Author: Qinghe President WeChat official account: Zhiben News Agency (ID: zhibenshe0-1)
A few days ago, I mentioned a solution, which is to directly send money to resident families.
Then, I received a lot of feedback, some people supported me, and of course, some people also raised many questions. I don’t think this issue has been thoroughly discussed, so further exploration is needed.
There are still many doubts about the usefulness and feasibility of directly sending money to ordinary families. Typical doubts, such as whether sending money will trigger inflation, where the money comes from, whether there will be a phenomenon of raising lazy people, whether the government’s debt is already so large, and whether there will be debt risks if the money is sent again.
Direct payment to residents
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Different attitudes among the Chinese and American people
I found a very interesting phenomenon in the United States, where voters shout for government money, and if you don’t pay, I won’t vote for you. Economists say it cannot be done, it will trigger inflation.
As a result, the money went down by several trillion yuan, and inflation did indeed occur. After inflation appeared, the people began to curse the Biden government again. Look at how you have caused the economy to become inflationary. If you don’t control inflation, I won’t vote for you. The voters in this country are not easy to serve.
However, it is different in China. Some economists in China suggest that the total demand is insufficient and the purchasing power of the people is relatively weak. They suggest that the government send money to the people and ordinary families. However, many of us say no, you economists are really confused. Sending money can trigger inflation, and everyone’s sending money is equivalent to not sending it. Having too much money not only triggers inflation, but also poses a debt risk to the government. So, we must not publish.
In contrast, our national quality is significantly higher and our position is higher. We are concerned about the overall situation and consider everything for the government and the country, but we are less concerned about ourselves.
Sending money directly to residents is
The most effective way to solve current economic problems
So, I think it still needs to be clarified whether to send money to residents and whether it is possible to do so. Firstly, my attitude is very clear. In terms of the current economic situation in China, directly sending money to residents is the most effective method, and the key depends on how to operate it.
I will first explain why it needs to be sent, and first explain the reason clearly.
The reason is actually very simple. Almost all economists are aware of a core issue in the Chinese economy, which is the insufficient total demand. This is a consensus and does not require much discussion. Due to insufficient total demand, our current investment and consumption are weak. From upstream to downstream, prices continue to decline. The current round of price decline must be highly valued, as its risks will continue to spread.
How to solve the problem of insufficient total demand
?
Economists have differences. What are the differences? They are probably two factions.
One faction defines total demand as investment demand, mainly according to Keynesians. They attach great importance to investment demand and ignore consumption demand. They advocate increasing government investment to drive investment demand, thereby boosting the economy. So, the measures they usually recommend are for the government to expand its finances, expand its currency, and borrow money to invest in infrastructure.
This measure has been adopted in every round of history when total demand is insufficient, such as during the 2008 financial crisis, when demand rapidly declined. What should we do? Four trillion yuan to rescue the market, where did four trillion yuan go? Mainly used for government infrastructure investment, construction of subways, high-speed railways, highways, 3G communication networks, and so on.
During the period from the second half of 2011 to 2015, due to the marginal decline of stimulus policies, high inventory, and excess raw materials, prices in the upstream significantly decreased, and downstream demand was very sluggish. What should we do at this time?
Another round of demand stimulus has arrived. Its name is supply side reform and monetization of shantytown reform.
Many people may have misunderstandings, isn’t this the “supply side”? It’s not a demand stimulus. However, we need to look specifically at what the measures for supply side reform are.
The main approach is to stimulate the demand side and boost the demand for real estate investment. From 2015 to 2019, there was an increase of approximately three trillion yuan in mortgage supplementary loans. These three trillion yuan are specifically for monetization of shantytown renovation, coupled with a large amount of loans from commercial banks across the country, a large amount of funds have flowed into the real estate market, stimulating real estate demand.
Then, from third and fourth tier cities to first tier cities, housing prices in various cities across the country have significantly increased. The demand for real estate has also significantly expanded, with new cities emerging in various regions. The large-scale expansion of investment demand in real estate has also driven the inventory clearance of upstream raw materials, cement, steel, and chemical products.
So, this round of stimulus is called the supply side, but the specific measure is to digest upstream inventory by stimulating real estate demand. So, essentially, it is still a demand side stimulus, mainly to boost investment demand through fiscal and monetary expansion.
Returning to the current situation, the economy has recovered this year, but there is a major challenge that is insufficient overall demand. What should I do at this time?
Some economists also suggest increasing the intensity of macroeconomic policies, expanding currency and finance, and increasing government investment. Some people just say that government investment will be shifted from infrastructure investment to new infrastructure, to new technologies. However, it is still the way for the government to borrow and invest to stimulate demand.
Have you noticed that economists of this type define demand as investment demand. Their measure is to have the government increase debt, increase investment, and then drive investment demand.
Another group of economists, who advocate for free markets, as well as the general public, may have a different understanding of demand. They are more focused on consumer demand, which is what we usually understand as consumer demand.
This understanding is the correct one. Especially at present, our demand is insufficient, what are the main shortcomings? On the surface, there is insufficient investment demand, but fundamentally, there is insufficient consumption demand, especially for ordinary households.
What are the reasons for insufficient consumer demand? The family’s purchasing power is insufficient. What is the reason for the lack of effective purchasing power in households? The family’s income is insufficient. The insufficient income of a household here mainly refers to net income, which is the income of the household minus debt. There are currently some middle-class families with decent incomes, but their household debt is relatively high, and their housing loans have overdrawn their consumption. Another point is that weak income expectations can affect consumer demand.
This year, the government is also implementing a demand expansion strategy, but different understandings of demand result in different policies implemented. Both individuals seem to be discussing the same issue, both addressing the issue of insufficient demand, but their understanding and proposed policies may be completely different.
Some economists define demand as investment demand, or focus on investment demand, and their approach is to increase government investment to drive investment demand. However, defining demand as consumer demand would be a completely different approach.
What is my opinion?
The insufficient total demand is fundamentally due to the insufficient income of ordinary households
My point of view is that from an economic perspective, demand can be divided into investment demand and consumption demand, but consumption demand is a more fundamental demand.
At the same time, my suggestion is to address the issue of insufficient total demand, which is to address the issue of insufficient consumer demand, rather than addressing the issue of insufficient investment demand.
What is the reason? There are three reasons,
The first reason is that the government can no longer continue large-scale borrowing and investment.
As I mentioned earlier, our current investment is subject to significant constraints. What are the few constraints? The first important constraint is local debt, which is currently large in scale. There are over 30 trillion yuan of explicit debt and over 40 trillion yuan of urban investment favorable debt, plus some implicit debt, which may be even more. Nowadays, the finances in many places are very tight, and they are busy borrowing money to pay salaries. They no longer have strong borrowing and investment capabilities.
At the same time, this government investment model is also constrained by household debt and corporate debt. The government continues to invest, and households and businesses are unable to follow up, resulting in lower and lower investment benefits. Currently, the government’s public investment multiplier is decreasing, and the return on investment is decreasing. The investment yield of urban investment bonds has dropped to a very low level, only slightly lower than deposits. If interest is included, the investment in urban investment bonds will be at a loss.
It can be seen that the current government investment yield is very low, and its economic driving effect is limited. Moreover, the risk of debt is still high, and this path cannot be further pursued.
The second reason is that a large amount of investment ultimately needs to be resolved through consumption, which eliminates the large-scale production capacity of upstream investment.
If consumption is insufficient, especially if households’ purchasing power is insufficient for a long time, what will be the ultimate result of round after round of investment incentives?
Overcapacity, excess raw materials, high inventory, and then another round of price decline. Just like from 2011 to 2015, due to the stimulus brought about a large amount of overcapacity, downstream household consumption departments did not have enough purchasing power to absorb production capacity, resulting in a four-year downward price cycle.
So, investment demand is only a superficial demand, or not the ultimate demand. The ultimate demand is consumer demand. Only when consumer demand increases can the entire national economy operate normally.
Some people may have doubts. Over the past twenty years, we have been investing on a large scale in infrastructure and manufacturing. If our consumption were insufficient, such a large investment would have led to overcapacity.
In fact, who will digest our long-term large-scale investment in infrastructure and manufacturing? Mainly for external demand, that is, exports. China is desperately investing and manufacturing goods, while the United States is desperately buying our goods. Simply put, large-scale investment forms large-scale production capacity, which is mainly digested by the US market.
Now that exports are declining, domestic demand cannot resolve such a large production capacity. What should we do? Can we continue to invest? Continuing to invest, exports are sluggish, domestic demand is insufficient, production capacity is higher, prices are falling, and government debt is higher. This is not about solving problems, but creating greater risks.
Consumption is the purpose of economic development
The third reason is that consumption is the purpose of economic development.
What is the purpose of economic development? We cannot reverse the purpose and means. The ultimate goal is not for economic growth, but to improve the consumer welfare of our families. This is the true purpose of our economic development.
Moreover, consumption is the driving force behind endogenous growth. Essentially, consumption is an investment in people, and people’s creativity is the source of all endogenous power. The benefits of economic growth are fed back to our consumer welfare. This forms a positive feedback.
So, only by improving the consumption capacity of households. Only then can we truly improve the consumer welfare of our families, which is the purpose of our economic development. We need to boost demand now, which is to boost the consumer demand of our families, and this is called achieving the goal directly.
So, my viewpoint is very clear. The core problem of the Chinese economy is insufficient total demand, but this total demand is not investment demand, but insufficient consumption demand. It is because the purchasing power and income of Chinese households are relatively weak, leading to a long-term shortage of consumption demand, especially the current low consumption demand.
So, how can we solve it?
The solution is not to increase investment, especially by increasing government borrowing on a large scale, but to improve household income, increase purchasing power, and consumer demand.
At present, the disposable income of Chinese residents accounts for only about 43% of GDP, while in the United States it is over 80%, and internationally it is generally over 60%. We need to significantly increase the income of ordinary families in order to overcome economic difficulties.
So, what exactly should we do?
I propose a plan called the National Income Plan.
Economist Teng Tai proposed a Chinese version of the “National Income Doubling Plan”. Teacher Teng Tai said that the multiplier effect of financial investment has now been reduced to one time. If the money invested in finance is sent to households, the multiplier effect it brings is three times.
I strongly agree with this point. Previously, I talked about a series of policies to increase residents’ income, replacing the current investment stimulus policies with these policies. I am now organizing it into a national income plan.
Suggest launching the National Income Plan
,
Directly sending money to ordinary families
The national income plan mainly includes the following items:
The first item is to send a sum of money to ordinary families, directly increasing their income.
The second option is to lower the interest rate on existing housing loans and reduce the debt burden on homebuyers, which is equivalent to increasing the income of ordinary households.
The third item is to increase the proportion of profits paid by state-owned enterprises on a large scale, reduce and refund taxes on small and medium-sized enterprises, implement a negative personal income tax system, and provide tax subsidies to low-income families.
The fourth item is to allocate state-owned assets on a large scale to enrich the social security fund and significantly increase the pension amount for rural households.
The focus is on paying residents.
Is it possible to send money? Will it trigger inflation?
Firstly, is it okay to send money?
The fact that the government sends money is actually a very normal act of financial transfer payment, so don’t make a fuss at all. This year, the central government’s budget for local transfer payments exceeded 10 trillion yuan, including 8.7 trillion yuan for general transfer payments.
Where will this huge transfer payment end up being sent? Some have entered enterprises through investment, agricultural subsidies, etc., some have paid salaries to civil servants and teachers, some have entered the household sector through pensions and social security, and some have provided subsidies to low-income families.
For example, in Hong Kong, the government often distributes surplus funds to citizens. During the epidemic, Hong Kong issued large red envelopes to its citizens, distributed in three installments of HKD 20000 per person.
Secondly, where does the money come from?
If it comes from fiscal and tax revenue, it is a typical transfer payment, where the money in the government’s pocket is transferred to the household’s pocket without any problems, without causing inflation or debt risk.
If it is within the government’s borrowing capacity, it is not a problem and there will be no inflation or debt risks. The central government also has the ability to borrow money. It can use the central government’s credit to issue a treasury bond for financing and then send it to ordinary families.
These two ways of sending money may lead to an increase in prices, but not inflation. Why? Because there is no excess currency in the market, the amount of currency is still so large, but the currency has moved from government accounts to the household sector, and then entered the consumer market. Consumer goods prices may rise slightly, but not inflation.
If the government overdraws and lends money to residents, it will trigger inflation and increase the government’s debt risk. The Great Inflation in the United States in 2022 was triggered by the Biden government’s overdraft, borrowing, and issuance of money. Don’t use this method if you don’t need it.
Keep looking, how to send the money? There are three ways:
The first method is to save 1 trillion yuan in ineffective and inefficient infrastructure investment annually, for three consecutive years, and distribute it indiscriminately to ordinary households.
Our current investment accounts for a very high proportion of GDP, reaching 47%, and the annual fixed assets investment is about 58 trillion yuan. Internationally, the proportion of investment is generally 20%. Considering that China is mainly focused on manufacturing and accounts for 30%, there is approximately 22 trillion yuan of inefficient and ineffective investment here.
This year is expected to be 15 trillion yuan, with a general public budget exceeding 6 trillion yuan and special debt exceeding 3 trillion yuan. Save 1 trillion inefficient and ineffective investments from this 15 trillion.
The second way is to issue special treasury bond, which is 1 trillion yuan a year for three consecutive years, to ordinary families without difference. However, the increase in local debt must be reduced.
The third method, if neither of the above methods can be implemented and there is a concern that borrowing may cause debt risk and inflation, then state-owned enterprises will turn in one trillion yuan of profits annually for three consecutive years, providing indiscriminate distribution to ordinary households.
Last year, state-owned enterprises made profits exceeding 4 trillion yuan, out of which 1 trillion yuan was allocated to subsidize households. The profits of state-owned enterprises are not debt, and there is no debt risk or inflation issue. At the same time, people’s livelihood is difficult, and state-owned enterprises should take responsibility, which is in line with the mission of state-owned enterprises.
Regarding the national income plan, especially the policy of direct payment, I need to explain:
First, it is better not to lend money if you can not. If you can lend money, you can only issue treasury bond for financing.
Secondly, if you can directly send money, do not send vouchers. If you do not send money, you can also send vouchers, with more and less restrictions.
Thirdly, the national income plan is a policy, not a long-term system, especially a monetary measure. It is a short-term policy that responds to the risks of economic downturn and quickly changes the insufficient consumption demand of households. However, I do not advocate using money distribution as a long-term policy and operating it as a basic national income.
If it benefits the people in the long term, we can achieve this by reforming the tax or resident income distribution system, such as directly reducing tax rates and reducing the government’s collection of this money.
Fourthly, the implementation of the national income plan addresses short-term risks, and the most important thing is to launch a new round of reform and opening up.
Only by deepening the reform and opening up, deepening the reform of the economic system, and changing the economic structure and growth mode can we increase the income of ordinary families, change the vicious circle of economic stimulus, finally get out of the economic predicament, and achieve positive feedback and positive circulation of the economy.