Understanding the Five Levels of Thinking in China's Economy - Macroeconomics from a Chinese Perspective

Understanding the Five Levels of Thinking in China’s Economy – Pan Deng’s Notes on Macroeconomics

power of thought

"The power of the ideas of economists and political philosophers is often beyond the expectations of ordinary people. In fact, these ideas are the only ones who rule the world. Many practitioners think that they are not affected by any academic theory, but they are often mistaken. Slave of a dead economist. A madman in power who thinks he is inspired by heaven, but whose fantasies came from some poor scholar some years ago. I am sure that the power of vested interests cannot help being Excessive exaggeration is far less powerful than the gradual erosion of ideas... sooner or later, to the formation of ideas of good or evil - more dangerous are ideas than vested interests." - John
Maynard · Keynes, The General Theory, 24(V) 1936

• What skills does an economics master need?

"The study of economics does not seem to require that exceptional and unique talent. Intellectually, isn't economics a remarkably simple subject compared with the depths of philosophy and pure science? Yet excellent, Even qualified economists are rare. A simple subject, but few are proficient in it! This statement seems contradictory, but it seems to be explained here: that is, a master in economics must be gifted Synthesis. He has to be pretty good at everything, and then combine these different talents that are difficult to knead together. In a way, he has to be a mathematician, a historian, and a political scientist at the same time. He must be able to comprehend symbols and to speak. He must look back and look forward to the future while studying the present. Nothing in human nature and customs is entirely outside his vision. He must be passionate, Seeking purpose without preconceptions. He must be as remote as the artist and as grounded as the statesman."
--John Maynard Keynes,

Study the three levels of macroeconomics

1. Macro is macro, micro is micro (not yet started)
2. The macro is the sum of the micro
3. The macro is not just the sum of the micro

Understanding the Five Levels of Thinking of China's Economy

The first level of thinking: only GDP theory

"Development is the last word"

• clear direction of work
• Established the status of "development" (use development to solve problems encountered in development)

In practice, development is often based on GDP, forming a "GDP-only theory"

• Simple and clear, easy to implement
• The local government's GDP competition makes the government a "helping hand" rather than a "predatory hand" of the economy
• GDP is the best economic statistical indicator of national welfare that can be found

The Second Level of Thinking: Naive Market School (The Influence of Neo-Neoclassical Comprehensive World View on China's Economy)

The relationship between "development" and "marketization"

• Since the reform and opening up, development is the goal, marketization is the means, and there is no contradiction between the two
• In the post-crisis era, the downward pressure on economic growth has increased, and development has become increasingly dependent on government-led policies for stabilizing growth, and there has been a contradiction between market-oriented policies

naive market pie

• It is believed that the current problem is mainly due to the insufficient degree of marketization
• It is believed that the "old road" style of steady growth has delayed (or even hindered) the advancement of marketization
• Believe that the economic structure needs to be adjusted through market clearing
• view the market as a target

Level 3 Thinking: Realism (Sub-optimal Theoretical Perspective)

Suboptimal Theory (Lipsey, Lancaster, 1953)

• The optimal market economy needs a series of preconditions to ensure
• When the preconditions cannot be met at the same time, it is not that the more preconditions are realized, the better the result
• Finding the second best often requires a case-by-case analysis
• The analogy of the prescription (less medicine may become poison, at this time 9 poisons are more poisonous than 8 poisons)

Suboptimal Theory Is the Theoretical Basis of Two Ways of Thinking in the Transformation of the Soviet Union and the East

• shock therapy
• incremental reform

The imbalance of China's economic structure is rooted in income distribution

• The structure of income distribution determines the lack of private demand (especially private consumption) in the demand structure
• Attempts to "clear the market" until the income structure is adjusted can only lead to a hard landing
• "Taking the old road" to stabilize growth is the second-best option

The third level of thinking is the negation of the negation of the first level of "GDP theory"

The fourth level of thinking: the market faction of realism

Jumping out of "second-best" through realistic market-oriented reforms

• Market-oriented reform is a process in which the real constraints faced by the market are constantly exposed and resolved
• The throes of economic conditions slipping from "sub-optimal" to "second-best" point to the real constraints that constrain the success of marketization
• Only by analyzing problems realistically and loosening constraints in a down-to-earth manner can we continue to promote marketization

The Difference Between Realistic Marketization and Utopian Marketization

• Marketization of Realism: Seeing the Pains of Reform as a Signal to Discover Key Constraints
• Utopian marketization: ignoring the signals released by labor pains, wishful thinking that as long as the reform continues, labor pains will disappear, but the result is long-term labor pains
• Different ways of ticking according to the Western checklist

example

• Interest rate liberalization reform: Distortion of financing platforms—financing platform cleaning—local debt replacement
• Awareness of steady growth

The marketization of realism is the negation of the negation of utopian marketization (the second layer)

The fifth layer of thinking: chief designer thinking

The breakthrough of key constraints is not accidental but inevitable

• a metaphor
  • A child was lost in a mountain village. The whole village searched and finally found the child
  • Where the child is and who finds it is an accident
  • The result of the child being found is inevitable (clear goals, systematic search engineering)

The Essence of Success in China's Reform and Opening-up

• "Development is the last word"
• "crossing the river by feeling the stones"

The biggest risk to China's economy right now

• The foundations of decades of reform and opening up success are being eroded
  • Development goals become blurred
  • The space for trial and error at the grassroots level is narrowing
• China's economy needs to get back on track
  • Re-emphasize that "development is the last word" and re-clarify the goals of economic work
  • Leave more space for trial and error, and encourage all parties to "cross the river by feeling the stones"
  • Persist in designing and evaluating economic policies in a realistic manner

China's economy has given another development path different from the Western mainstream economics

• Clear goals: "Development is the last word"
• Systematic search engineering: "crossing the river by feeling the stones"
• Organic combination of market and government

other aspects

The Political Significance of China’s Development—Western-style Democracy Is Not the Only Answer

• Western-style democracy
  • Focus on the process (procedural justice is more important than substantive justice)
  • Maintain the lower limit through institutional checks and balances
    • Interest groups restrict each other to reduce efficiency
    • Difficult to reach agreement when internal differences are too large, lack of execution
  • "Multiple Selection of Talents": Leaders' ability to speak is more important than ability to act
• Chinese political system
  • focus on substance
  • pursuit of the upper limit
    • The Chinese Communist Party itself is an aggregate mechanism of public opinion, with democracy and centralization
    • "Concentrate on big things" with high efficiency
  • Under the tradition of China's "election society", "select talents by merit"

The Philosophical Significance of China's Development——The Malpractice of Neoliberalism Is Increasingly Prominent

• Neo-liberalism
  • Rights take precedence over goodness, political neutrality (do not rank the various concepts of goodness at the public level)
  • more emphasis on safeguarding negative liberty
  • The atomic 'unbridled self' is dismantling communities, destroying foundations of neoliberalism
• Socialist thought with Chinese characteristics
  • Perfectionism: Promoting people to live a good life through the distribution of public resources
  • More emphasis on achieving positive freedom
  • Utilitarian overtones (three in favor)
  • seek truth from facts
• It is not that the west wind overwhelms the east wind, nor does the east wind overwhelm the west wind, but the blend of east wind and west wind

Answering Eight Questions about China's Economy

The problem of economic growth

• These are the same people, these lands, and this country. Why is there such a huge difference in the performance of China's economic growth before and after the reform and opening up?
• What did China do right after the reform and opening up, and what successful experience did China have to create such amazing economic achievements? If one-fifth of the world's population can achieve such an economic miracle on the basis of poverty, there is no reason why people in other countries cannot do it. In this sense, the successful experience of China's economy has worldwide significance, and the study of China's economic growth is closely related to the well-being of all mankind.

A large part of the reason is that the comparative advantage development strategy was adopted after the reform and opening up. After the reform and opening up, the problems of distorted macro-environment and micro-level individual production enthusiasm were solved to a certain extent. Through the decomposition of growth measurement, the most significant changes before and after the reform and opening up It is the change of technological contribution, which shows that the change of economic structure cannot be underestimated for China's growth;

• Can China continue its rapid growth over the past few decades?

Yes, because China's savings rate is higher than that of other countries. A high savings rate means sufficient long-term funds, which can ensure a high level of investment, and the level of investment can be converted into physical production capacity

• Will China fall into the middle-income trap?

No, countries caught in the middle-income trap have one thing in common: they will have a trade deficit for a certain period of time, and then fall into a balance of payments crisis. In order to get rid of the crisis, they will save money and produce a trade surplus to make up for it; In this case, China's trade surplus has lasted for a long time, and under the current situation of the high savings rate, the trade deficit will continue;

• What measures can China take to avoid the middle-income trap and prolong the period of high growth as long as possible?

As mentioned above, it is to maintain a certain proportion of trade surplus and maintain a good balance of payments to avoid falling into the middle-income trap;

• Why does the economy fluctuate?
• Will economic volatility destroy the economy?
• Should we try to smooth the economy?
• Can economic fluctuations be smoothed by macroeconomic policies?
• What policies can be used to smooth economic fluctuations?
• Why did the volatility of China's economy increase after the subprime mortgage crisis?
• In an economic downturn, should we use policies to underpin economic growth, or should we allow the economic growth to decline?

China's economic fluctuations seem to be less than those described by classical economists. It fluctuates around the potential output level, and the economy is in the process of converging to the two extremes of "overheating" or "overcooling". "In the process of extreme convergence, the output is lower than the potential output level; it is necessary to create demand and stabilize economic growth through expansionary aggregate macro policies; continue to stimulate aggregate demand through expansionary aggregate macro policies and stabilize growth; the Chinese economy After the subprime mortgage crisis, the export-oriented became domestic demand-oriented. It is precisely because of this change that China's policy factors have a greater impact on China's economy. A little carelessness in policy will cause the economy to deviate from its original state. track;

• If we believe that the proportion of household consumption in the economy is too low, how high is the appropriate proportion, and what is the standard for judging?

The intertemporal subjective preference between consumption and savings must be in line with the intertemporal subjective preferences of residents. No one can know what this ratio is. Only a fully and effectively sub-market can give the answer, but obviously China does not have such a fully and effectively market;

• What is the core reason for the low proportion of Chinese residents' consumption?

The core reason is the rigid savings of state-owned enterprises, in addition to the preventive expenditures of residents, and private enterprises are only owned by a few people, and private entrepreneurs have the desire to build great enterprises

• What is the appropriate structure for the Chinese economy?

spend more

• What is the relationship between China's internal economic structure and the outside world?

China's insufficient consumption and excess savings have caused a global savings excess, and China's infrastructure cycle has had an important impact on the global economy

• What kind of policies can achieve consumption transformation?

At present, neither structural nor aggregate economic policies can achieve consumption transformation. What needs to be done is conducive to the income distribution system of the resident sector, so that consumption transformation can be realized;

• Can simply raising wages for residents promote consumption transformation?

Obviously not, in a perfectly competitive market, the effects of rising wages and falling employment will cancel each other out. Ultimately, wage levels have nothing to do with the ratio of total wages to GDP. Therefore, the strategy of trying to increase consumption by raising wages is doomed to fail.

• How high a level of debt can the Chinese economy sustain?
• Is the current trend of rising debt sustainable?
• Should we reduce debt levels, or should we allow room for fiscal policy by allowing debt to rise?
• Will so much money piled up in the economy trigger price inflation, asset price bubbles and financial crises?
• Is the rising housing price in China a bubble blown by the currency?
• Has China already experienced excessive currency issuance, so that monetary policy must be greatly tightened to withdraw currency?
• If China's currency is not overissued, then how does that explain China's M2-to-GDP ratio being so much higher than most other countries?
• Why did China have a higher currency growth rate after the subprime mortgage crisis, but the economic growth rate was lower than before?
• Is there room for monetary policy to relax?

China's debt problem is caused by the inability of China's savings funds to flow to the world (mainly the United States) after the subprime mortgage crisis; China's special financing method, that is, a bond-based financing method, shows that China's rapid debt rise is actually financing Demand is rising rapidly, and because China has a large amount of rigid savings without return, the rise of debt seems to have no cost. When the debt income is low, the debt will continue to rise; but in fact, the rise of debt must have a ceiling, but Now we can’t talk about high debt, or even a debt crisis;
the rise in housing prices is caused by the contradiction between excessive urbanization and real estate supply. Due to the characteristics of real estate, residents must rely on bank loans and mortgages to buy houses. Therefore, it is manifested as a bubble illusion that when the monetary policy is loose, the house price will rise accordingly. China's M2/GDP is a real variable. It is still because China's savings are converted into too much money for investment, not because of the excessive issuance of currency. After the credit crisis, the higher money growth rate is not because the central bank has injected too much base money, but because in the domestic banking system, funds are stored in the country, and banks create deposits through their loans.

• The return on investment of Chinese local government financing platforms cannot cover financing costs. Are local governments playing a "Ponzi scheme"?
• Is local government financing sustainable?

It is not a "Ponzi scheme". The reason why the ROA of Chinese local government financing platforms is lower than their coupon rate is because they have not seen the externalities brought about by them. Once the externalities generated by them are added, the ROA may be higher than Its coupon rate; coupled with the government's soft budget constraints, make local government financing platforms stronger than ordinary private enterprises;

• What is the relationship between the capital market and the real economy?
• Why did the stock market deviate from the growth of the real economy in 2014~2015?
• What do financial markets have to do with macro policy?
• How to identify asset price bubbles? how to respond?

The capital market is the mirror of the real economy. The sharp deviation between the stock market and the growth of the real economy is an abnormal phenomenon. It is the unbalanced real economy that brings about an unbalanced financial system, which creates conflicts with the government that resents the imbalance; the financial market can respond to macroeconomic policies, and the market The game with the government continues; asset price bubbles are separated from the real economy, and only need to keep an eye on the development of the real economy to naturally identify abnormal phenomena in asset prices;