What is the main contradiction in the current economy? - Huxiu#
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Highlights#
Chairman Mao clearly criticized this tightening approach of living within one's means, saying: “Their minds are stuck in a loop of simple fiscal revenue and expenditure issues, going round and round, yet still cannot solve the problem.” Why can't simple fiscal balance solve the problem? Chairman Mao explained: “The quality of fiscal policy certainly affects the economy, but what determines the fiscal situation is the economy. There is no way to solve fiscal difficulties without an economic foundation, and there is no way to have a surplus in fiscal matters without economic development.” ⤴️ ^3b644597
Economic issues take precedence over fiscal issues ⤴️ ^f085e878
According to data from the National Bureau of Statistics, the proportion of formal employment in our country has significantly declined in recent years, which is directly related to changes in the economic environment. ⤴️ ^1413b30b
Theoretically, the state-owned economy does not have to operate according to profit expectations, so as long as there is sufficient political determination, the government and state-owned economy can provide enough force to promote capital accumulation, thus completely reversing the unfavorable economic situation. ⤴️ ^2713fad1
This historical process is also clearly articulated in Professor Yu Yongding's recent analysis: “The main reason for this problem is that the central government was unwilling to increase the fiscal deficit at that time and encouraged local governments to establish financing platforms to raise funds from banks and capital markets.” ⤴️ ^6d6caf9a
Chairman Mao criticized a purely benevolent governance viewpoint: “Some comrades ignore the needs of war and simply emphasize that the government should implement 'benevolent governance,' which is a mistaken viewpoint. Because if the War of Resistance against Japan is not victorious, the so-called 'benevolent governance' is merely applied to Japanese imperialism and is irrelevant to the people. Conversely, although the burden on the people may be somewhat heavy for a time, if they overcome the difficulties of the government and the army, support the War of Resistance, and defeat the enemy, then the people will have a good life, and that is the true benevolent governance of the revolutionary government.” ⤴️ ^977948aa
Teachers are awesome!
Figure 1 shows the economic growth rate and unemployment rate in the United States from the start of the Great Depression in 1930 to the start of the Korean War in 1950. It is clear that the implementation of the New Deal in 1933 did not fundamentally change the depressed state of the American economy. Although the economic growth rate temporarily rebounded, unemployment remained above 15%, failing to truly solve the problem. It was not until World War II that a comprehensive change in the situation occurred. Due to the needs of war, the United States effectively implemented a planned economy, massively reorganizing American production and consumption, absorbing a large labor force for wartime production. Therefore, within just a few years, the severe unemployment problem in the United States was resolved, and the high efficiency of the planned system led to rapid economic growth, with growth rates approaching 20%. Only then did the United States truly emerge from the Great Depression, more than a decade after it began. Without factors such as "World War II" and the wartime planned economy, whether American or global capitalism could survive remains an unknown. Moreover, after the war, once the U.S. government reduced spending, the economy would enter another recession. However, by this time, the Great Depression crisis had been resolved, and no new systemic depression occurred. With the onset of the Cold War and the outbreak of the Korean War, the U.S. economy entered a small growth period, leading to the so-called post-World War II golden age. ⤴️ ^bfbf6446
What is the main contradiction in the current economy?#
This article discusses the current economic issues in China, pointing out that fiscal debt is not the main contradiction, but rather the slowdown in economic growth. The author believes that the decline in the speed of capital accumulation is the main problem facing the Chinese economy. The article also mentions the historical experiences of the United States and the Soviet Union, emphasizing the importance of maintaining a reasonable level of capital accumulation and economic growth.
• 💡 Economic issues take precedence over fiscal issues; economic development is the main contradiction.
• 💡 The crux of the current economic problem is the decline in the speed of capital accumulation and the downward trend in economic growth.
• 💡 Solving economic problems requires actively increasing fiscal expenditure, promoting public investment, and focusing on technological breakthroughs.
More than 80 years ago, due to the invasion of the Japanese and the blockade and cutting off of fiscal funds by the Kuomintang government, the Shaanxi-Gansu-Ningxia Border Region once faced severe economic difficulties. Chairman Mao described it this way: “We once had almost no clothes to wear, no oil to eat, no paper, no vegetables; soldiers had no shoes or socks, and workers had no blankets in winter.” Despite encountering such harsh circumstances, the Chinese Communists found a path to development, guiding the economic recovery of the border region, thereby laying the economic foundation for the victory in the War of Resistance against Japan and the subsequent liberation of the entire country.
What kind of path was this? According to the currently popular view, since there is not enough fiscal money, the first step is to cut expenditures and live within one's means. This means that the government often has to reduce necessary expenditures in social and economic aspects, adhering to a conservative principle in the economy. From the perspective of world economic history, this kind of thinking is often the requirements proposed by international organizations like the World Bank to countries facing economic problems. For example, balancing the budget, implementing austerity policies, and carrying out so-called structural adjustments, which often involve blind privatization and marketization. The problem is that many countries, after implementing austerity policies, even if they barely balance their budgets, the economy still fails to improve, bringing enormous costs to society, and many third-world countries increasingly rely on Western political goodwill.
If the adjustment were based on fiscal balance, the history of the border region and later modern Chinese history might need to be rewritten. Fortunately, the Chinese Communists did not think about problems this way. ==Chairman Mao clearly criticized this tightening approach of living within one's means, saying: “Their minds are stuck in a loop of simple fiscal revenue and expenditure issues, going round and round, yet still cannot solve the problem.” Why can't simple fiscal balance solve the problem? Chairman Mao explained: “The quality of fiscal policy certainly affects the economy, but what determines the fiscal situation is the economy. There is no way to solve fiscal difficulties without an economic foundation, and there is no way to have a surplus in fiscal matters without economic development.”==
This means that ==economic issues take precedence over fiscal issues==, which is the main contradiction in economic development. In Shaanxi-Gansu-Ningxia, the border region government emphasized the development of the people's economy and the public economy, including large-scale production by government personnel, thereby developing the economy and ensuring supply. This is undoubtedly a policy formulated based on the local conditions at that time, which, in Chairman Mao's words, is a “special product under special conditions.” This strategic thinking of focusing on the main contradiction in the economy remains applicable in contemporary circumstances.
The main contradiction in the contemporary economy
The contemporary Chinese economy faces numerous contradictions, such as macro-level fiscal debt issues, overcapacity, and micro-level issues like involution and consumption downgrade. However, if we look at the overall picture, it is not difficult to find that the core contradiction is actually one: the decline in the speed of capital accumulation, which is accompanied by a decline in the overall economic growth rate. Whether public, personal, or corporate, debt is merely a future payment obligation; it only becomes a real problem when the speed of economic growth continues to decline to the point where future debt repayment capacity is questioned. This is similar to how, when the market is good, financial institutions want to lend more, but if the situation worsens, they are reluctant to lend. Therefore, theoretically, the absolute amount of debt, whether it is trillions or not, is a secondary issue; it is more meaningful to discuss it in relation to the scale and growth of the economy.
Overcapacity is similar. Normal market economic development must have a certain amount of capacity redundancy; as the economy fluctuates, the capacity utilization rate will rise and fall. Whether a certain absolute number represents overcapacity is not a fixed rule. Although China's industrial capacity utilization rate has declined from historical highs, it still maintains around 75%, and has been recovering in the first three quarters of 2023. Therefore, overcapacity is unlikely to be the main problem currently. More importantly, capacity utilization is directly influenced by the speed of capital accumulation and economic growth; if economic growth slows down, even if other conditions remain unchanged, the so-called overcapacity will appear increasingly severe.
We can also think about micro-level contradictions in the same way. For example, the term “involution” refers to increased competitive pressure, where ordinary people have to spend more labor time to achieve the same income. This situation ultimately stems from the relative decrease in the number of formal employment positions available in the Chinese economy. Only in state-owned enterprises and foreign-funded enterprises are jobs relatively secure and management relatively standardized; other less formal sectors cannot provide stable and secure employment. Therefore, workers have to compete harder for the relatively fewer secure positions, leading to increased competition and involution. ==According to data from the National Bureau of Statistics, the proportion of formal employment in our country has significantly declined in recent years, which is directly related to changes in the economic environment.== The slowdown in economic growth puts pressure on the proportion of the formal economy, while the increase in the informal economy makes even those in the formal economy feel exhausted, fearing they might fall out. Thus, for ordinary people, the micro-level feeling is that the economic situation is poor, and they must “involve” themselves to maintain their previous standard of living.
In summary, the crux of contemporary China's economic problems lies in economic growth, and the core driving force for economic growth is singular—capital accumulation, which is the continuous addition of new investments. Throughout thousands of years of civilization, for most of the time, human economies have been consumption-driven, with little surplus available for accumulation. If consumption could create growth by itself, then human productivity would not have to wait until modern society to advance rapidly.
So, what changes have occurred in China's capital accumulation over the past several years? First, whether during the planned economy or the market economy, China's economy has maintained a relatively high level of accumulation or savings rate. It is noteworthy that after 2014, China's capital accumulation clearly entered a new phase; fixed capital investment experienced rapid growth during the first decade of the 21st century, but overall significantly slowed down after the short-term shock caused by the 2008 global financial crisis, dropping from over 20% annual growth to around 5% before the pandemic. Partly due to this change, China's economic growth rate has gradually declined from nearly 10% in the early 21st century to around 6% in 2019. This achievement is still remarkable globally, but the trend of stable slowdown is also evident.
Due to space constraints, this article does not enumerate the various direct reasons for the slowdown in capital accumulation, but generally speaking, it is closely related to the blind and profit-seeking characteristics of the market and private capital. Although government departments have certain market regulation tools, such as adjusting borrowing costs, this is only one of the factors determining whether individual capital will invest. Over a certain period, the decision to invest also depends on whether expected profits can meet a certain profit standard. There are at least two factors here: one is profit expectations. What specifically determines these expectations requires more detailed research; roughly speaking, it is what Keynes called “animal spirits,” which itself carries a certain degree of uncertainty, but at least has some correlation with the overall economic trend. The second is the profit standard, which is a product of specific historical conditions. For example, if a project used to generate a net profit of 10% but now only has a profit margin of 5%, although it is still technically profitable, if the profit standard recognized by capital is higher than 5%, then capital will reduce investment, and capital accumulation will slow down.
Specifically in contemporary China, both of these factors may be in relatively unfavorable circumstances: on the one hand, as the economy slows down, everyone’s growth expectations become more pessimistic, which further reduces the enthusiasm for capital accumulation; on the other hand, according to relevant studies, economic profit margins have indeed shown a downward trend over the past decade.
Therefore, the investment enthusiasm of private capital, which is most directly affected by pessimistic factors, is not high. This low willingness cannot simply be attributed to excessive government regulation or high labor demands. On the one hand, when the government regulated more strictly in the past, capital accumulation still maintained a high level; on the other hand, under the circumstances where most of China's labor force still has low incomes and is even forced to engage in “involution” to make a living, the government has not attempted to save some private capital investment willingness at the expense of the hopes of the vast majority of people for a better life.
In fact, the most effective way to improve the willingness of private capital to invest is often not political statements, but the tangible recovery of economic growth momentum. In other words, private capital prefers to add icing on the cake but finds it difficult to provide timely assistance in times of need. Only when there is a good accumulation trend in the market can private capital truly be reassured. Fortunately, China's economic system has advantages that ordinary market economies do not possess, namely a strong and unified party and government leadership and the state-owned economy that serves as its economic foundation. ==Theoretically, the state-owned economy does not have to operate according to profit expectations, so as long as there is sufficient political determination, the government and state-owned economy can provide enough force to promote capital accumulation, thus completely reversing the unfavorable economic situation.==
To be pragmatic, although the capital accumulation of state-owned enterprises has shown some counter-cyclical performance in recent years, overall, it has not shown much difference compared to private capital. This is reflected not only in being similarly constrained by profit orientation but also in the fact that the overall speed of fixed capital investment is basically consistent with the slowdown in private capital asset investment. This indicates that the advantages of the Chinese system still remain largely on paper and have not formed actual economic driving forces. This phenomenon may still be due to a lack of deep understanding in society regarding the main contradictions in the economy, just as Chairman Mao once said, failing to grasp the main contradictions and merely going around in circles on fiscal revenue and expenditure issues. When it comes to the government promoting investment and the state pushing for construction, there is fear of debt and concerns about creating so-called market distortions, etc. As discussed in the next section, these worries are all secondary.
The origin of contemporary fiscal issues
If we focus on fiscal matters, we will realize that although the debt issue is significant, it is not on the same scale as China's economic problems. Specifically, there are three points worth noting regarding China's fiscal burden.
First, although China's debt level is relatively high, it is by no means at an unsustainable level, and there is still considerable room for fiscal expenditure. Just from the perspective of general government debt, it is difficult to categorically state that a certain level of debt will necessarily have adverse effects on the economy; it requires specific discussion. In academic discussions, there was once an attempt by scholars to provide a specific number as the maximum limit for government debt. For example, after 2010, the policy circles in Europe and America often cited a paper by two Harvard economists, one of whom was a former chief economist of the International Monetary Fund. This paper made many attempts, including finding a so-called empirical rule that once government debt exceeds 90% of GDP, it is detrimental to economic growth. However, subsequent scholars found many problems with the calculations in this paper, even including simple errors like not dragging numbers down in Excel. Once these errors are corrected, it becomes clear that 90% is not an important threshold. In fact, many countries have government debt exceeding this level but still achieve reasonable economic growth.
According to data from the Bank for International Settlements, by the first quarter of 2023, the ratio of China's government debt to GDP was still moderate, not only lower than that of developed countries like the U.S., U.K., France, Germany, and Japan but also lower than that of typical developing countries like India and Brazil. Of course, as will be mentioned later, some debts may be held in other forms, but even if we take the non-financial sector debt level as a standard, China's overall debt level is still far lower than Japan's and close to Canada's (with some liabilities due to the impact of COVID-19). Moreover, China's situation is different from the debt crises faced by third-world countries, which often owe money to international capital and must face harsh international financial markets, while China's debt has limited connections to international capital. As Professor Yu Yongding recently pointed out, considering “the high savings rate of Chinese residents and good international balance of payments,” both the government and enterprises should be able to bear a higher level of debt.
Second, a large amount of local debt in China is precisely the direct result of fiscal conservatism. During the 2008 global economic crisis, facing a significant change in external demand, China urgently needed to increase domestic investment levels to maintain growth. However, the government fell into fiscal conservatism, trying to avoid deficits and debt as much as possible. As some analysts pointed out, the technically safest fiscal plan would be for the central government to borrow and then transfer payments to local governments. However, the actual operational method was to assign the task to local governments, allowing them to engage in financial “innovation” off the government balance sheet, so that increased expenditures would not explicitly appear as deficits in government accounts.
As a result, local government financing platforms and other state-owned enterprises undertook massive investment tasks and the accompanying debts. As mentioned above, China's debt rapidly increased after 2008, with non-financial sector debt rising from $6.5 trillion in 2008 to $36.8 trillion in 2019. The main growth area was corporate debt, which saw its share of GDP rise from about 95% in early 2008 to over 160% in early 2016. Among corporate debts, state-owned enterprises accounted for a significant portion. By mid-2018, about 82% of corporate debt was borne by state-owned enterprises.
Is the limited participation of private enterprises in this debt because state-owned enterprises have squeezed out private capital? This possibility is low. Because a large part of these stimulus expenditures is in infrastructure and social welfare construction, the short-term economic returns are very limited. According to the 2013 national government debt audit, over 60% of local government off-balance-sheet borrowing was invested in municipal construction, transportation, and social projects.
The total debt caused by the “four trillion” is not exaggerated in the total amount of the Chinese economy; however, due to the conservative fiscal mindset, it has led to relaxed regulation and a large amount of off-balance-sheet borrowing by local governments, increasing overall risk. The collateral for local financing platform loans is often land. This financial operation can be sustained when land values and the overall development of the real estate industry are good, but once asset prices stop rising or even decline, this borrowing model will face immense pressure.
==This historical process is also clearly articulated in== ==Professor Yu Yongding's recent analysis: “The main reason for this problem is that the central government was unwilling to increase the fiscal deficit at that time and encouraged local governments to establish financing platforms to raise funds from banks and capital markets.”== If the government wishes to stimulate economic growth through infrastructure investment this time, it must learn from past experiences and take on the primary responsibility for funding infrastructure.
Finally, we need to analyze debt and fiscal issues within a certain historical context. Between 2008 and 2019, China's government debt overall grew by 120%; although the increase is not small, China's economy maintained an average growth rate of 7.8%, and during this period, important infrastructure such as the national high-speed rail network was completed. Such debt, even if hundreds or thousands of specific problems can be identified, undoubtedly brought about progress in productivity overall.
Moreover, many of China's fiscal problems are not primarily due to the government spending more money. During the high-growth period after 2000, the average annual growth of government expenditure was 19%, but the deficit as a proportion of GDP remained low. After 2010, the growth of government expenditure slowed down, while the deficit ratio gradually rose to 4.9% before the pandemic. Therefore, the increase in the deficit ratio is not due to rapid growth in government spending, but more due to a significant slowdown in government revenue growth. This reflects two conflicting ideas of the Chinese government: on the one hand, emphasizing tax cuts, especially for enterprises, such as the business tax to value-added tax reform implemented since 2011, which reduced tax revenue by two trillion yuan between 2012 and 2018; on the other hand, various levels of government still bear a considerable degree of expenditure to maintain economic and employment stability. The parallel pursuit of these two goals leads to deficits.
Ultimately, we cannot think about fiscal issues in isolation; we cannot be trapped in the mindset of an accountant. Debt is certainly not better the more there is, and it is not about exhausting resources and demanding endlessly. However, when there is a real need to spend money, the larger economic goals should take precedence. Constantly reducing taxes has little effect on improving the enthusiasm of private capital, and this has been validated in the histories of many countries. Moreover, indiscriminate tax cuts and increased government burdens may affect the overall political and economic landscape. ==Chairman Mao criticized a purely benevolent governance viewpoint: “Some comrades ignore the needs of war and simply emphasize that the government should implement 'benevolent governance,' which is a mistaken viewpoint. Because if the War of Resistance against Japan is not victorious, the so-called 'benevolent governance' is merely applied to Japanese imperialism and is irrelevant to the people. Conversely, although the burden on the people may be somewhat heavy for a time, if they overcome the difficulties of the government and the army, support the War of Resistance, and defeat the enemy, then the people will have a good life, and that is the true benevolent governance of the revolutionary government.”==
Similarly, debt and fiscal expansion are certainly necessary in the current context, but it should not be random spending or aimless; it should promote economic growth, provide more and better job opportunities, and genuinely benefit workers rather than a few capitalists, which is the true benevolent governance.
International historical experience regarding economic growth
We can also look at the difficulty of restarting growth and the importance of maintaining growth from significant historical milestones. For ease of comparison, we take the United States and the Soviet Union as examples, two major countries with vastly different economic systems that both experienced significant changes in economic growth.
The longest economic downturn in American history was the Great Depression of the last century. From a simplified historical narrative, the 1929 Wall Street crisis triggered the economic depression; the Roosevelt administration implemented the New Deal in 1933, laying an important foundation for the United States to emerge from the Great Depression. However, those familiar with economic history understand that the economic recovery in the United States at that time was far from simple; many people today can hardly imagine the tremendous shock that historical juncture posed to capitalism. Even with the push of the New Deal, it was not easy for a market economy giant to turn around from a downward trajectory. The main driving force of the American market economy still lay in private capital; several landmark projects and legislations of the Roosevelt administration, such as the Tennessee Valley Authority and the National Labor Relations Act, while important, were relatively small in scale and slow to take effect, making it difficult to fundamentally change market conditions and rescue the American economy.
==Figure 1 shows the economic growth rate and unemployment rate in the United States from the start of the Great Depression in 1930 to the start of the Korean War in 1950. It is clear that the implementation of the New Deal in 1933 did not fundamentally change the depressed state of the American economy. Although the economic growth rate temporarily rebounded, unemployment remained above 15%, failing to truly solve the problem. It was not until World War II that a comprehensive change in the situation occurred. Due to the needs of war, the United States effectively implemented a planned economy, massively reorganizing American production and consumption, absorbing a large labor force for wartime production. Therefore, within just a few years, the severe unemployment problem in the United States was resolved, and the high efficiency of the planned system led to rapid economic growth, with growth rates approaching 20%. Only then did the United States truly emerge from the Great Depression, more than a decade after it began. If it were not for factors such as "World War II" and the wartime planned economy, whether American or global capitalism could survive remains an unknown. Moreover, after the war, once the U.S. government reduced spending, the economy would enter another recession. However, by this time, the Great Depression crisis had been resolved, and no new systemic depression occurred. With the onset of the Cold War and the outbreak of the Korean War, the U.S. economy entered a small growth period, leading to the so-called post-World War II golden age.==
On the other side of the Cold War, the Soviet Union maintained long-term stable growth due to the advantages of its socialist system. Because of this, the Soviet Union, as a relatively backward country, was able to rapidly complete industrialization, defeat the Nazis, and become one of the decisive forces in ending World War II. The Soviet Union also achieved breakthroughs in several important fields, such as manned spaceflight, which brought tremendous shock to the United States and the West.
However, starting in the 1970s, the Soviet Union's economic growth showed significant changes. After maintaining long-term high-speed growth, the Soviet growth rate began to decline (see Table 2). It is important to note that while the Soviet system had many contradictory issues, such as technological bottlenecks and demographic problems, these long-term issues did not directly and rapidly lead to a decline in economic growth. According to research by David Kotz and other scholars, one important reason for the noticeable decline in growth was policy missteps, specifically the Soviet decision-makers' voluntary reduction of growth rate targets in the 1970s. The purpose of this was to improve efficiency and quality; however, once economic growth slowed down, many other problems emerged, and efficiency and quality did not improve. The Soviet leadership realized that they faced more difficulties than they had imagined, and leaders like Gorbachev hoped to rely on more market-oriented reforms to solve the problems, the consequences of which we are now all too familiar with. When economic growth rapidly declined, the late-stage reforms in the Soviet Union actually further abandoned state planning and intervention, leading to chaos in the socio-economic landscape, ultimately ending in a tragic shock therapy.
Reflecting on the experiences of the United States and the Soviet Union highlights one issue: maintaining a reasonable level of capital accumulation and economic growth is essential for any social system under certain historical conditions. During the Great Depression, American capitalism relied on large-scale mobilization and planned economy to overcome the crisis; conversely, the Soviet socialist system, after actively lowering economic growth targets, attempted to promote economic growth through more market-oriented means, leading to painful lessons.
Economic issues cannot be ignored due to specific challenges
Based on the above discussions, I believe that the entire society must have a sufficient and clear understanding of the current economic challenges. Focusing on capital accumulation and economic growth does not mean that the past growth model should not change; it does not mean that the state should not emphasize reform and innovation, but it requires observing the overall situation and grasping the main contradictions. Whether it is reform, handling debt, or other policy objectives, they should be balanced with ensuring reasonable growth.
The political and economic landscape of the entire world has reached a special moment. At this time, China's economic prospects hold significant meaning. Many observers in the West judge that the era of China's economic growth has passed. We certainly understand that no economy can sustain high-speed growth indefinitely, but we also understand that China's economy still has enormous potential. Under the guidance of correct policies, China's state intervention can lead economic development, and it can continue to maintain reasonable growth for a considerable period.
Under the current conditions, it is entirely necessary to actively increase fiscal expenditure, emphasize the importance of planning, and negate the tendencies of conservatism. On this basis, it is necessary to develop a large number of jobs that can genuinely improve laborers' conditions and are more stable, promote the transformation of social ecological civilization, and push for breakthroughs in key technologies, which is precisely the task that public investment needs to accomplish. As long as the direction is set, these specific technical discussions can unfold. With improvements in the economic environment and increased tax sources, fiscal issues are bound to ease. If the main contradictions are confused, we may face a more unfavorable domestic and international situation.
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