Paul Krugman explains the looming economic crisis that "bodes ill for the world as a whole"

"Is it possible that after all these years [governments] still don't get how this 'market' thing works?"

Published August 14, 2015 12:07PM (EDT)

 (AP/Lai Seng Sin)
(AP/Lai Seng Sin)

The New York Times' Paul Krugman wrote today about increased concerns that the crony capitalists who run the Chinese economy simply don't know what they're doing. "[T]heir zigzagging policies over the past few months have been worrying," he noted, asking "[i]s it possible that after all these years Beijing still doesn't get how this 'markets' thing works?"

Apparently, the answer is "yes," as he demonstrates that the government fundamentally misunderstands basics like the ratio of consumption to production. It attempted to float its economy through infrastructure spending -- a sound idea -- but did so "by funneling cheap credit to state-owned enterprises," resulting in them taking on debt -- which isn't quite so sound an idea.

China then boosted stock prices artificially, by relaxing regulations and encouraging investors to purchase stocks with borrowed money. "The goal may have been to help out those state-owned enterprises, which could pay down debt by selling stock," he wrote. "But the consequence was an obvious bubble, which began deflating earlier this year."

The common theme in these wild policy swings is that China’s leadership keeps imagining that it can order markets around, telling them what prices to reach. And that’s not how things work.

I’m not saying governments should never interfere with markets, or even set limits on prices. There is, as I’ve written in the past, a strong case for raising the minimum wage and in general for promoting higher wages for American workers; there’s an even stronger case for effective financial regulation.

There’s even a case for occasional intervention to prop up asset prices. Three years ago, the European Central Bank’s promise to do “whatever it takes” to safeguard the euro — generally interpreted as a promise that it would buy government bonds if necessary — worked wonders. Back in 1998 the Hong Kong Monetary Authority purchased large amounts of stock to beat back a hedge fund attack on its currency, and scored a notable success.

But these were short-lived actions, taken at times when markets seemed to have lost their bearings. Staffers at the Federal Reserve used to call these moves “slap in the face” interventions. That’s very different from the kind of sustained intervention and political dictation of prices China seems to imagine it can pull off. Do the country’s leaders really not understand why that won’t work?

If they really don’t, that’s a big concern. China is an economic superpower — not quite as super as the United States or the European Union, yet, but big enough to matter a lot. And it’s facing tough times. So if its leadership is really as clueless as it has been looking lately, that bodes ill, not just for China, but for the world as a whole.

Read the rest at the New York Times...

By Scott Eric Kaufman

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Business China Economics Paul Krugman