Republicans are worried the U.S. economy won't cooperate with President Trump's 2020 reelection campaign. But they have a plan.
It's a bad plan, of course. But what's also interesting is that, despite being cooked up by free marketeers in the GOP, the plan is strikingly similar to policies in the state-run, capitalist-communist hybrid of China.
The Republicans' plan, in a nutshell, is to deregulate the banks.
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"House and Senate Republicans have made clear in recent days that they're dissatisfied with the pace at which the president's appointees have pursued regulatory rollbacks for gigantic financial institutions and tiny community lenders alike," Politico reported. Last year, before they lost the House of Representatives, Republicans passed a pretty significant law to reduce financial sector regulations. The job of actually carrying out that reduction was left to various agencies, such as the Federal Reserve and the Federal Deposit Insurance Corporation. Which is why the GOP is now using hearings, letters, and other avenues to press officials at those agencies to get a move on.
The basic idea is that if the banks face fewer rules and regulatory constraints, they'll lend more to businesses. That increased flow of credit will then goose investment, job creation and so forth, and keep economic growth humming along. "We've heard from a number of experts either within the administration or in the financial services community that capital is not moving as quickly as it can," Sen. Thom Tillis (R-N.C.) told Politico.
What does this have to do with China? We usually assume that state-run economies like China's rely on direct government spending to fuel industry and economic activity. But it turns out the Chinese government also often relies on the slightly less direct method of juicing the supply of credit from the country's banks to its companies. That's how Chinese corporations racked up enormous sums of debt in recent years.
One key difference, of course, is that most Chinese banks are state-owned, and thus lend under orders from the government. Republicans hope that, in America's market-driven model, the banks will voluntarily lend more to make greater profits, once the regulations are out of the way. But the direction and nature of the money flows are the same in both cases, as are their intended effect on the broader economy.
The potential side effects are the same as well, most obviously big build-ups of hazardous debt. In fact, America already has a worrying corporate debt bubble that may pop in the next few years.
But China neutralizes that threat in a way the U.S. does not. Since Chinese banks are state-owned, they're backstopped by the Chinese government's control of the Chinese currency. All of China's banks operate under the implicit guarantee that they'll be bailed out in a pinch. Individual Chinese companies may default and fail, but the country's financial system can essentially keep shoveling out credit — both good and bad — in perpetuity, without fear of a 2008-style financial collapse. In America's market economy, by contrast, banks are supposed to be able to fail if they make too many bad loans.
Republicans have been as loud as anyone in condemning the bank bailouts that followed the bursting of the housing bubble. The problem, of course, is that rolling back financial regulations makes another crisis more likely, while refusing to backstop the banks makes it more likely the crisis will be another Great Recession rather than a mere bump in the road. The last few decades should also put the lie to the idea that private profit-driven actors will distribute credit in a wiser manner than government central planners.
There's another danger with this approach that China illustrates. Opening up the credit hose may produce more growth, but it's not always the most effective way of producing growth. And even when it is, the resulting growth can be pretty unequal. China, despite its reputation as a rival for U.S. capitalism, actually has an inequality problem to rival America's own.
Simply put, loans and credit are money directed at capital owners rather than at consumers. For Republicans, with their supply-side economic ideology, that's probably a feature rather than a bug. But their ideology is wrong: Banks, and the companies that borrow from them, do not invest simply because they can. They invest because they expect a profit. And how much profit they can make is determined by how much buying consumers can do. The more unequal a society becomes, and the more workers' incomes stagnate, the less buying they can do and the less attractive investment becomes. That's why U.S. business investment went into a steady collapse over the same time period that inequality shot up and working-class incomes flatlined.
Of course, you can always juice consumer spending by increasing the generosity of the welfare state, hiking minimum wages, pouring government money into public investment, or some combination thereof. Even better, because the U.S. government controls the U.S. dollar, just like China controls its currency, the government borrowing necessary to finance that spending would be vastly safer. But all that is ideologically anathema to the Republican Party. And surprisingly enough, China hasn't done much better. There just isn't enough aggregate demand out there to justify the kind of investment needed to get the economic growth that policymakers want. And if consumers themselves take on more debt to increase their consumption, we all know where that leads.
China solved this problem by straight-up ordering its banks to keep piling on the loans. The Republicans hope to solve it by trimming the banks' rules. That may not increase demand, but it will marginally increase the profit banks can make by loaning to meet the existing demand. It's just that every increase in investment you get with this method also increases the level of risk to the economy.
China at least addresses those risks created by the strategy, if not the intrinsic limitations of the strategy itself. American policymakers may not have the good sense to address either.
