e-magazine
The Hot Zone
China's newly announced air defense identification zone over the East China Sea aims to shore up national security
Current Issue
· Table of Contents
· Editor's Desk
· Previous Issues
· Subscribe to Mag
Subscribe Now >>
Expert's View
World
Nation
Business
Finance
Market Watch
Legal-Ease
North American Report
Forum
Government Documents
Expat's Eye
Health
Science/Technology
Lifestyle
Books
Movies
Backgrounders
Special
Photo Gallery
Blogs
Reader's Service
Learning with
'Beijing Review'
E-mail us
RSS Feeds
PDF Edition
Web-magazine
Reader's Letters
Make Beijing Review your homepage
Hot Links

cheap eyeglasses
Market Avenue
eBeijing

Expert's View
Special> Coping With the Global Financial Crisis> Expert's View
UPDATED: January 4, 2009 NO. 2 JAN. 8, 2009
CRISIS FOCUS: Different Situation, Different Solution
Share

The spreading world economic crisis poses grim challenges for both China and the United States, the world's two leading economies. Is there a universal remedy for both? Edmund Strother Phelps, Jr., an American economist and the winner of the 2006 Nobel Memorial Prize in Economic Sciences, made an in-depth analysis of the situation at the Third China Beijing International Cultural and Creative Industry Expo in December. Edited excerpts from his speech follow.

In my opinion and in the opinion of most economists in the United States, the speculative fever in housing prices and other assets was bound to break. And when it did, it was bound to lead to a mounting collapse of assets prices and difficulties for the banking industry in the United States.

And as it happened, it was the new expectations in 2007 of higher interest rates that appeared to trigger the end of the asset price quote. Once asset prices wavered, once they stopped going up every week or every month, speculators lost their confidence that prices would continue to rise for houses and other assets. The foundation for sky-high house prices was finally recognized to be simply not there.

And once asset prices started coming down, there was less investment in new housing by the construction industry. And once wealth started coming down, consumption demand fell as well. Now, China is being hurt by reduced American imports and by an increase in the uncertainty premium in the capital markets and in the bond markets.

The question now is what will be desirable for China to do in response to the decline of export demand-demand for Chinese exports. The adjustment will have to involve diverting resources from export supply that's counterbalancing the drop in export demand with a drop in export supply. That could be done by a cutback of total output of supply-slower growth for one-or by an increase in consumer demand, which would pull resources away from export supply. It seems clear to me that the best choice for the government is to boost investment demand along with consumer demand.

How could such a consumer stimulus be implemented in China? That is not an easy question. A tax cut on household income is not a very well-focused instrument for that purpose. It would stimulate consumption less than what was hoped for. Perhaps government rebates for households or companies for each household expenditure on finished consumer goods would be more effective. Households would have to spend in order to earn the rebates.

I would point out that stimulating consumption in the situation which China has created for itself would oppose efforts to stimulate consumption in the United States. In the United States, the problem is that the real price in the capital goods industry has dropped relevant to the price index for consumer goods by 25 to 40 percent.

The task is to restore or improve the prices of capital goods. Stimulating consumption in the United States would tend to raise the prices of consumer goods rather than asset prices, which is the wrong direction for us to go.



 
Top Story
-Protecting Ocean Rights
-Partners in Defense
-Fighting HIV+'s Stigma
-HIV: Privacy VS. Protection
-Setting the Tone
Most Popular
 
About BEIJINGREVIEW | About beijingreview.com | Rss Feeds | Contact us | Advertising | Subscribe & Service | Make Beijing Review your homepage
Copyright Beijing Review All right reserved