The Chinese “Consumption Problem” Problem

Just a quick, wonky missive on China.

One of the crucial analytical claims in arguments about China is its underconsumption, which sometimes gets conflated with overcapacity.

Although rarely mentioned prior to the pandemic, during the Biden era, underconsumption became a way to express a sense of scandal about China as a novel threat. As someone who was in those early conversations where the Democratic Party groped toward a “foreign policy for the middle class”—which was actually about great-power rivalry—the idea was that underconsumption/overcapacity arose from the “China shock” (ie, “China stole our manufacturing jobs!”). The China shock, in turn, was the Democratic Party’s convenient way of externalizing the consequences (job loss) of its own choices to pursue neoliberal globalization.

But consumption is supposed to refer to the proportion of national income that households and individuals spend on consuming goods and services. Underconsumption thus implies one of two things: 1) Either there is some healthy consumption equilibrium and Chinese workers are below that rate, or 2) Chinese production far exceeds its workers’ ability to consume it, leaving a surplus for export, which in the green tech context people now call “overcapacity.”

From one point of view, thinking about Chinese consumption is a mundane accounting thing. From another point of view, it’s a justification for great-power competition and a way of villainizing China. From still another point of view, there is no unique level of underconsumption; nothing to see here.

But what I think is most true—and perhaps most controversial to claim—is that none of these points of view are quite correct.

In The Rivalry Peril, Mike Brenes and I place domestic inequality in China—an aspect of which can be represented as “underconsumption”—at the center of our working theory of China as a policy problem:

At root, the observations that animate U.S. policymaker grievances are symptoms of and worsened by extreme inequality in China…the wage share in China has not remotely kept pace with the growth of Chinese productive output…When economists speak in terms of “high rate of savings” and “low rate of consumption,” they are describing an accounting dimension of the surplus value that results from worker exploitation.

We then go on to document both the connection between inequality and ethnonationalism, as well as the many ways in which state policy facilitates the transfer of workers’ surplus value to owners of capital (private and SOE owners of capital).

Our point is not to villainize China but rather to relativize it, to keep it in proportion. This is what capitalism looks like. The connection between inequality and ethnonationalism, moreover, is most dramatic in the US.

On the one hand, China’s problems are just large-scale reflections of global problems—most states are trying to modernize and provide economic stability in a world of declining economic growth. Remarkably, China’s dong a better job of it than most. But the capitalist world-system is experiencing an extended period of crisis (a subject I’ll return to in a separate post). That doesn’t mean capitalism is about to end; it means that states and owners of capital are going to be strategizing and improvising in novel (and likely more predatory) ways that were less common in the neoliberal era.

On the other hand, if we understand “underconsumption” as “overcapacity,” then there is a tremendous, world-historical upside to Chinese domestic imbalances. As Kyle Chan and others have repeatedly explained, China is producing at scale what the world needs in order to make a just green transition amidst climate catastrophe. America and Europe have shit the bed. The global South lacks the means to make this transition independently. But China’s surplus of (cheap!) green tech is precisely what the world needs (that and sovereign debt relief).

What separates our view of Chinese consumption from someone like Michael Pettis is not that we disagree about imbalances in the Chinese economy. It’s that 1) those imbalances are deliberate, part of an export-based economy, and 2) Chinese imbalances are not something imposed on the world but rather are interdependent with it, part of a whole.

The great failing of Pettis is that he chooses to view Chinese data from the perspective of the American flag, which leads him to see China’s share in an unbalanced relationship (extreme concentrations of production in China, extreme concentrations of both capital and debt in the US) as somehow coming at America’s expense rather than being partly a consequence of America’s choices.

I do think that China would be better off if its domestic consumption increased by increasing the wage share of Chinese workers; Chinese intellectuals already know this but it’s not so easy to do in a one-party state that does not want labor to have power.

And as we discuss in The Rivalry Peril, the US is not really in a position to compete with China in the zero-sum fashion that it has been. A new detente with China would not only be good for stability (and therefore Taiwan); it’s also the only way for US auto firms to actually partner with Chinese firms, which in turn is the only way they’ll survive short of US nationalization of the Big 3.

So insofar as underconsumption represents inequality, it’s a problem that connects to ethnonationalism, in China as everywhere. Insofar as underconsumption represents overcapacity, it’s a double-edged sword. It can lead to dumping of excess exports in the global South, displacing the productive capacities of nations with no real development ladder to climb in the 21st century; I don’t want to be naive about that risk.¹ But Chinese overcapacity is also the only thing that can save the world. America opposes that at our collective peril.

1. I’m always on the lookout for indicators of the John Hobson theory of imperialism as a function of domestic inequality.