German economic policy then, China now
I have that old English debate advice bouncing around my head: “The first person to mention Hitler, loses”. And deservedly so. Adolf Hitler and his National Socialists carved out and administered whole new realms of evil, and thus comparisons with anything else tend to be both lazy and unfair to one’s target.
That said, if something seems just a bit similar, if you can see the seeds, it’s probably worth pointing it out - and, very importantly too, figuring out what the differences are, and how important they are. So this is not a “China today is like Germany in the 1930s” piece. It is there some significant similarities *and** differences; and we should be on the look out for shifts in both.
There are some clear political parallels between China’s recent ‘National Socialism’ and the German variety, though China is usually a milder version: the take-over of the state by the Party, the highly-nurtured spirit of anger & resentment about ills fostered on the country by foreigners, all the talk about “the will of the people” to cover up for the lack of elections, the military parades which fill many with pride, the endemic surveillance and the crushing of organized opposition, the utter lack of jokes at the big meetings. In their early years, the Nazis were pretty popular at home and abroad; they were the party of social order, of economic growth, of building stuff; they made many proud of being German again.
Of course, much of this stuff is classic righ-wing populist politics. Trump at his happiest would be him humorlessly saluting a parade, oozing resentment, while mulling the cancellation of the 2020 election.
Of course, there are some big differences too. The Nazis engulfed society in their shit; the CCP is not as totalitarian. National Socialism was Hitler - he could have had anyone shot; power is more distributed in the CCP. While race is increasingly important, the CCP still thinks about Han-ness in different ways than the Nazis thought about Germanness. For all its crimes, the CCP usually uses prison to crush its enemies, not a bullet. I discussed the parallels and differences between the two ideologies here.
But it is the economic similarities and differences which kept flirting with me while reading Adam Tooze’s magisterial Wages of Destruction that I would like to discuss today. Wages is all about pre-war Nazi economic policy and the economic logic of its defeat. As a child brought up on Blitzkrieg, Dunkirk and V-2 Rockets it was a revelation to me just how utterly doomed Hitler was when he launched his war. The Blitzkrieg that defeated France in days was a hugely-lucky roll of the dice, the British losses at Dunkirk were massively and inevitably outweighed by Russian and American troops, and those rockets never had any scale. At root, Germany simply did not have the economic capacity to build and resource a war machine to fight on two fronts. It was doomed.
War-econ aside, the economic policy of Germany in the 1930s were fascinating. Briefly, it was:
- Mobilization of the economy to finance massive militarization.
- Extensive industrial policy to build self-sufficiency.
- This led to large twin deficits, increasing administrative intervention in the economy, and suppression of consumption.
- A focus on gaining control of resources outside of the country.
1. Mobilization of the economy to finance massive militarization
Right from the start, Hitler prioritized militarization. It was the be-all-and-end-all of Nazi-econ. As the 1930s, and his impatience grew, the constraints that stopped him channelling all the country’s resources into steel, guns and ships fell away (or were shot). It was quite an extraordinary rewiring of the economy; 1% of GDP went to the Wehrmacht in 1932, 20% by 1939.
An economic boom from the mid-1930s helped finance this. While the Nazis claimed its infrastructure and jobs programs were the cause, Tooze shows that this spending was small, and that the boom was likely the result of the end of reparations (the Nazi regime just stopped paying over time), the order they bought to recessionary chaos, and all that military pump-priming.
2. Extensive industrial policy to build self-sufficiency
Tooze delves deep into the depths of everything from chemicals to agriculture to cars. Before the ‘last election’ in 1933, business was told to pay up into the “Adolf Hitler Spende” fund. But with state funds behind them, the capitalists were generally happy to do the Supreme Leader’s bidding. They did not much like the protectionist policies, or the tariffs that others levied as Germany “peacefully” expanded, but they were making money, and they were smart enough to know what happened to critics. Hitler had a great line: “There is no need to nationalize business if the population can be nationalized.”
From 1936 Herman Goering was basically in charge of industrial policy. There were successes. And failures. Ferdinand Porsche’s efforts to build the People’s Car, the “Volkswagen”, is a classic example of the latter. He sold the dream of an affordable car to Hitler, who funded him, and, surprise surprise, the economics of making a decent, affordable car defeat Porsche, and not a single VW Beetle is delivered before 1945. (I’m not sure I’m going to feel quite the same the next time I get behind the wheel of a Cayenne.)
3. Large twin deficits, increasing administrative intervention in the economy, and suppression of consumption
Despite the growth, Berlin had a big twin deficits problem. The budget blew out for obvious reasons. And with industry sucking in overseas oil, iron ore and rubber, so did the current account deficit. Hitler refused to bend on spending or to devalue the Reichsmark because of fears of triggering inflationary turmoil again. So the twin deficits became structural.
The inevitable result was then that more and more state intervention was needed to keep the machine pumping. In 1936, all foreign exchange and gold were requisitioned by the state. By 1938, banks were being force to buy tons of government bonds, access to foreign exchange was being strictly rationed, and price controls were endemic, especially on wages. Businesses supplying the state had to accept a minimum of 40% of their payments as tax credit. The Reichsbank is financing the deficit by this point, and the quality of production is collapsing as businesses cannot pass on cost increases. But Hitler cares not; he attacks Poland.
4. A focus on gaining control of resources outside of the country
Infamously, Hitler craved “lebensraum” (living space), most of all the lands east of Germany. He saw global politics as a battle for resources, and while the United States had a whole continent, the British their Empire, Germany was stuck in the middle of Europe, entirely dependent on others for its food and energy, and thus ever weak. So Poland had to be taken - and the people living there entirely wiped out, to make space for good German farmers. He had similar designs on the oil of the Caucuses, a need which partly drove him to invade Russia.
And so to China
There are clearly lots of interesting parallels with Communist Party economic policy today, and critical differences.
First, national resources are being pushed into the military, with startling effect, and hundreds of billions of state bank dollars are being thrown into high-tech industries with dual-use applications. The recent resurgence of efforts at ‘civilian-military fusion’ suggests they want to push more. Famously more is spent on internal than external security. But given the Party’s day-to-day tools of generating consent are not that violent, they have to ensure a happy population too. So that means allowing enough resources to be channelled to growing the consumer and financing an expanding social safety net. To some extent, at least. (Sometimes it seems like Premier Li Keqiang wants to maximize the latter, and his boss the former.) Strong economic growth has meant Beijing could have its pineapple cake and eat it too. But as growth slows, there are difficult spending choices coming down the line. My bet would be that security takes priority, and this is turn would mean a less ‘moderately prosperous’ society.
Much has been written about Beijing’s industrial policy (including this brilliant piece by, err, me here). The aims of the two states are the same; self-sufficiency, because of shared paranoia about being cut off from global supply chains. And that ambition is in itself deeply suggestive of future intentions. Unlike Germany, a lot of this is just-catch and Beijing has all the SOEs to use too. Despite claims to the opposite, the private sector is also, by hook and crook, being enlisted, though much of this happens quietly. A friend tells me of Alibaba’s efforts to help the military develop chips in its new silicon unit, Pingtouge. When I met Ehang a couple of years back, the Guangzhou-based flying cars venture now looking to IPO, they were setting up a separate company to deal with the PLA. (You need to keep such stuff out of public view - but civilian-military fusion will make that less easy). There are plenty of Porsches out there, men happy to take the subsidies with promises of accomplishing amazing things. The head of one of the major semi-conductor groups springs to mind. But for every failure (thus far), there’s a success. T
On the twin deficits, Beijing currently runs a large fiscal deficit - 4-5% of GDP officially, 10-15% of GDP if you throw in all the local infrastructure the Ministry of Finance swears will never, ever be their liability (until it is). To get this under control and for growth not to crash would require a productivity miracle, which is not going to happen. (Or rather, is happening in large parts of the private sector, but that is being wiped out by waste in the SOE and government sectors.) Like Germany, Beijing has a lot of influence over the banking sector - and so that will be increasingly deployed to support government priorities, further squeezing resources available for the private sector.
On the balance of payments, as Brad Setser at CFR is enjoying pointing out, the trade surplus is up this year, thanks to weaker imports, suggesting a current account deficit is unlikely in the near term. I’ll take the opposite side of this bet with a five-year view; by 2025 I think Beijing will have consistent trade deficits. That’s partly because of falling household savings rates and an investment-put on the part of the authorities, as well as a chunk of electronics export capacity moving offshore. Many in Beijing are prepping for just that - thus the aggressive push for the Connect schemes and the wooing of foreign portfolio investors.
And, finally, in the search for access and some measure of control over overseas’ resources, we have of course the Belt and Road Initiative (BRI). Rather than invasion, this is all about financing infrastructure construction (which I wrote about here, and bribery aside, it is entirely up to other country governments to participate or not. The prime goal does seem to be resource extraction. Map the ports and railways and they usually end up near a mine or near where Shanghai-bound oil tankers float by. What China is doing in the South China Seas is less “win-win”.
All this bears more thinking about. The differences between the two models are as important as the similarities today. I guess the more the politics resemble the 1930s, the more economic policy will have to too. Of course, I hope and pray nothing so awful happens.