From the minute the money is spent, government spending slows economic growth. That’s because central planning of resources is central planning of resources.
That government spending is an economy-sapping tax requires mention as economists and economic pundits speculate on who will blink first in response to a mindless tariff war, Donald Trump or Xi Jinping. Oh well, who will?
The Wall Street Journal’s Joseph Sternberg believes it could be Trump. About who will win, Sternberg would likely agree that no one wins a tariff war simply because there’s no warring in trade. There’s just winning. Economies aren’t blobs, they’re individuals. And individuals gain the more that they have the world lined up to freely serve them, and the winning only grows precisely because the world is lined up to serve them. As in, when the world is doing for us our odds of doing the work most associated with our unique skills and intelligence grow.
Still, Sternberg yet again thinks China could win. Why? The columnist says it’s about the voters. Xi will “never” face them, while Republicans in Congress walking the plank for Trump will face voters in November of 2026.
So, while Sternberg acknowledges that Xi “can’t afford to impoverish the Chinese people permanently,” he’s got the power to “ride out a trade war at least past a U.S. election.” All of which is difficult to argue with assuming Xi is the person Sternberg thinks he is, and that such a person would risk the credibility that is economic growth to “beat” Trump. Most would agree with Sternberg, but the view here is that no leader wants to be associated with economic decline.
Most would likely agree with Sternberg's economic analysis too. He observes that in addition to time being on Xi’s side, the “dog that has yet to bark here is additional ‘stimulus’ for the Chinese economy, in the form of debt-funded fiscal transfers to households and businesses to boost consumption, or another credit expansion to stave off business bankruptcies and fund more public-works construction.” This is where the Keynesian within Sternberg gets off track, along with the majority.
It's too easily ignored that investment, not consumption, is the driver of economic growth. Furthermore, the mistake within the "stimulus" argument resides in the notion that there's some kind of "other" from which wealth and consumptive ability can be extracted. There is none. Just as the “other” in the U.S. is you, me, and the taxpayer behind the tree, so is that the case in China. For the dog to bark would be for Xi to pair the enormous tax that is government spending with the cruel burden of the tariff war.
Sternberg agrees, at least somewhat. He writes that “Such policies won’t permanently replace lost U.S. demand for Chinese exports.” Actually, they never will. And they won’t because governments can’t extract demand from Pluto, which means Xi can only redistribute consumption power insofar as others have less of it.
Sternberg believes that Xi and his people can “suppress normal indicia of economic distress,” except that they can’t. Markets always speak, and even if Xi could quiet China’s indices, the only closed economy is the world economy. If Xi hits his people with a tariff war followed by increases in government spending, the very real unhappiness of the Chinese people will align with falling U.S. equities to reflect Xi’s errors.
It’s a long way of saying that while Sternberg may be right about the eventual winner between Xi and Trump, he’s probably overstating Xi’s advantages. Though Xi has more power than Trump, reality always intrudes on central planning. Xi may be an authoritarian, but he’s not a magician.
