China-Financed Infrastructure Spending

ARRA Sign, Acadia National Park (my photo, available under cc license)

Reihan Salam writes that “Michael Pettis has a brilliant idea that, alas, will never be put into practice — putting China’s surpluses to work in U.S. infrastructure projects.”

Based on the one-sentence description, that struck me as a pretty silly idea. The idea, presumably, is that China could do this to keep American consumption high rather than annoying us with their dollar-boosting bond purchases. But dollar-boosting bond purchases finance the US fiscal deficit so we could just accomplish the same thing by engaging in more deficit spending to build more infrastructure. And it turns out that if you click the link this is also what Pettis thinks:

One way for this to happen is for the US government to fund and engineer the infrastructure spending directly. The resulting increase in the US trade deficit would of course be financed by Chinese lending to the US government as it is forced to accumulate USG bonds. But aside from the fact that there is too much pork-barrel politicking involved in US government spending, it will result in a rapid rise in the US fiscal deficit.

Would that matter? No, because this is exactly the kind of fiscal spending that is sustainable. US wealth creation would exceed the rise in debt and so the US is in the aggregate better off. But of course the politics of a rise in the US fiscal deficit are pretty sticky.

And I agree. The politics of additional fiscal expansion are bad. But the politics of direct Chinese for-profit ownership of newly constructed US infrastructure are obviously much worse. So it seems to me to make more sense to just stick to basics and say that the right answer to the “currency manipulation” issue is just for the United States to make policy that’s appropriate to our conditions. That means expansionary monetary policy and deficit spending on infrastructure initiatives. China will then need to adapt with some different policies and we in turn will need to adapt to that. Pettis’ proposal is useful as a thought-experiment, but it simply goes to illustrate the foolishness of attempting austerity budgeting under present circumstances.