money creation, it doesn't 0:24:44.600 --> 0:24:49.040 really matter because whatever increase on the demand side, the 0:24:49.119 --> 0:24:52.840 increase on the supply side is even greater. Obviously, if 0:24:52.880 --> 0:24:56.680 you repair the roads in New York City, the savings 0:24:56.800 --> 0:24:59.440 to American car owners is much greater than the cost 0:24:59.480 --> 0:25:02.200 of repair the roads, and and on and on and on. 0:25:02.560 --> 0:25:05.399 So the the US can do both of these things, 0:25:05.400 --> 0:25:07.159 and I think they're the right things to do. In 0:25:07.240 --> 0:25:10.280 the long term, infrastructure is probably more important, but in 0:25:10.320 --> 0:25:13.080 the short term, boosting household income for the poorest is 0:25:13.160 --> 0:25:16.320