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November 11th, 2008
Rebuilding the economy with infrastructure spending

As China’s recent double-digit economic growth slowed to its lowest level in five years, its government announced on Nov. 9 a $586 billion financial stimulus package. “The stimulus package,” The New York Times reports, “will be spent over the next two years… to construct new railways, subways and airports and to rebuild communities devastated by an earthquake in the southwest in May.”

This comes at a time when infrastructure projects in the United States are being put off due to widespread funding and budget shortfalls by local and state governments, in addition to the federal Highway Trust Fund running on empty.

Chinese President Hu Jintao is scheduled to soon travel to Washington for a global economic summit hosted by President George W. Bush. President Hu also recently spoke with President-elect Barack Obama about, among other things, the global financial crisis and what China and the U.S. could do to help.

With their proposed stimulus package, the Chinese government has set the example of rebuilding an economy in decline with infrastructure spending.

However, in the U.S., both the outgoing President and incoming President do not agree on the federal government’s next step in reviving the country’s financial system.

Though President Bush pushed for the government’s intervention in the country’s private sector, he is unsupportive of further interventions beyond actions similar to the tax-rebate stimulus passed in early spring 2008.

President-elect Obama, on the other hand, supports continued government intervention – perhaps even with the financial bailout of the country’s auto industry. What is more, Obama supports a stimulus package focused on infrastructure spending (similar to that of China’s). Bush has never made infrastructure investment a priority and believes its impact on the economy would be too slow acting.

What may work in China, may not necessarily work in America

The New York Times reports, “China’s package is not comparable to fiscal stimulus measures that are being discussed in Washington. In China, much of the capital for infrastructure improvements comes not from central and local governments but from state banks and state-owned companies that are encouraged to expand more rapidly.”

Additionally, unlike the U.S., China is a developing, Communist nation – there is a great need for primary infrastructure projects, especially in rural parts, and that need can be more easily fulfilled as the government still has absolute authority, and can fund and take land at will.

As a result, comparing infrastructure needs and policies between China and the U.S. is extraneous as the two systems of governing are at such odds with each other.

And, it did not work in Japan

In the 1990s, Japan experienced a similar economic downturn to that of the U.S. and China (and, it again faces a similar recession today). To stimulate the Japanese economy then, the government invested heavily in public-works projects to lift the economy out of a 15-year economic slump. But, the investment accomplished little and left the country with little-used bridges and other infrastructure. In dealing with its likely recession now, the Japanese government announced a $51 billion package focused on payouts to families and businesses (which, has yet to work in the U.S.).

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