Gao Peiyong: Macroeconomic policies not a panacea for all problems

The following is a summary of Gao Peiyong's keynote address to attendees at the Fifth Conference of Government and Economics held at Tsinghua University, Beijing, on April 22, 2022. Dr. Gao is the Vice President of the Chinese Academy of Social Sciences.

On April 27, 2023, the Fifth Annual Conference of Government and Economics, co-hosted by the Society for the Analysis of Government and Economics (SAGE) along with Tsinghua University's School of Social Sciences and the Academic Center for Chinese Economic Practice and Thinking (ACCEPT), was broadcasted online. The Vice President of the Chinese Academy of Social Sciences, Gao Peiyong, delivered welcoming remarks to attendees at the conference in a keynote speech.

According to Gao, China's overall fiscal deficit ratio has not exceeded 3% during the past five years. He mentioned that this mainly reflects two considerations, and with both being in line with the basic principles that define the subject of government and economics. First, the configuration of macroeconomic policies necessitates performing a cost-benefit analysis: What should the GDP growth target be? How much expansion will it take to achieve this target? What is the appropriate role for fiscal policy? And what is the appropriate role for monetary policy? Undertaking research and analysis into costs represents one of the fundamental questions for the field of government and economics. When making a case for the direction of macroeconomic policy, the proposed stance may lack the necessary restraint if it ignores the possible costs associated with such a policy. Gao asserted that there is a basic principle in government and economics that cannot be overlooked—namely, the Pareto principle. That is, the gains from any macroeconomic approach must be greater than the losses, since an expansionary policy always involves paying a corresponding price to achieve stated goals, which therefore means insisting that the benefits of any policy course remain greater than its costs.

Furthermore, although macroeconomic policies can solve short-term contradictions and problems, they are not omnipotent, since not all cyclical, structural and systemic contradictions impacting the functioning of an economy are of a short-term nature. If we do not fully consider the overall situation, and simply use macroeconomic tools to deal with all of our contradictions and problems, the result would inevitably lead to a deluge of stimulus measures with economy-wide ramifications. Gao stressed that in the face of the threefold pressures of shrinking demand, disrupted supply and especially the strain from weakening expectations, even relatively more robust macroeconomic policies are sometimes unable to have the desired effect, with a large number of problems instead needing to be resolved through reforms. He observed that the rest of the world often regarded China's economy as having a high degree of resilience, a great growth potential and boundless vitality, and yet if the intention is to turn this into a reality, the country must ultimately depend on carrying out the necessary reforms. We must not use macroeconomic policies as the remedy for all problems and we must adhere to a proper view regarding the role for policy versus reform, suiting the medicine to the illness and implementing targeted measures accordingly.