Isabella M. Weber
Says More…
This week in Say More, PS talks with Isabella M. Weber, Assistant Professor of Economics at the University of Massachusetts Amherst and the author of How China Escaped Shock Therapy: The Market Reform Debate.
Project Syndicate: In May, you and Karsten Neuhoff argued that Europe should already be pursuing a comprehensive policy response to the possibility that Russia will cut off gas supplies. Such a response – as you recently outlined in a policy brief for the German Institute for Economic Research – would start with voluntary saving schemes. During the COVID-19 pandemic, efforts to convince the public to make sacrifices for the public good had mixed success. How should the pandemic experience inform European efforts to prepare for a potential gas shortage?
Isabella M. Weber: We are living in a time of overlapping emergencies: the pandemic is not over, climate change is a reality, and geopolitical stability has reached a nadir. This requires us to reimagine economic policymaking as a form of disaster preparedness. We need to be able to employ both market and non-market coordination to respond to the shocks that inevitably occur as crises multiply.
Such coordination has occurred during the pandemic. Global markets were crucial to increasing the supply of critical goods, such as masks, and to bringing down prices rapidly (after their initial spike). At the same time, there was no “voucher market” for mask-wearing; instead, there were binding social commitments, established and enforced by the state.
Our proposal for a European gas-saving program recognizes that vague calls to action based on appeals to individual responsibility are not enough. We advocate creating concrete gas-saving targets through a consultation process involving key stakeholders, including business organizations, labor unions, consumer-protection agencies, and environmental groups.
Such a participatory approach offers an alternative to both market-based and top-down action. Should the voluntary implementation of the savings targets fail, however, action to meet them could be mandated, with government providing guidance for meeting the tremendous challenge of rationing energy usage.
PS: You have repeatedly argued that, rather than “recessioning” their way out of inflation through interest-rate hikes, countries should pursue selective price caps for essential goods and boost strategic investment. In a PS commentary last year, you suggested that even price controls elsewhere – namely, in China – could help to ease inflation pressures in countries like the United States. Does that also imply that individual economies’ ability to control prices is limited and, if so, what can countries do to overcome these constraints? More broadly, what would you say to those who, citing the Nixon Shock of the 1970s, warn that price controls carry serious risks?
IMW: First, it is important to note that high inflation is a really thorny problem. There is no magic bullet. It is also worth highlighting that price controls worked well during World War II. In the 1970s, when they were implemented in a cynical fashion (that is, to boost Nixon’s re-election prospects), their success was more limited.
Even if inflation is transitory, it is destructive, because it erodes purchasing power. This can lead to sharp boom-bust cycles, like those we saw after WWI and WWII. The “Volcker Shock” of the early 1980s – when then-US Federal Reserve Chair Paul Volcker raised the fed funds rate to unprecedented levels to rein in inflation – inflicted severe harm in both rich countries and indebted developing countries, with already-vulnerable groups suffering the most.
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Given today’s overlapping emergencies, it seems clear that the era of relatively stable global markets is over, at least for the time being. If severe sectoral shocks become frequent, an inflation-management strategy based on interest-rate hikes – which restrict aggregate demand and suppress the entire economy – becomes impractical. We need an alternative set of policy instruments to stabilize systemically important prices, without driving the economy repeatedly into recession. Strategic price controls can be one of these instruments, buying time for other measures that tackle the underlying market imbalance to take effect.
To stabilize specific prices, policymakers need to take into account the institutional, structural, and technical configurations of an industry. Housing markets are primarily local, and rents are often regulated by municipal authorities, so price stabilization could be handled at that level.
Now consider energy. For gas, the transportation infrastructure involves extensive pipelines, meaning that supply cannot easily be rerouted in the short run, though there is some scope for increased reliance on liquefied natural gas (LNG). A European cap on wholesale gas prices – ideally implemented in cooperation with other economies that are bidding for LNG – is therefore a feasible option. Oil, by contrast, is transported mainly by ships, meaning that supply can be rerouted much more easily, calling for a more global approach, like that proposed by Janet Yellen at the G7 summit last June.
The need to tailor price-stabilization measures to the configuration of specific sectors also means that we need sectoral state capacity – a kind of a central bank for a range of systemically important sectors.
PS: While the US is not yet stabilizing prices directly – though a bill on which you advised has been introduced – the CHIPS Act and the Inflation Reduction Act suggest that it is embracing the kind of strategic investment you have advocated. It could be said that, in doing so, the US is taking a page out of China’s economic-policy playbook, especially if it adds price stabilization to the mix. Your book How China Escaped Shock Therapy: The Market Reform Debate examines not only the contents of that playbook, but also how it was written: through a “fierce debate among the foremost reform economists.” As the world seeks a “new paradigm of economic stabilization for our times of overlapping emergencies,” what lessons can the US and other advanced economies draw from this debate?
IMW: A core theme of my book is how to maintain monetary stability amid rapid structural transformations. The main focus is China’s transition from a command economy to a market-based economy. But the inflation that the world is grappling with today is likewise occurring against a backdrop of rapid structural shifts, such as the post-pandemic economic reopening and the move from peace to war in Europe.
The idea behind shock therapy was that suddenly liberalizing prices in core sectors like energy and steel would send the right scarcity signals and thus lead to a rapid structural adjustment of the entire economy. More often than not, the outcome was high inflation and recession. China avoided this with a dual-track approach: the state retained control over core sectors, keeping the prices of essential output stable, and the market reigned on the margins.
Echoes of this debate can be heard in the advanced economies today. Some economists argue that letting prices skyrocket – a kind of shock therapy – is the only way to encourage consumers to save gas. In February, Sebastian Dullien and I proposed a dual-track pricing scheme: consumers would receive a certain amount of natural gas – enough to cover their basic needs – at a stabilized price, and would have to pay market prices for any additional gas they consume. Our proposal has been endorsed by Germany’s governing Social Democratic Party; the government is setting up a commission to assess such a gas price cap for essential consumption. A version of the scheme has been implemented for electricity in Austria. The US bill you mention – the Emergency Price Stabilization Act – calls for an extension of President Joe Biden’s supply-chain task force to create capacity to monitor and stabilize essential prices.
BY THE WAY . . .
PS: As you put it in your book, China’s narrow escape from “shock therapy” in the 1980s amounted to a “critical crossroads” in its reform path. Today, China’s growth is slowing, and deglobalization seems to be gaining traction. Is the country now at a similarly momentous point? What are the key battle lines of the reform debate in China today?
IMW: In the late 1970s, when China began its reform and opening up, its integration with the capitalist world economy was minimal. The country was truly at a crossroads, which would determine the trajectory of its economic model. Today, after more than four decades of deep integration of trade and investment, it is not just China that is at a crossroads; the entire world economy is.
When we talk about a US-China “decoupling,” it can sound as if the two economies can simply be unhooked, like the wagons of a train. In fact, it is more like removing organs from a very sick patient. Deglobalization exacerbates the shocks that are already being generated by overlapping emergencies.
It is difficult to know exactly how this is being debated within China. One advantage of the kind of historical research that formed the basis of my book is that you can get deep insights into debates, whereas records of current debates are difficult to obtain. But it seems clear that the dual-circulation strategy – which has attracted widespread attention since 2020, but dates back to the late 1980s – is China’s dominant approach. The basic idea is to try to maintain integration while reducing dependency. This leaves open the possibility of a lurch in either direction, driven by foreign-policy considerations and other developments.
A similar balancing act – reflected in last year’s regulatory interventions in the real-estate and digital-services sectors – can be seen in the relationship between the state and private businesses. China’s recent stimulus package underscores the government’s commitment to do whatever it takes to stabilize the economy, but there is a clear willingness to sacrifice growth for the zero-COVID policy. Next month’s 20th National Congress of the Communist Party of China will provide an important indication of the country’s trajectory.
PS: In How China Escaped Shock Therapy, you emphasize that the debate was among Chinese reformers – “not, as is often alleged, between anti-reform conservatives and market reformers.” What other fundamental misunderstandings do outsiders have about China’s reform trajectory, whether during the post-Mao decade or more recently?
IMW: There is a long-standing assumption that China’s marketization implies convergence with the Western economic model. Some free-market liberals used to claim that China’s breakneck growth rates vindicated their paradigm, and critical scholars on the left frequently concluded that China was becoming a neoliberal economy. From this perspective, the re-strengthening of the state in China during the past several years appears like a break with the previous trajectory.
A more nuanced understanding of how China avoided a shock liberalization in the 1980s – maintaining state control over the economy’s core, while growing into the market – shows that China’s entire reform trajectory has been defined by the state-market duality, with the boundaries of essential economic areas changing over time. From this perspective, recent events look less like a radical break with the past, and more like another in a long series of regular shifts in the internal balance of power.
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