It continues to amaze me that Marxian economists like Roberts continue to fuse neoclassical thinking into his analysis.

Roberts claimed that Western neoliberal economies with their consumer-led economy is bad. No, consumption economy in itself is not a bad thing. The problem with Western economies is that their consumption is fueled by debt - personal and household debt, while real wages have stagnated. This created an economy that can only sustain itself with more and more credit, which ultimately ends with a recession when the people can no longer afford to keep up with the debt-fueled spending (see: the 2007 subprime mortgage crisis in the US).

Roberts also claimed that China’s domestic consumption has gone up, so it’s wrong to say that its consumption is weak. Of course, domestic consumption has gone up, but so have household and corporate debt!

But that’s not even the crux of the problem. The 2008 global financial crisis and the 2009 global recession that followed plunged China’s export-led economy from a 13% annual GDP growth rate in 2007 to a mere 5% these days. This is not a good sign. It shows you how much the vast potential of China’s productive capacity is not being fully utilized. Just because my legs hurt and can no longer run, but hey, you’re even worse, you had to crawl, therefore I am still winning the race isn’t exactly something to celebrate about.

So what’s the problem here? Post-2009 crash, China ramped up its investment (4 trillion RMB) to stimulate the domestic economy from a global consumptive slump. There is no doubt that such huge investments had stabilized the Chinese economy and prevented it from suffering from the same recessions that were happening elsewhere in the world. However, do you see the problem here? Huge increase in investment while exports are down, and the domestic consumption continues to be weak, where else could all the huge amount of investment end up in? Real estate! This is where China’s real estate bubble came from, and it caused a deeply entangled crisis where the local government debt crisis is intertwined with the banking and real estate sector with no easy solution to get out of (as noted in Roberts’s piece as well). Local governments cutting corners to raise GDP by selling land and allowing the property market to proliferate, to make up for the loss in GDP from the real economy. In the meantime, the financial sector (especially the shadow banks) and the real estate investors benefited greatly from such arrangements. Yes, GDP is still higher than other countries, but how much of it is fueled by the real economy, and how much by the virtual?

Now that the housing prices are inevitably coming down, a lot of investors (both households and corporates) are going to lose a lot of their invested money. Exports are not expected to recover. So, how are you going to offset this loss of financial assets without triggering a recession? Clearly, consumption has to go up in order to make up for it to keep the economy moving. The difference here from those prescribed by Western economists is that the consumption must not be fueled by debt, but from the increase in real wages. And that requires the government to increase its budget deficit, pumping out the money and get them into the hands of the people, rather than relying on bank lending and export surplus.

One way or another, China has to go into a domestic consumption-led economy. It is better to do it earlier than later. People who continue to think China is doing “just fine”, no need to change anything, refuse to see the vast potential of China’s economy and how its continued entanglement with the export sector (where the global market is controlled by the US) causes it to be vulnerable to Western economic and financial warfare.