Should China "send money to promote consumption" like some countries? Learning Times article points out 8 misconceptions about expanding domestic demand: economy | China | cognition

In the first half of this year, China's overall economic performance rebounded and innovation momentum continued to strengthen. However, due to various complex factors at home and abroad, promoting high-quality development still faces some challenges and pressures, and insufficient domestic demand has become the main contradiction in China's macroeconomic operation. On July 24th, the Central Political Bureau meeting proposed to actively expand domestic demand, leverage the fundamental role of consumption in driving economic growth, expand consumption by increasing household income, drive effective supply through terminal demand, and organically combine the implementation of the strategy of expanding domestic demand with deepening supply side structural reform. To further enhance the effect of expanding domestic demand and promote the effective improvement of quality and reasonable growth of quantity in the economy, it is necessary to clarify eight cognitive misconceptions and optimize the ideas and measures for expanding domestic demand.

The cognitive misconception of "pure investment or consumption driven"

For a long time, there has been a debate in the academic community about "investment driven" and "consumption driven", especially in recent years when there has been a proposal to adopt a "consumption led development model". The theoretical foundation of these views is the "three carriages" theory, which states that investment, consumption, and imports and exports are the three driving forces behind economic growth. In fact, these three aspects reflect the sources of GDP composition in a statistical sense, and their roles in economic growth are not the same, nor do they form a necessary driving logic. The central government has clearly stated that efforts should be made to expand domestic demand and fully leverage the fundamental role of consumption and the key role of investment. Consumption plays a fundamental role in economic growth and directly affects the quality of economic cycles. Investment not only generates immediate demand, but also serves as the true driving force for growth, a prerequisite for technological progress and industrial structure upgrading, determining the speed, quality, and supply level of economic growth, and ultimately determining people's income status and consumption ability. Therefore, we must abandon the cognitive misconception of relying solely on investment or consumption to drive, and view the relationship between the two from the perspective of the national economic circulation system, and cannot separate them. The improvement of consumption ability and the expansion of consumption demand to a certain extent depend on the expansion of investment, which is the result of investment. A package of policies to promote investment and consumption should be comprehensively considered based on the macroeconomic situation, especially changes in total demand. Only by effectively combining the two can we achieve the strategy of expanding domestic demand.

The cognitive misconception of "excessive investment and low consumption"

Excessive investment and low consumption are often considered an important manifestation of China's economic structural imbalance. If investment is not valued or suppressed according to this logic, it will bring huge negative effects to China's economic and social development, affecting the achievement of a series of development goals. The high proportion of investment in our country is determined by our country's development stage, development tasks, and resident savings rate. The rapid growth of investment is an important reason for the rapid development of China's economy in the past few decades. For example, the average annual growth of fixed assets investment from 2003 to 2011 was 25.6%. Whether there is much investment or not depends on the development goals and tasks, resource conditions, and macroeconomic conditions, rather than simply comparing countries.

In addition, there are also issues of underestimation of consumption and overestimation of investment due to statistical caliber. Of course, we also see that the current problem of sluggish consumption has become an important factor affecting the quality and vitality of the economic cycle. To solve this problem, we need to start by improving consumption capacity and willingness, rather than limiting investment. Expanding investment is actually a prerequisite and foundation for expanding consumer demand and improving people's living standards. In 2022, China's per capita GDP was only about 16.7% of that of the United States. Whether it is promoting high-quality development, promoting industrial structure transformation and upgrading, or improving people's living standards and achieving common prosperity, investment must play a key role, especially in better leveraging the role of government investment as a driving force.

The cognitive misconception of "low investment efficiency"

Low investment efficiency often becomes an important issue in monitoring China's economic growth. From the perspective of the incremental capital output rate indicator, the marginal output per unit of capital is gradually decreasing. This trend corresponds to the continuous growth of capital in China and conforms to the laws of economic development, but it does not represent an efficiency issue in China's investment itself. According to calculations, China has a higher efficiency compared to other countries at the same stage of economic development. The investment required for unit GDP growth in our country is not only much less than in the United States, Japan, or Western Europe, but also less than in other countries at the same stage of economic development. To expand domestic demand and stabilize growth, it is necessary to continue optimizing investment structure and methods, increasing investment that conforms to the direction and trend of industrial development, and further improving investment effectiveness. At the same time, handle the relationship between housing for living, not for speculation, and stable real estate investment. In recent years, China has adhered to the principle of "housing is for living, not for speculation", and the dependence of economic growth on real estate has significantly decreased, which has not been easy to achieve. From the perspective of medium - and long-term fundamentals, there is still room for healthy development in the real estate market. In the future, it is necessary to maintain a reasonable scale and growth rate of real estate investment, actively promote the transformation of "urban villages" and investment in public infrastructure construction for both emergency and emergency use.

Cognitive misconceptions such as "excess and waste of infrastructure, limited space"

To eliminate the concepts of "excess and waste of infrastructure", "promoting infrastructure is just following the old path and not in line with high-quality development", and "limited space", it is necessary to fully understand the role of infrastructure investment from the perspective of the overall development of the national economy. Infrastructure investment not only generates economic linkage effects through the expansion of total demand, which is conducive to stable economic operation, but also enhances macroeconomic efficiency and improves people's livelihoods, effectively supporting high-quality development. Overall, there are no excessive problems with infrastructure, but rather shortcomings that hinder the improvement of national economic efficiency and people's living standards. The per capita infrastructure capital stock in our country is only 20-30% of that of developed countries, and the per capita investment in public facilities by farmers is only about 1/5 of that of urban residents, with a very large investment space. Increasing infrastructure investment is not a temporary or short-term demand management tool, but an important measure that should run through the entire process of achieving the Party's second centenary goal. At the same time, the connotation of infrastructure construction is different in each era, and there is no need to overly emphasize the distinction between old and new. However, the content of infrastructure construction needs to be innovated and adjusted in a timely manner according to development and people's production and life needs. The current new infrastructure mostly belongs to the category of industrial investment, therefore, it is necessary to handle the investment relationship between traditional infrastructure and new infrastructure well.

The cognitive misconception of "government investment crowding out private investment"

Although there is a crowding out effect in economic theory, it has strict prerequisites and conditions, and is also closely related to the direction and spatiotemporal conditions of government investment. The government investment in our country is mainly focused on infrastructure construction investment, which has significant positive externalities. In the case of insufficient social investment motivation and weak willingness, not only will there be no crowding out effect, but it can also generate compensatory and induced effects. On the one hand, to fill the demand gap caused by insufficient investment in enterprises, to fill the investment "shortcomings" related to the quality of life of residents and the development environment of enterprises, and to maintain a reasonable investment demand; On the other hand, indirectly increasing the return on investment of social capital, generating induced effects, attracting social investment, and expanding the total demand of society. Of course, it is necessary to adhere to the decisive role of the market in resource allocation, optimize the direction of government investment, and focus on providing fundamental and strategic support and guidance for economic and social development, avoiding government investment competing with the people for benefits.

The Cognitive Misconception of "Separation between Resident Consumption and Public Consumption"

When observing and analyzing the expansion of consumer demand, many viewpoints and propositions revolve around the consumption of individuals or families. Undoubtedly, this is the main content of expanding consumer demand, but if we only focus on this or limit ourselves to it, it will affect the effectiveness of expanding consumer demand. Economy is a system, and consumption should not be fragmented. Broadly speaking, consumption includes both household consumption and public consumption. Public consumption not only includes basic public services such as education, healthcare, and social security, but also includes the consumption of physical state-owned assets such as infrastructure. From a consumer perspective, infrastructure investment forms future public consumption. Public consumption has an impact on household consumption from both the perspective of consumption capacity and willingness. Therefore, to enhance the effect of expanding consumption, on the one hand, it is necessary to promote the actual consumption of individual residents; On the other hand, through public consumption, we need to accelerate the construction of public services and infrastructure, improve the consumption environment, clear consumption bottlenecks, enhance the willingness and ability of residents to consume, and drive personal consumption.

The cognitive misconception of "sending money to promote consumption"

Some argue that China should directly distribute cash like some countries to stimulate consumer demand. Although this method can have a certain effect, the cost is too high and it is simply not feasible in our country. The consumption and savings habits, as well as the level of development, of Chinese residents are significantly different from those of developed countries such as the United States. If each person sends 1000 yuan in cash, it would require about 1.4 trillion yuan, but how much effect can this have on stimulating consumption? This not only creates a huge financial burden, but also constrains its effectiveness due to the consumption habits, structure, and willingness of residents. In particular, the epidemic has to some extent enhanced residents' preventive motivation and made consumption more conservative, which inevitably leads to inefficient use of valuable financial resources. In fact, in foreign countries, this approach has also encountered many problems such as high costs, poor efficiency, and serious waste. From the perspective of improving the efficiency of fiscal resource utilization, encouraging residents to consume should focus more on strengthening the construction of the social security system, providing stable expectations for the people, solving the main problems that constrain consumption demand such as housing, elderly care, parenting, and medical care, and enhancing residents' willingness and ability to consume.

The cognitive misconception of "no policy space"

There is a view in the current society that "there is great financial pressure, expanding domestic demand, and no policy space". Although the contradiction between fiscal revenue and expenditure is still prominent and the issue of local debt has received widespread attention, the main tone of fiscal policy enhancement and efficiency has not changed, and China still has policy space to expand domestic demand. There are indeed structural problems with local bonds in some parts of our country, but they do not constitute the main contradiction and problem of the economy. Non growth or low growth is the biggest risk that our country should prevent. From a practical perspective, by optimizing the combination of fiscal policies and resources, revitalizing assets, and formulating and implementing a comprehensive debt restructuring plan, a certain policy space can be released. From a theoretical perspective, fiscal space should be viewed from the perspective of the overall development of the national economy. The essence of fiscal deficits and government debt issues is the balance between growth and risk. The key to creating debt risk lies in the direction and efficiency of the use of debt funds. As long as debt funds can restore the economy or increase potential growth levels, and the financial foundation can be strengthened, there will be no major debt risks. Of course, we also need to pay attention to preventing and resolving liquidity risks of local bonds in certain regions.