From the TUC

Osborne relies on Chinese Keynesianism

15 Aug 2011, by in Economics, International

There is a lot of kremlinology to be done on George Osborne’s comment piece in today’s Financial Times (£), in part no doubt because of the need to blur the language to co-sign with his opposite number in Singapore and line the Australian, Canadian and South African Finance Ministers up as co-authors. It is being presented as ‘the rest of the world – including a couple of socialists – agree with the coalition’s cuts’ – although it would in practice have been perfectly possible for Ed Balls to sign up to almost all of it, as it sidesteps the issue of how fast and how deep to make cuts, what ratio of cuts and tax increases is needed, and how far measures to promote growth should take the place of/delay either. But it is absolutely clear, as the FT’s accompanying news item pointed out, that you can only promote growth at the same time as massively reducing domestic demand in the developed world if the rest of the world stimulates its own domestic demand and buys our exports. And by and large, the rest of the world mostly means China.

So, UK government economic policy depends on the Chinese government promoting domestic demand, which is generally held (by international institutions and also on occasions by Government Ministers) to mean raising workers’ wages and building up the welfare state (not least to discourage Chinese workers from saving money for their children’s education, for health care and so on). Such irony is likely to be lost on the British workers seeing their wages fall and their welfare state being slashed.

4 Responses to Osborne relies on Chinese Keynesianism

  1. Ken
    Aug 15th 2011, 7:23 pm

    I feel the UK has a lot of mending to do if it wants to become a viable trading partner with China. The UK will need to become more price competitive in their exports to gain more revenue this way. This could be achieved by slashing red tape, but at the cost of how much unemployment?

  2. Owen Tudor

    Owen Tudor
    Aug 15th 2011, 7:55 pm

    Thanks Ken, but to give him the benefit of the doubt, I don’t think Osborne’s strategy (if you can call it that – it’s more like wishful thinking) is based on us competing directly with Chinese workers. The plan could be (who knows?) to sell the Chinese things like luxuries, services and technology (the Germans are doing pretty well ast luxuries and technology, for example). But it still depends on the Chinese government doing the precise opposite of what ours is doing….

  3. The Squeeze
    Aug 16th 2011, 3:06 am

    Why is it ironic? If UK conusmers are spending heavily on Chinese imports, and saving too little to prevent the need for borrowing from abroad, then squeezing consumer spending and encouraging saving in the UK helps fix the trade deficit with China surely?

    We keep hearing this argument in favour of ‘domestic demand’ over here, but if all of that gets spent on Chinese imports, well, (exports – imports) is part of the GDP calculation.

    But China are not doing this, they have been tightening to fight inflation. If everyone in China started spend their savings inflation there would most likely rip.

    Of course, their aggressive peg on the dollar does not help matters either way.

  4. Owen Tudor

    Owen Tudor
    Aug 16th 2011, 9:50 am

    The Squeeze: I agree with you on the valuation of the Chinese currency – the TUC has Congress policy on precisely that.

    The point about domestic demand is that without it, we are totally dependent on exports to fuel any sort of growth (which we need to have more jobs and higher wages). Exports ARE increasing – probably largely due to the weak pound, rather than increased demand elsewhere – and imports are declining because of low domestic demand. And higher domestic demand probably would suck in imports, but it would also grow the UK economy – the richer people are, the more they spend, surprisingly enough, and some of that is spent on imports!

    But there are countervailing effects, as the US has found in spades over the last generation. Their real wages have been stagnant or falling for longer than ours, and as a result, people downshift their spending to buy what are traditionally cheaper foreign imports (eg Walmart goods) – but of course buying more cheap goods from abroad in place of smaller amounts of luxury items from abroad has less off an impact on the trade balance.