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Tale of Two Stimuli
Posted on October 9th, 2009 5 commentsWhen the major economies of the world went into a deep recession many countries responded with stimulus packages. The stimulus packages all had a similar goal; improve the domestic economy and, by extension, improve the global economy. Unfortunately, different countries have different domestic drivers that resulted in differing methods used to stimulate their economies. In several cases, the result of the stimulus will actually hurt the long term economies of the world.
Two specific cases are the burdensome national debt in the U.S. and the steel bubble in China. While the U.S. stimulus is probably why we are seeing some life in the economy, many components of the stimulus did not provide the best bang for the buck. In China, while some of the stimulus was used to increase domestic consumption, a significant portion of the stimulus was used to keep manufacturing humming even though there was little demand.
In the U.S. stimulus, money went to many initiatives that had little impact on the rest of the economy. For example, the $2 million earmarked for swine odor research in Iowa. As a stimulus, this project was an ineffective use of money and should have either been used in a better way or just not spent. On the other hand, money spent on improving the country’s infrastructure has great value. Local jobs are produced that require a resource such as steel and cement which creates other jobs. Add to this the economic value of a better infrastructure and you get the most out of every dollar. Admitted, the percentage of money that went to projects similar to the swine odor research was small, but that is not the point. The point is that the benefit of the marginal projects did not justify the potential future damage.
China is estimated to have loss over 20 million jobs due to the global recession. Since they could not afford additional job losses, stimulus money went into keeping steel, and other, plants operating and people working. The end result is that China is now producing more steel then ever and they have nowhere to sell it. Steel industry analysts do not expect world demand to reach 2007 levels until 2012. What China is doing is maintaining excess capacity and compounding the problem by producing an excessive stockpile, which only exacerbates the excess capacity problem.
In the end, the U.S. and China will have to deal with their own problems due to their stimulus packages. What it means to the global economy ten years from now is anyone guess.
5 responses to “Tale of Two Stimuli”
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China’s bubble is far worse. They will bring down to world steel industry with them. But maybe that is their plan.
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JB, great link. I still stand by one of my early post about the “innovation economy” using the iPod as a clear example of how it really does not add up.
Our economy has problems that have to be addressed and not hidden under a mountain of debt. The longer the problem is hidden, the less likely people, and politicians, will act.
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PMinA
I read your comment on the Economist article and think you are on the money here. Both stimuli are damaging and self-defeating for the long term but the Chinese reflation effort in particular is damaging its trade partners (particularly the US) by propping up and even adding to the overcapacity problem which in turn will not allow the US to deal with its structural trade deficit. I fear that all the worldwide efforts to “fight” recession are prolonging the agony or papering over the cracks all the while adding to the possibility of a meltdown. My take is here:
http://hubpages.com/hub/Peak-America-an-economy-in-irreversible-decline -
China’s bubble is far worse. They will bring down to world steel industry with them. But maybe that is their plan.
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JB, great link. I still stand by one of my early post about the “innovation economy” using the iPod as a clear example of how it really does not add up.
Our economy has problems that have to be addressed and not hidden under a mountain of debt. The longer the problem is hidden, the less likely people, and politicians, will act.
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