Like China’s current leadership, Richard Nixon feared the political fallout from a slowdown, and so resisted hard. He bullied the Federal Reserve into conjuring up a stimulus, just as China’s ruling State Council recently directed the People’s Bank of China to cut interest rates. He propped up the defense contractor Lockheed, much as China’s government supports large state-owned enterprises. He unleashed government-sponsored lenders to shovel credit into the economy—for the mortgage-finance companies Fannie Mae and Freddie Mac, substitute China’s state-owned banking behemoths.
Inevitably, Nixon’s efforts to force growth above its natural level stoked inflation, to which the president responded with almost-communist control measures: A new Price Commission, led by Donald Rumsfeld, tried to freeze prices by diktat, drawing unenforceable distinctions between apples and applesauce, popped and unpopped corn. Not surprisingly, the controls cracked after a short period; inflation resumed, and the rest of the 1970s were a stagflationary nightmare. In sum, by denying the inevitability of the slowdown, Nixon helped set the country on a path to double-digit inflation, wiping out savings and eventually forcing the Fed to respond with extremely tough medicine, which inflicted back-to-back recessions on Americans at the start of the 1980s.
In today’s strange economic circumstances, inflation poses no immediate threat to any major nation, China included. But if China’s leaders follow Nixon in resisting an inevitable slowdown, the penalty will show up elsewhere. By trying to boost growth with low interest rates and government-directed lending, China will add to its debt burden, which already jumped from 134 percent of GDP in 2007 to 217 percent in the second quarter of 2014, according to McKinsey. In itself, that ratio is manageable, but the trajectory isn’t: The debts of the government, and of the banks that are effectively a part of it, are expanding at about twice the rate of the economy, according to the China watcher Michael Pettis—which is to say that debt is piling up much faster than the country’s ability to repay it. Like the U.S. four decades ago, China will discover that a reality-defying stimulus only makes matters worse.
The second American lesson for China concerns financial reform. Again, this was a challenge Nixon refused to face squarely, even though most economists urged him to be bold. By the time of his inauguration, America’s outdated system of capping bank-deposit rates—the same sort of system that still exists in China—had been rendered dysfunctional, and for reasons that contemporary China watchers would quickly recognize. Once upon a time, the caps had usefully forced down banks’ cost of capital, allowing them to make cheap loans to the industries that fueled growth. But as the U.S. economy developed and the financial system grew more sophisticated, new types of savings vehicles sprang up, offering market-linked interest payments; because those market rates were more attractive, savers voted with their wallets. As deposits migrated from banks to upstart rivals, small businesses, which relied on bank loans, found credit hard to come by. Home buyers faced a similar credit crunch.