Don't talk about inflation, the core is to increase people's income

Steven N.S. Cheung is a great economist, and there is no doubt about this—

It can be said that Zhang Wuchang is the most famous and internationally recognized economist in Hong Kong's history.

In 1967, Zhang Wuchang's doctoral dissertation "The Theory of Tenant Farmers: References to China's Agriculture and Taiwan's Land Reform" caused a sensation in the Western economic circles and became one of the representative works of Western institutional economics. In the same year, Zhang Wuchang went to the University of Chicago to do postdoctoral research, working with Nobel laureates in economics Friedman, Coase and others.

The University of Chicago, as the base camp of new institutional economics, has won the Nobel Prize in Economics for several people who have exchanged and discussed economic issues with Lao Zhang, but unfortunately, although Lao Zhang himself won the University of Chicago Prize in Political Economy and was invited to participate in the Nobel Prize ceremony in 1991, he has never won the Nobel Prize.

In 2003, Zhang Wuchang was prosecuted by the U.S. government for "massive tax evasion," and Zhang Wuchang called it "slander," and he was wanted by the U.S. government for refusing to pay back taxes and refusing to appear in court, and he has since fled the United States and lived in Chinese mainland, which has no extradition regulations with the United States — an interesting story that is not the subject of today.

Don't talk about inflation, the core is to increase people's income

The topic I'm going to explore today is Zhang Wuchang's latest blog post in the past two days:

"China should push inflation to around 6% as soon as possible"

Article URL:

https://finance.sina.com.cn/china/2023-12-09/doc-imzxmnhr6063806.shtml

Zhang Wuchang writes articles with a characteristic that he always likes to quote the opinions of a bunch of his Nobel Prize-winning friends in economics (similar to Rui Chenggang's "My friend Clinton said") and then put forward his own ideas.

The same is true for this article, where he first mentions the clash between Keynes and Friedman's views on the household consumption function:

To the end, a key point in this controversy is that Keynes believed that the consumption of citizens was based on their income, while Friedman believed that the consumption of citizens was based on their wealth. ”

Then, Lao Zhang appeared as an "arbiter" and gave his opinion:

But from the point of view of consumption, all the evidence says that Friedman was right.

Furthermore, Zhang Wuchang said:

One of the difficulties of China's economy today is that for a number of reasons, property prices have fallen, which is the W decline in the above equation, that is, wealth, wealth is also...... The decline in wealth means that the public's expectations of future income have fallen forever.

……

But according to a number of information provided by friends, the decline is quite severe. How can we solve these problems? Letting property prices float freely is certainly right, and our friends in Beijing are clearly doing the same.

……

I think the easiest way to do this is Friedman's idea 50 years ago, that China's central bank should push inflation up to about 6% per annum as soon as possible, then adjust it to 4%, and then let the 4% inflation rate continue until the economy as a whole has a comprehensive and considerable development.

The above is the main content of Zhang Wuchang's blog post.

I don't know how Lao Zhang got the figure of 6%, but it's not the first time he's said it. Three years ago, at an online seminar held by Phoenix Finance, Zhang Wuchang gave a speech entitled "Will the new coronavirus cause the Great Depression?", which mentioned:

In the current situation, China can raise the inflation ceiling to 6%, because the inflation that can be regulated by the central bank is really just an increase in prices, which can be appropriately lowered at the appropriate time, which will not lead to hyperinflation.

Let's take a look at what China's inflation has looked like over the past few decades if the official year-on-year increases in CPI and PPI are used as a proxy for inflation.

Source: Choice

Obviously, over the past 40 years, China's official CPI has increased by more than 6% year-on-year (commonly known as inflation) in four periods:

1987-1989;

1992-1996;

from the second half of 2007 to the first half of 2008;

Mid-2011.

The first two were big inflation without monetary constraints, and the last two were short-lived inflation rates of 6% due to proper management, lasting 12 months from 2007 to 2008 and only 4 months in 2011.

But the problem is that Lao Zhang only said that he would push up inflation, and he didn't mention how to push it up.

A few more words here.

For example, in 2014-2015, when China's foreign exchange reserves were "surplus", Zhang Weiying suggested that all foreign exchange reserves should be distributed to the people, while Zhang Wuchang claimed that "I would rather burn foreign exchange than appreciate the renminbi", and the whole country was in an uproar.

If it is just to push up inflation, it is actually very simple, the central government ordered the People's Bank of China to directly print 100 trillion yuan, and each civil servant to issue 1 million yuan, I guarantee that China's inflation can immediately reach more than 10%.

Zimbabwe and Venezuela did this at that time, and the inflation rate not only quickly exceeded 6%, but also moved directly towards the high level of 100%, 1000%, 10000%, 1000000%......

But is this what we want?

Under the credit money system, if we analyze the causes of inflation, I think there are only two kinds of inflation.

The benign inflation of economic prosperity, if prices rise moderately, is the result of the normal operation of the social economy, due to the increase in residents' income, the vigorous production of enterprises, and the prosperity of social consumption, the unemployment rate also remains low, this is benign inflation - ready-made cases, that is, the inflation shown in the United States and Japan in the past three years;

If prices rise rapidly, but the production and consumption activities of the whole society do not increase, residents have no income, enterprises maintain or reduce production, the growth rate of social consumption is sluggish, and the unemployment rate is rising, this is hyperinflation - a ready-made case, which is the inflation shown in Argentina and Venezuela in the past three years.

To put it simply, no matter what the number, as long as inflation continues to promote the production and consumption of the whole society, it is benign, and any inflation that fails to achieve this goal is all malignant.

From my point of view, people-oriented, the typical signs of benign inflation I give are:

The growth rate of disposable income was significantly higher than the increase in prices.

Zhang Wuchang's so-called "China should push the inflation rate to 6% as soon as possible" is actually a meaningless sentence, just like my child's grades are not very good, but I encourage my child to say that you should score more than 90 points in the test every time......

If it is benign inflation brought about by economic prosperity, like in 2006-2007 or 2011, of course we would like inflation to reach 6% or 4%, and if it is hyperinflation caused by indiscriminate printing of money, don't say 6%, even 2% is a plunder of the people, why do we want this kind of inflation?

China's current problem is not inflation at all, but the problem of falling housing prices, widening gap between the rich and the poor, and sluggish consumption in the residential sector.

If people's incomes don't increase much, but prices are pushed up by 6% out of thin air, won't this make the people have no way to live?

Don't talk about inflation, the core is the income of residents, especially the income of middle and lower class residents!

Speaking of which, I would like to remind you to check the growth rate of the average disposable income of urban residents in China in the last two years.

Source: choice

Clearly, the growth rate of average disposable income of urban residents in China has hit the lowest level since the second quarter of 2022 (except for 2020, when the pandemic began at the beginning of the pandemic).

At this time, the core of economic recovery should not focus on what inflation is not inflationary, but should focus on how to increase residents' income.

If it is a general way to send money to the people, this way to push up the inflation rate, as the United States, Europe, Japan, Australia and even Taiwan, Hong Kong, Macau and Singapore have done, this kind of push is certainly possible - because all residents send money, which means that the purchasing power of the middle and lower classes has been really improved, and the "inflation" obtained in this way must be benign inflation (please automatically refer to my previous definition), and the United States and Japan have already given us a way in front of this aspect.

It would be disastrous for China to continue to engage in the previous high-intensity state investment model, and to "send money" to local governments, central and state-owned enterprises to build infrastructure, and forcibly push up inflation.

As long as the income of residents rises and the people's expectations for the future are better, they will naturally actively consume, and with consumption, the expectations of enterprises for the future will become better, and they will also increase productivity, and the economy will naturally circulate.

In particular, I don't need anyone to stimulate consumption, just like I want to eat when I'm hungry, I don't need anyone to stimulate, as long as I have money, I'll buy food, unless I really don't have money, I will find a way to "downgrade consumption".

Zhang Wuchang's latest article: Looking at today's economic situation from Friedman's consumption function theory