A Tale of Two Stimulus Plans

A recent New York Times article highlighted China's spending on rail projects as part of its stimulus package. The package, totaling $586 billion, amounts to almost 14% of the entire economic output of China in 2008. The goal of the plan, which is almost entirely focused on infrastructure projects, is to add 1 to 3 percent to its economic growth in 2009. The differences between the Chinese and American stimulus plans illustrate the differences between China and America's current economic doldrums.

China's infrastructure stimulus is an attempt to maintain growth levels in the area of 13%, the level at which China's economy was expanding up until 2007. Already, in 2008 China's rate of growth fell to 9%. While China's economy is not contracting, and continues to grow, Chinese leaders are worried that any loss of jobs will cause unrest amongst workers and lead to social instability.

China's stimulus plans are almost entirely focused on traditional infrastructure projects, which, in addition to expanding China's rail system, include subway, road and airport projects. This plan is much closer to the traditional Keynesian-style stimulus efforts than the public spending provisions of America's stimulus. China is able to spend so much money in so short a time on traditional infrastructure stimulus for two reasons:

1. In 2004, China halted a vast majority of public works projects. Inflation had started to become a problem, and China's central planners, afraid that the economy might simply overheat, halted all local and provincial infrastructure projects. This means that there is a large volume of "shovel ready" projects ready to go.


2. Unlike America, China does not have an existing rail and highway network stretching across the country. Much of the coastal development which has modernized western China has not made its way eastwards. Simply put, there is much more work to be done.

However, there are deeper reasons why China's stimulus is so different from America's. China is a manufacturing nation which relies heavily on exports as a source of economic growth. Global recession has weakened demand for the goods that China produces, which has caused China's manufacturing sector to slow considerably. However, when the global economy starts to pick up again, this will increase demand for goods and manufacturing in China will expand once again, creating jobs and economic growth.

Things are different here in America. Much of the prosperity of the last decade was fueled by rising home values and cheap credit, and now that the housing bubble has burst its becoming more and more apparent how much of our wealth was being created through financial maneuvering; finance was no longer an industry that allocated capital in order to maximize growth and make sure money got from investors to those who needed access to capital. The financial sector continued to engage in these activities, but it also became the only engine that was "powering" economic growth. And, like a house of cards, it collapsed.

This is why Obama's stimulus plan does not look like China's stimulus, or any previous stimulus. Unlike China, we will not be able to send people back to work and grow our economy by doing the same things we were doing before the recession. It is not that America's engine of growth has stalled, it just isn't there.

However, it seems like our politicians have not yet fully recognized this bleak truth, which is why the stimulus, while allocating money to areas that are national priorities with potential for growth, lacks cohesion. If we want our stimulus plan to create new engines of growth for the economy, we cannot throw money scattershot at a few different energy projects or education programs like we would for new rail projects and highways and airports. A cohesive frame, a goal, a plan is as critical to creating a new engine of economic growth as is the capital that is invested in it. Without a guiding vision and goal for a new clean energy economy, we will not be able to formulate a plan that will result in sustained growth.

So it seems that American lawmakers are standing with feet in two camps: the first camp is calling for a new type of economic program that demands a degree of planning and a coherent frame in order to create sustained growth; the second camp demands that we just get the money out the door as fast as possible in order to make up for decreased demand and put people to work. Perhaps both camps are right, and we need to do both--if this is the case, then policy makers should recognize the difference between the two goals and work towards them separately. But the American Recovery and Reinvesment Act is attempting to do both at once, and in doing so, it might do neither.