Ordinary People’s Livelihood, the Foundation of a Big Country / Sheng Hong

灿烂墙子路 (1).JPG

In recent years, I have visited the Qiangzilu Great Wall every autumn. The autumn here is very beautiful. As soon as I stopped my car this year, a farmer came up and told me that I could not climb the Great Wall here because it had to be protected. During the conversation, I knew he had accepted the government’s money and had to do his duty. I saw that the Great Wall Resort has been developed nearby, and the larger parking lot was also newly built. Obviously, the local farmers are finally determined to make use of the local Great Wall resources to develop tourism. So I felt a logical paradox. The government paid the peasants to do something to break the peasants’ way to earn money. Of course, it is also important to protect the Great Wall, but is it a supreme goal that totally negates the economic rights of the peasants in the vicinity, or is it a complementary and compatible thing with local development? For example, appropriate “maintenance fees” are charged to those who climb the Great Wall and special maintenance personnel are hired. We will not discuss this detail for the moment.

China’s achievements today depend entirely on market-oriented reform. The market system is a rule of discrete decision-making by countless individuals. We can’t know what the results of individual decision-making will be, but we know that the results must be much better than those made by the planning authorities. So the foundation of the market system is the economic freedom of everyone, not just some people. On the one hand, as Hayek said, “Since the value of freedom lies in the opportunities it provides for unpredictable and unpredictable actions, we seldom know what we will lose by imposing specific restrictions on freedom.” On the other hand, how can we judge that this rule is applicable to the whole society? Simply, as long as we find that one person’s economic freedom is improperly restricted, we can conclude that the principle of economic freedom has been damaged, which will certainly involve more people.

Economics has a concept of “investment multiplier”, which means that a new investment will bring several times the market demand. This is because new investment will increase the same amount of income at the same time. People will save part of their income and consume the rest, which in turn will become the income of other people, so circulating and repeating. Finally, there is a demand that is several times larger than the initial investment. One of the important institutional prerequisites is the market system. If any person’s freedom of trade is limited, market transactions can not be smoothly carried out because of government intervention, even if only one transaction is blocked by the government, the mechanism of multiplier formation will be destroyed. When the existing market system is interfered with by the government, the multiplier that has worked will be invalid, which is equivalent to divisor. Although the market economy is good, it can’t stand the torment of government intervention. Without too much time, the economy may enter a depression. If the market can bring us “unexpected surprises”, intervention in the market will bring us “unexpected disasters”.

For example, the government limits the scale of urban development. This policy goal has entered the planning of big cities such as Beijing and Shanghai. Its policy means is to use coercive force to drive out residents from other provinces. This not only  led to the “drive out the low-end population” which shocked at home and abroad, but also continued to close small shops, ordered migrant residents to move out, suspended schools for children of migrant workers, and so on when people were not concerned. But it immediately destroyed hundreds of thousands of people’s livelihoods, millions of people’s normal lives, and related economic output, as well as the resulting chain reaction. Especially in the urban-rural fringe, there are a large number of people who provide commercial retail, catering, car washing, haircut, express delivery and other services. They lose their jobs and their corresponding income. On the other hand, those who rent houses in the fringe of urban and rural areas are forbidden to rent their houses, so there is no rental benefit; those who provide services for them here do not have a livelihood income.

Perhaps some people think that this is only a partial matter, not the overall situation. Actually not. Take only Beijing and Shanghai, two big cities that publicly claim to control their population size, with a limit of 23 million people and a limit of 25 million people. Compared with other metropolises in the world, such as Tokyo’s 42 million, there is still a lot of potential. By 2016, Beijing’s population has experienced negative growth. Let’s assume that there are two million fewer people in each city. We assume that these people leave these two cities to make a living elsewhere, or are unable to enter Beijing or Shanghai where they would like to enter because of restrictions, only to earn the national average income. Taking Beijing’s per capita GDP of 128992 Yuan and Shanghai’s per capita GDP of 124600 Yuan minus the national per capita GDP, it is approximately regarded as the efficiency loss of limiting population size, multiplied by 2 million Yuan each, totaling about 277.4 billion Yuan. In 2017, China’s marginal propensity to consume was 0.4, which is put in the multiplier formula, resulting in a total loss of income of 467 billion Yuan. This is equivalent to 0.57% of GDP in 2017.

But the chain reaction goes beyond that. Those earnings saved did not exit the market either. Whether it is residents’ direct investment, deposits in banks or purchases of other financial products, these money or as investment demand increases the total demand of society. People who sell investments will turn their income into new demand. People who sell financial products will also buy financial products when they get this income. This cycle also forms a multiplier. There is only one limitation, that is, reserves are deducted from bank savings. Therefore, this multiplier is called “currency multiplier”, roughly speaking, it is the reciprocal of the reserve ratio. Assuming that the reserve ratio is 9%, the savings portion of the loss of 277.4 billion Yuan because of the above-mentioned restrictions on the urban population will lead to potential demand of 184.93 billion Yuan by the currency multiplier. Plus the loss of the above-mentioned consumption portion, the loss caused by restrictions on the urban population of Beijing and Shanghai can reach 2.8 percentage points of GDP. Of course, both investment multiplier and currency multiplier need to be completed in a certain period of time. If the speed of currency turnover is slow, it may not be completed in a year, but this can only make the loss distributed in a longer period of time and more difficult to detect in the short term.

The restriction of scale has not improved the environment in Beijing or Shanghai, but reduced the supply of factors. The first is housing supply. Some people who work in Beijing and are deprived of suburban housing still have to live in Beijing, so they have to live in the city. This makes Beijing more crowded. This immediately became apparent. According to Zhuge Housing Data Research Center, the rent level in August this year was 25.8% higher than the same period last year. This may directly affect the cost of many enterprises, or make young people in Beijing can not afford and consider leaving Beijing. Generally speaking, the enterprise’s rent cost accounts for about 5% of the enterprise’s cost. In order to compensate for the rising rent, the enterprise’s rent cost should be increased by 1.25 percentage points. In the face of rising costs, enterprises may increase the prices of products or services, which will lead to cost-driven price increases; or because they are in the field of competition, they dare not increase prices too much, thus digesting the cost increases themselves. The reduction of labor supply will directly lead to the rise of labor price. So in the competitive logistics industry, the price has risen by 10%, while the price of oil sticks at the entrance of our community has risen by 50% (this is a geographical monopoly). To make matters worse, we can’t buy services for money. For example, we can only wash our cars by ourselves now.

In fact, the city is the most effective manifestation of the market in the specific space. It brings the externality of the market network through the agglomeration of population, and creates more trading opportunities and trading dividends. It therefore attracts people to further agglomerate in this interest center until the cost of agglomeration, such as traffic congestion, air pollution and rising land prices, rises to offset the benefits of agglomeration. As long as people can earn a living in Beijing and Shanghai, it shows that there are also agglomeration dividends. Some people need their business. From the perspective of the whole society, there is an additional GDP, and no one needs to prove their rationality here. The lack of a certain resource (e.g. water) to prove that population control is based on a single objective to negate the comprehensive results, without noticing that it is not worth the money as a whole. If all kinds of resources are priced by the market, or artificially set prices close to the market, scarcer resources can be adjusted to achieve a new balance, and there is no need to make a big move to demolish other people’s houses on winter nights. On the other hand, reducing or eliminating government intervention will reduce the size of cities like Beijing. This has been discussed in the article “Reviewing Xiongan Plan with Prospect of Urban Economics”, and I will not repeat it.

For another example, in the name of protecting the environment, production and living behavior are restricted. It is well known that the government mandatorily requires using coal to be converted to using gas. Even if the gas equipment has not been installed or ventilated, it requires that coal be stopped burning for heating and many rural children are frozen. What we know little is that the government requires farmers not to burn the straw, but to process the straw. This seems to be a small matter, but the government implements it in the form of mandatory orders. Some rural areas reflect that rural cadres should often visit the fields. If smoke is found in some places, cadres should be fired and peasants should wear handcuffs. Such administrative acts are certainly against the law. As a result, farmers are afraid to use the simple method of burning straw to recover straw fertility, and have no extra energy to deal with straw or transport straw out in other ways. As a result, because of this small government intervention, a large number of abandoned farming. This is not a trivial matter, and it immediately shows the macro results. According to the National Bureau of Statistics, the total output of summer grain in China this year has decreased by 3.06 million tons compared with the previous year, a decrease of 2.2%. Not allowing to burn straw may be one among factors.

The problem is that these seemingly environmentally friendly practices actually undermine the role of the market and reduce economic output, but fail to achieve the goal of environmental protection. Professor Coase pointed out that environmental issues are “interactive”, that is, environmental protection will increase the cost of enterprises or bring losses. The government should not simply enforce environmental protection measures for a single goal, but should balance the interests of both sides through market transactions and achieve effective allocation of resources. He then put forward the concept of “emission trading”. The meaning of this concept is that since the production of enterprises will inevitably cause pollution, enterprises can not be closed artificially for the sake of environmental protection, only given a certain amount of emission permits, and then let enterprises trade in the market. This proposal was quickly accepted by the U.S. government and the market, and through practice, a mature system was finally formed, resulting in environmental protection effects. In fact, this method has also been introduced to China, and has been tested in many provinces. But on the whole, it was not successful. This is because the emission right depends on the initial definition and distribution of the government, but there are still many defects in our governmentsystem, so that it cannot be equitably and effectively defined and allocated.

However, the basic spirit of Coase theory can be used to guide environmental protection work. That is, when taking environmental protection measures, we must consider the possible costs and losses. In fact, when environmental protection does not violate market principles, considering efficiency factors, it is also necessary for environmental protection. Because we should not only examine the discharge of pollutants in absolute quantity, but also examine the environmental protection achievements in terms of the discharge of pollutants per unit of economic output. In 2009, we did a study on the impact of China’s economic marketization on energy supply and demand and carbon emissions. We found that “from 1980 to 2005, China’s market index increased from 4 to 6.3, and its carbon emission efficiency (GDP/carbon emissions) increased from 920 US dollars/ton to 2560 US dollars/ton.” Conversely, the intensity of carbon emissions per unit of GDP (carbon emissions/GDP) is declining. “From 1980 to 2004, the intensity index of carbon emissions in OECD countries declined by 2% annually on average, compared with 4.4% in China.” Because of this, Premier Wen Jiabao promised at the Copenhagen Climate Summit in 2009 that by 2020, China’s carbon intensity will be 40-45% lower than in 2005. If the government directly intervenes in reducing emissions, it may reduce some carbon emissions, but it will increase the intensity of carbon emissions by reducing economic output more dramatically.

ordinary people.jpgData Source: Unirule Institute of Economics, The Impact of China’s Market Economy on Energy Supply and Demand and Carbon Emissions, 2009.

Explanation: In the period of planned economy, the carbon emission per unit GDP (carbon intensity) is relatively high. After the reform and opening up, the carbon emission intensity has decreased significantly year by year.

In fact, the air pollution caused by burning straw accounts for a small share of the total pollution and is seasonal. Industrial pollution, automobile pollution and other traffic pollution are the main part of the air pollution, especially the continuous haze. But our policy does not limit the use of vehicles, such as automobiles, or industrial production. Even if some industrial enterprises have been relocated, their purpose is not to reduce the total amount of exhaust emissions, but to protect the environment regionally. Among all these related groups, it is clear that rural residents are the lowest-income and most politically disadvantaged groups. Therefore, the so-called environmental policy of forbidding burning straw is a policy that has little positive impact but harms the most middle and low income groups. According to Rawls’ second principle of justice, if a society has to change the initial distribution of the market, it can only tilt towards the lowest income group. This policy of forbidding rural residents to burn straw and enforcing it is obviously contrary to the way.

Again, excessive security protection. A political conference or an international conference should have certain security measures, but if the security radius is too large and the requirements of the measures are too high, it will bring a lot of economic losses. Losses include two aspects. On the one hand, security costs have been greatly increased, on the other hand, other people’s insecurity has been increased. In fact, the concept of security is relative. If it is too safe for some people, or if it has done too much security work for no reason, it may be unsafe for others. In the name of a political conference or an international conference, breaking the normal life of the surrounding residents and demanding that the surrounding enterprises stop operating are the insecurity of the lives of these residents and the insecurity of the property rights of enterprises. The so-called property rights security means that its operation should be stable and reliable. If there are too many unpredictable factors to stop its operation, the property right is unsafe. In short, the real and overall security is that the Constitution is respected and the constitutional rights of the people are protected.

For example, security in Beijing has expanded to the surrounding provinces of North China in a period of time. On Shanxi’s expressway, the safety inspection of entering Beijing began. The establishment of security checkpoints outside the Sixth Ring Road in Beijing, especially during peak periods, can cause extremely serious congestion. I returned to Beijing from the north on the eleventh holiday the year before last. I was blocked for more than seven hours on the Badaling Expressway. For example again, because of the meeting, enterprises are shut down. The extreme example I saw was a political conference that shut down businesses 750 kilometers from Beijing. It is in this industrial park that two-thirds of enterprises have been shut down because of losses due to the rising cost of coal-to-gas conversion. The negative impact of this excessive security seems to be very partial, but in fact it will also bring about macro-results. For example, in North China, it is also a huge number to assume that one-fifth of enterprises are shut down for 10 days each year because of meetings. According to the data of 2016,  it would decrease the GDP by 108 billion yuan. Considering the investment multiplier and currency multiplier, the GDP decreased by 900 billion yuan, which is equivalent to 1.2 percentage points of the national GDP in that year. Moreover, in recent years, international conferences have been held not only in Beijing, but also in places such as Hangzhou, Qingdao and Guangzhou, where the losses caused by excessive security are even more serious.

The problem is that this excessive security not only fails to achieve the purpose of security, but worsens the security situation. First of all, these excessive security protection do not add a single bit of security technically and physically. In other words, in economic terms, the marginal utility of security is zero, but the marginal cost is huge. Because these excessive security measures are only conceptual security, they do not seem to have any specific technical analysis, nor do they show the wisdom of security experts, but increase costs in vain. Secondly, this so-called security, which makes others unsafe and makes the public bear the cost, has no positive significance except to increase the disgust. This leads to the insecurity of government structure at the strategic level. Because the government’s security should first be reflected in its political legitimacy, if the government’s political legitimacy is harmed in order to protect the government’s security, it will be counterproductive. Isn’t a disgusting measure a more unsafe one?

Generally speaking, the above discussion is only a small part of the multiple government inappropriate interventions, and is limited to individual areas. This article does not discuss larger and entire interventions, such as intervention in the property market, financial markets, and network operations, etc. But even these minor inappropriate interventions have general characteristics. First of all, these measures are mainly implemented in Beijing, Shanghai and other major cities. And the capital and the first-tier cities have demonstration effect in the whole country. It is reported that Chengdu, Qingdao, Dalian and Xi’an have determined the population size control quantity. The expulsive behaviors in Beijing and Shanghai have also spread to some areas. It is said that Taiyuan is also closing down small businesses in the name of renovating “back streets and old communities”. Therefore, the losses estimated by our above analysis are only partial losses, which will be much larger in the whole country.

The second aspect is that a value orientation declared by these practices may become a general principle of the government and cause widespread damage. If a political conference or an international conference is held and the residents of the city are asked to stop working, and the enterprises in the surrounding provinces are suspended, it means that the interests of the conference and the general public are directly in conflict or in opposition. These meetings did not care about the livelihood of the ordinary people at all when formulating the “national strategy”, and even highlighted these meetings’ “greatness” with such indifferent arrogance. In fact, any great society is made up of countless ordinary people’s livelihoods, and the noblest attitude is to treat the people as if they were hurt. How dare to make any ordinary people lose their livelihoods? On the contrary, the attitude is not only to let some ordinary people lose their livelihoods, but also to declare a rule to oppose the market and to infringe on economic freedom, which will harm all people. Therefore, no matter what resolutions or declarations these conferences have reached, the excessive security protection of the conference itself is a deconstruction and irony of these resolutions or declarations.

“Zuo Zhuan” says, “Regarding the people as the injured, the country will rise; regarding the people as the soil mustard, the country will be death.” Don’t think that the city administrators have nothing to do with themselves when they confiscate the pancake stalls, and don’t regard the rise of big power as a reason to despise the livelihood of the ordinary people. In fact, the most precious thing for us is the principle of economic freedom to ensure the livelihood of every ordinary people, and compassion for the hardship of making a living for small families. When these principles and feelings are gone, our Chinese miracle will come to an end. If we want to be proud of ourselves as the citizens of a big country, it is not because of how many prosperous cities and magnificent buildings, how many advanced weapons and huge armies, how many wealthy people have entered the world rankings, but because our society cherishes those who are still struggling on the edge of the city, those who have no power and no force, those whose parents have left their homes and whose children are isolated and helpless in the countryside. If their economic freedom is not violated and their basic rights are protected, will we worry about the freedom and security of others? A country that can pay attention to the livelihood of the ordinary people is a great country that can base itself on the world.

November 3, 2018 at Fivewoods Study

First published in FT Chinese and China-review Weekly

Author: flourishflood

Economist, Confucianist

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