Boarding China's Economic Elevator

There's a growing consensus thatthe great recessionis over, but the pace of US recovery will be slow. Meanwhile, China's economy is speeding up. A comparison of economic policies in the two countries indicates the White House must be more aggressive.

In the second quarter of 2009 US GDP was slightly down, whileChina's economygrew at an annualized rate of 14.9 percent. Experts attribute the rapid expansion to four factors.

Both countries enactedeconomic stimulus programs, but China moved faster. Last November, the Chinese Government announced a $586 billionEconomic Stimulus Plan. In contrast, the US didn't officially acknowledge a recession untilDecember 1stand it took until February for Congress to pass a $787 billionRecovery and Reinvestment Act. Furthermore, the economic stimulus funds were distributed more rapidly in China; by early July the Chinese had spent half the allocated funds while the Obama Administration had expended only one-quarter.

As a one-party state, the Chinese Communist leaders implemented their recovery with no dissent. In contrast, the American economic stimulus act was passed with only a handful of Republican votes and remains controversial. (Nonetheless, the most recentNew York Times/CBS News Pollfound a significant increase in the number of Americans who believe that the Economic Stimulus package "has made the economy better.")

While China's unemployment hovers around 5 percent, the US rate approaches 10 percent. (And many observers believe that one in six Americans is unemployed or underemployed.)Many economistsfeel there will have to be an additional US stimulus package focused on job generation.

The second factor that distinguishes China from the US is theavailability of credit. The Chinese government controls its banks, which incurred minimal losses in the fall 2008 financial meltdown that slammed American financial institutions. Under orders from the central government, China's banks "unleashed $1.2 trillion in extra lending to Chinese consumers and businesses in the first seven months of this year." During the same period, US consumer creditdeclinedby 10.5 percent and commercial and industrial lending fell by 8 percent.

The third factor isexports. The Chinese government has given broad assistance to exporters, including tax breaks and restrictions on imports. There is no comparable program in the United States, although some might say that the Federal government's bail out of banks and auto companies was a step in that direction. (From a business perspective, the focus of the American Recovery and Reinvestment Act was on tax cuts to offset losses and investment in alternative energy, healthcare, and infrastructure.)

For the foreseeable future, China will be a net exporter of greater than $300 billion per quarter, while the US will be a net importer of roughly$400 billion per quarter.

The fourth factor explaining the difference between the American and Chinese economies ispublic sentiment. There's no reliable measure of Chinese consumer confidence, but with unemployment at 5 percent and visible signs of economic recovery, it's likely that it is positive. In comparison, the most recent New York times/CBS News Poll found that only 36 percent of Americans felt our economy is getting better, while 17 percent felt it is getting worse, and 46 percent said it is about the same. That's a big improvement over a year ago, when only 2 percent felt it was getting better, but there's obviously a lot of room for improvement. While USconsumer confidenceis improving, it's still below the level it was at a year ago, before the collapse of Lehman Brothers. American consumers are, at best, guarded; Chinese consumers are optimistic and therefore in the mood to buy goods and services.

It's useful to imagine the economies of China and the US as elevators. A year ago they were both in freefall. Now the Chinese elevator is steadily moving upward. Meanwhile the American elevator is stuck between floors.

If the US economic "elevator" is going to begin to move upward, there has to be more active involvement by the White House. The Obama Administration must speed up the stimulus process and ram a second stimulus package through Congress. The Administration and the Federal Reserve should force American banks to expand consumer and commercial credit. Finally, the Administration should encourage exports in key industries by a combination of enlightened fiscal policy and import restrictions. To increase the growth of US GDP, and prepare America to compete in a global economy where China has taken the lead, the White House must be more aggressive.