Divergent responses to COVID-19
Goolsbee argued that COVID-19 has complicated pre-existing ideas about what a “normal” economy looks like in the United States and which sectors suffer during recessions.
“This is a business cycle unlike anything we’ve seen before,” he said. “The sectors that have been the most affected—like personal services, leisure, entertainment and travel—are the ones that in the past have been considered recession-proof.”
The result is that economists and policymakers “need to do some soul-searching,” said Goolsbee, the Robert P. Gwinn Professor of Economics at Chicago Booth. “People are basing their decisions on what happened in 1975 or 1995, when it’s clear that those models don’t work today.”
Yang commented that the Chinese government—after an initial period of fumbling—ultimately acted decisively to contain the virus by locking down 11 million of its citizens. The Chinese government’s actions, he said, were informed by President Xi Jinping and other leaders’ memories of the earlier SARS epidemic.
“In 2003, China was on the receiving end of World Health Organization travel advisories and was deeply troubled by what was going on,” said Yang, a leading expert on the Chinese political economy. “This time, they took an extraordinarily strong stance in terms of analyzing and dealing with the virus and also took a global stance in terms of economic management.”
Over the past several years, the United States and China have been engaged in a trade war. Will it continue?
“I think the tensions between the Chinese model and the Western liberal democracies will continue,” Yang said, in part because of key structural differences between them: China remains a country with communist leadership and an economy dominated by state-owned enterprises, which is not the case in Western democracies.
“The Chinese economy operates on a scale very different from other societies,” said Yang, the William Claude Reavis Professor in the Department of Political Science. “Today, you have two generations of young people who have only seen growth and prosperity, who are incredibly patriotic and have very little toleration for people who question the system.”
Goolsbee, former chairman of the Council of Economic Advisers and a member of President Obama’s cabinet, was more optimistic about the prospects for alignment over the next decade.
“I think a lot of the tensions we are experiencing right now will sort of drift away over the next 10 years,” Goolsbee said. “As China gets richer, its economy will naturally look more and more like that of other rich countries, which is to say it will be dominated by services like health care, education, travel and entertainment. These things are pretty naturally domestic demand-driven rather than exported, and I think the leadership in China knows that and is kind of wanting to move in that direction.”
Climate change: An opportunity for compromise?
One key to China’s success has been a willingness to absorb lessons from other cultures, Yang noted.
“The Chinese ruling system has imported a lot of things from the West, including Marxism, and also from Hong Kong and Japan,” he said. “As a result, the system in China is really a combination of different values.”
However, the country faces some headwinds in the future, including an aging population and declining fertility rates: “The burdens of an aging population will begin to kick in around 2030 and will make it much harder for [China] to sustain the level of growth it has experienced in recent years,” he said.
According to Goolsbee, climate change is one issue that could encourage cooperation between the United States and China in the future.
“Cooperation with China is going to be vital,” he said. “The U.S. went through a phase when it was rapidly developing and there was a massive amount of urban pollution. But ultimately, the body politic decided it was willing to have less economic growth if the result was cleaner air and water. I think the same thing is starting to happen in China. They’re starting to talk about environmental regulations. And as that happens, it’s going to make our interests pretty similar.”
—Adapted from a story first published by the Booth School of Business.