Limitations of fiscal policy in an incomplete market

Policy effectiveness in relation to economic growth

The interaction between fiscal and monetary policies was a much-debated issue between Keynesians and Monetarists. According to post- Keynesian mainstream economics, in macroeconomic regulation the government should, except in times of crisis, avoid adopting fiscal and monetary policies that are tight or loose at the same time. A better choice is to pair tight fiscal policy with loose monetary policy, or loose fiscal policy with tight monetary policy. Monetarists, in principle, are not opposed to the interaction between fiscal and monetary policies, but they maintain that fiscal policy has great limitations. For example, a loose fiscal policy may not achieve the expected goals because fiscal expansion tends to partially “crowd out” private consumption and private investment, but if fiscal policy is tight, it cuts into the economic growth rate, resulting in fiscal expenditure cutbacks that invariably bring down fiscal revenue, thereby diverting the fiscal policy from its prescribed goals. Consequently, they believe that monetary policy is more effective than fiscal policy. Such is the basic policy preference of Monetarists.

In a policy debate with Monetarists, Keynesians further argue that the coordination between fiscal and monetary policies should be discussed in combination with economic policy goals. To be specific, they argue that it is necessary to observe the effects of the coordination between these two policies from the perspective of whether it is conducive to economic stability and sustainable growth.

The topic of my speech today is the relationship between economic reform, new public ownership, and a new culture. In my opinion, when we clarify the relationship between these three things, we will gain a better idea about the significance of and prospects for the economic reform that has been going on in our country for a whole decade, and find it a lot easier to understand the trials and tribulations our nation has gone through in the course of it.

The study of people

In studying economic issues we are obliged to face certain questions. What is the purpose of growing the economy? For whom do we provide products, labor, and service? Why should we turn out more and more products and provide more and more labor and service? These questions boil down to one: What is the purpose of production? Common sense tells us that production per se is not the purpose. Human beings do not live in the world merely as laborers. People do not come into this world to serve production – it is production that serves people. The purpose of production is for people to be better cared for and better educated. It defeats the purpose of production if we concentrate single-mindedly on offering more products while our standard of living and cultural and educational attainments remain the same, and if our people are not duly respected and cannot live up to their potentials.

Years have passed since economic restructuring came under way in this nation. What is to be done next? Here I would like to share my thoughts, which come in twenty-eight points, and involve seven issues altogether. Some of these ideas may be controversial, but I see controversy as a good thing. Without discussion and debate, there will be no economic prosperity.

Ownership reform holds the key to economic restructuring

(1) Economic restructuring may break down if price reform fails. The success of economic restructuring, however, hinges not on price reform, but on ownership reform, which entails revamping the corporate system. This is because price reform serves the main purpose of shaping an environment in favor of the growth of the market economy, but only ownership reform or corporate system reform can address such issues as interests, responsibility, motivation, and incentives.

(2) The purpose of ownership reform is to build state firms truly liable for their own gains and losses. Being “truly liable for their own gains and losses” means that, for one thing, firms should bear all the consequences of financial losses, and for another, gains and losses must be symmetrically treated not only for firms but also for their leaders. The most crucial task of ownership reform is to make state firms really accountable for their successes and failures, and, even more so, to answer the question of what is to be done with firms in the red.