In the modern mythology of the Republican Party in the United States, Ronald Reagan is the Zeus on Olympus. I am sure the Gipper would like to throw down some thunderbolts on his infighting followers of today. Ronald Reagan was, by their standards, the most successful modern day President.
To muddle a metaphor, his Herculian feats include pulling the economy out of the doldrums, uniting a fractious party, instigating that other Star Wars and defeating the commies. Less partisan observers note the Iran-Contra scandal, increased inequality and the fact that communism, at least of the Soviet kind, imploded instead of surrendered.
But no commentator from the 1980s would have dared to predict that almost thirty years after the end of the Reagan Presidency a Communist leader would use his terminology to get his own economy out of the centrally planned doldrums.
We are talking about the boring sounding supply-side reforms. In Ronald Reagan’s White House, supply-side economics was a way to combat the disastrous interplay of inflation and slow growth that had resulted in a moribund economic outlook when he came to power in 1980.
Reagan took steps that, at the time, were bold and unorthodox. He cut taxes and tried to enact policies that encouraged companies to invest and become more productive to promote growth. If everything else stays neutral, changes on the supply side of the economy lead to changes on the demand side.
Reaganomics was successful on quite a few fronts. Real median family income grew by $4,000 during the Reagan period after experiencing no growth in the pre-Reagan years; it experienced a loss of almost $1,500 in the post-Reagan years. Interest rates, inflation, and unemployment fell faster under Reagan than they did immediately before or after his presidency. The only economic variable that was lower during period than in both the pre- and post-Reagan years was the savings rate, which fell rapidly in the 1980s. The productivity rate was higher in the pre-Reagan years but lower in the post-Reagan years.
Desperate attempts by modern Republican minnows to repeat this should be ignored by anyone with common sense. The US economy today has serious long-term challenges, despite reasonable growth to date, but these are different from the combination of inflation and low growth of the 1970s.
More poignantly, neither are China’s problems in any way similar to those of the US before the Reagan years. When the Chinese leadership now talk about supply-side reforms, they are not channeling Ronald Reagan.
The US was battling inflation, but China, especially its businesses are battling the increasingly real prospect of deflation. Inflation is a de facto tax on savings, but a good thing for debtors because the value of both savings and debts decrease in real terms.
Deflation is a threat for the prospects of the indebted Chinese economy. Mounting corporate debt is getting harder to pay off. This debt is now slowly but surely eating away at the profitability of many Chinese companies as a slowing economy reduces demand for their products.
This is the situation that is plaguing Japan for decades already and while the central planners in Beijing have copied much of the Japanese neo-mercantalist growth model, they are eager not to stumble into a Japanese-style post-growth zombie model, where firms are weighed down by debt, but still make enough to just not die. Some analysts believe China is already entering a Japanese-style era of deflationary pressures, especially when comparing China’s relative growth of the debt-to-GDP ratio in the 2010s to that of Japan in the 1990s.
It is difficult to see how supply-side reforms can help China. It may give some small jolts to sectors of the economy, but the benefits will be more than offset by a looming market correction that the same supply-side central planners seem increasingly desperate to avoid.
The start of 2016 saw another stock market upset and all important assets in the Chinese economy are overpriced: real estate, bonds and, yes still, stocks. No central planner can outpace the market forever, but among China bulls there seems to be the illusion that ‘Beijing is on it’ and therefore, market realities do not apply.
All the problems that the Chinese economy faces are essentially problems on the demand side of the economy. The fact that the CCP is increasingly using a mantra of supply-side reform can mean a number of things—none of them very good.
The first option is that this is basically PR and a public move in an internal Party struggle over where to take the economy. The second option is that this is a sign that the economic team of President Xi is gambling on another mechanical bull market, comparable to the one that artificially inflated the stock market during the spring of 2015. The third option is that nothing much is happening and the slogan of supply-side reform sounds more pro-active than central planners rearranging the deck chairs on the Titanic.
Reaganomics with Chinese Characteristics is not the solution to Chinese deep-rooted imbalances.