A Housing Bubble in China: A Rationale for Government Intervention

As of October, 2016, China was in the midst of a dizzying housing bubble. A month before, “economists at the Bank of China warned in a report that worsening asset price bubbles were adding to a frothy market that could result in trouble.”[1] Shanghai’s average housing price was up nearly one-third from a year before; prices in major cities like Beijing and Guangzhou were not far behind.[2] The recognition of the bubble—which does not come easily—should have triggered counter-cyclical measures by the Chinese government.

For example, the government could have increased the minimum requirements for down-payments and even increased tax on purchases of additional properties to counter the impact of speculators. Rumors alone of these measures was enough in 2016 for many couples to file for divorce “so that one partner could still be treated as an independent buyer” so as to be able to buy additional properties as investments.[3] That people would go to such an extreme based on rumors points to how carried-away market bubbles can get. For this reason, increasing the minimal down-payment and associated taxes even on a couple’s purchase of one property may not be excessive.

Adding to the difficulty in curtailing the boom was the “growing amount of American-style debt.”[4] Long-term household loans (mostly mortgages) doubled as a share of total official bank lending in 2016 through mid-October. In August, the loans accounted for about 40 percent of all new loans, contrasted with just 20 percent at the start of the year. The value of new home-loans as a percentage of all housing sales surged to a record high. Underground lenders were also feeding the boom. Unfortunately, the loans facilitated the role of speculators in the market, whom I submit play a crucial role in any market-bubble.

Unfortunately, the loans stemmed from the lending oriented to keeping the Chinese economy growing. As long as the government wanted to use leverage as a fiscal stimulus for the economy, clamping down on bubble-facilitating, long-term loans could only be difficult at best. Hence the need for tightened government-regulations making the loans less easy to get, especially but not limited to additional properties. One challenge for regulators in such a context is to enable the poor to become homeowners even as unnecessary home-buying is stymied until the bubble has been shrunk.  In other words, regulators should have distinguished home-ownership as a basic human right (and in this sense not a commodity) from home-ownership as an investment—and these two in turn from overall economic growth.

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1. Neil Gough and Carolyn Zhang, “In China, Property Frenzy, Fake Divorces and a Bloating Bubble,” The New York Times, October 16, 2016.

2. Ibid.

3. Ibid.

4. Ibid.

U.S. Government adds $587 Billion to Its Debt in 2016: Revealing a Fault-line in Democracy

The U.S. federal-budget deficit for the fiscal year that ended at the end of September, 2016, represented a reversal on the six-year run of declining deficits. The $587 billion deficit is equivalent to 3.2% of GNP; the previous year’s deficit had been $438 billion, which is 2.5 percent of the GNP.[1] The underlying reason for the altered trend has to do with democracy itself—something notoriously difficult to budge.

The revenue loss from the extension of tax breaks for businesses and individuals, plus the refusal of Congress to “pair the tax cuts with some tax increases on wealthy Americans” is the immediate cause.[2] To be sure, President Obama’s proposed tax could be viewed as being unbalanced given the emphasis on the wealthy; refuting this imbalance came at the expense of a larger fiscal balance, given Congress’s extension of the tax breaks. Yet Congress could have substituted another sort of tax to counter the deficit-increasing effect of the tax-cut extension. The refusal to mandate such balance may be due to democracy itself.

In short, elected representatives have a political incentive to provide fiscal benefits to constituents and a political disincentive to extract corresponding fiscal costs. The decoupling itself can be viewed as a vice of democracy. With elected representatives legislating, it is not clear whether they can employ enough self-discipline to couple tax increases or spending cuts to tax cuts. With a federal debt just short of $20 trillion at the time, the systemic imbalance can be said to be inherent to democracy itself, and ultimately to the refusal of an electorate to insist that fiscal benefits be paid for in a reasonable time. Outside of dire emergencies, such as the Great Depression and World War II in the twentieth century, the abstract ideal of balanced government revenue and expenditures should not be so difficult to achieve in practice; so that it is testifies to the difficulty of self-government, whether within the psyche or the polis. The difficulty, in other words, is systemic—in human nature itself—and thus particularly onerous to being corrected.

The only solution I can see is the body politic setting for itself an automatic “coupling” mechanism for “the future” (and thus not so scary). Such a device of parchment would have to be sufficiently protected from the urge for “something for nothing today” and yet flexible enough should an emergency occur. The key might be a constitutional amendment that is sufficiently rigid that it would hold under normal circumstances (including even minor wars), and sufficiently flexible when it really matters. Therein would lie the rub: the possibility that the accommodative feature(s) would be exploited. A constitutional amendment subject to jurisprudence from the judiciary might capture the balance in terms of solidity and flexibility that so alludes fiscal balance in representative democracy.

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1. Jackie Calmes, “U.S. Deficit Increases to $587 Billion, Ending Downward Trend,” The New York Times, October 14, 2016.

2. Ibid.