Why Deficit Stimulus Spending Doesn’t Fix Recessions, Part 1 of 2

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5 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff explains in two columns why government deficit “stimulus spending” won’t get China out of its problems and why it’s failed over and over throughout history.

The Economics Correspondent has commented several times that China’s attempts at “fiscal stimulus”—that is, the government borrowing and spending vast amounts of money to reverse the economic downturn—will ultimately fail and that the longer Beijing implements stimulus the longer stagnation or at minimum historically very slow growth will persist.

In fact, the Correspondent thinks China’s borrowing and blowing money on stimulus measures is the best thing its competitors can hope for: a kind of self-immolation of the Chinese economy. Hence he’s offered to buy a business class seat for Paul Krugman to visit Beijing and serve as China’s economic advisor for the next decade.

But why this the conviction that stimulus fails?

The answers are both historical and theoretical. In this first of two columns we’ll cover the notable historical failures of government stimulus.

1) Historically, stimulus in response to an endogenous economic downturn has failed every time it’s been tried. The more deficit stimulus spending, the longer the downturn drags on.

Even though British economist John Maynard Keynes famously advocated stimulus spending in his 1936 book “The General Theory of Employment, Interest, and Money,” the first great deficit stimulus experiment actually preceded him by seven years—at the start of America’s Great Depression.

President Herbert Hoover responded immediately to the 1929 stock market crash with a rash of interventionist measures including fiscal stimulus. In his four years in office Hoover doubled federal spending (when adjusted for inflation), and the deficit grew from a surplus of 0.8% of GDP in Calvin Coolidge’s last budget to a deficit of 5.8% of GDP in Hoover’s last budget.

By the time Hoover left office the economy was in shambles with 26% unemployment, although the great banking crisis of early 1933 was a major contributor to that astonishingly high unemployment rate as well.

Franklin Roosevelt continued to borrow and spend on stimulus, running a deficit for every one of his 12+ years in office, something unheard of at the time.

Result? The depression dragged on for another 13 years, only ending in 1946. In 1940 unemployment was still over 15%, far higher than in 1930.

Even with all that stimulus spending the Great Depression lasted nearly three times longer, as measured by time required to return to private full employment after a financial crisis, than the next longest depression in American history.

Some Keynesian economists claim the economy recovered in 1946 because for the first decade-plus the government just didn't borrow and spend enough, but starting in 1942 it finally did what was necessary: borrow and spend Herculean amounts of money to pay for World War II and balloon the national debt from 44% of GDP to a record 119% in four years.

This is an odd argument considering deficit stimulus spending never existed as a policy or even an economic theory prior to 1929, yet every other preceding depression in American history (and there were several of them) ended in, at longest, one-third the time.

The Keynesians also leave out that FDR effectively ended his New Deal during World War II and finally stopped crushing American business with strangling regulations—because he needed them to function properly and deliver record numbers of tanks, planes, and ships—and *that* is what really ended the depression.

The Correspondent has previously written in detail about what ended the Great Depression in several articles including this one:

https://www.cautiouseconomics.com/2019/06/the-great-depression-15.html

2) Japan suffered from the mother of all cheap money asset bubbles in the late 1980’s which burst in 1990. At its peak Tokyo's real estate was worth more on paper than all of America’s real estate, Japan’s real estate was worth more on paper than the rest of the planet, and the Japanese stock market’s capitalization was greater than the United States’ stock market capitalization despite Japan’s economy being less than 40% the size of the USA’s.

Then the bubble burst and created a financial crisis and the Japanese government responded with the mother of all stimulus packages: nearly three decades of borrowing and spending on every government program imaginable.

From 1990 to 2024 Japan went from one of the most fiscally sound OECD governments to worst debt-to-GDP ratio on earth: from about 65% to 264% which is worse than Venezuela, Sudan, and Greece.

(For reference the USA’s now-record debt-to-GDP ratio is 121%).

34 years later Japan is widely acknowledged as having endured three decades of stagnation, the so-called “three lost decades.” In fact Japan is already being cited as a story China might repeat: building up an export-driven economy with cheap central bank money and too much debt.

If China responds the same way Japan did, with years or decades of fiscal stimulus, the story is even more likely to repeat itself.

3) When the 2008 financial crisis struck the Obama administration responded with classic fiscal stimulus: borrowing and spending over 8% of GDP for three straight years, then 6.7% and 4.1%, and swelling the national debt from $10.7 trillion to $19.8 trillion—nearly double—in eight years.

The result was not only the second longest recovery to full employment in American history (only faster than the Great Depression), but the eight year annualized economic growth rate from the crisis was by far the slowest ever in American history: an average of 2.1% per year versus anywhere from 3.5% (after the Panic of 1907) to 5.3% (after the Panic of 1893).

More details on how Obama’s record slow recovery compared to all the others are available at:

https://www.cautiouseconomics.com/2018/09/macroeconomics-01.html

Also forgotten but laughable was Obama’s prediction that (paraphrasing) “If you pass this stimulus budget, unemployment will fall to 5.6% by 2012, but if you don’t pass it unemployment will remain much higher.”

The attached chart shows the famous two blue lines that Obama's economic team sold the public and which the media first lauded but has since buried.

The dark blue line represents how quickly Obama claimed unemployment would come down with his stimulus package and the light blue line represents the horrible predicted consequences of not passing his stimulus.

The red-dotted line was added later based on actual unemployment figures, obviously not added by Obama’s team. The evidence showed with stimulus the result was worse, far worse, than even the alleged bad consequences of passing no stimulus at all.

The pro-Obama media obviously never published the revised chart, and when confronted with why unemployment remained stubbornly high Keynesian (pro-stimulus) economists and Obama himself said (paraphrasing) “We didn’t realize how bad the recession was and the stimulus just wasn’t big enough.”

Again, strange that in the 140 years before 1929, when stimulus was never tried, economic recovery growth rates were usually double that of Obama’s and unemployment came down far faster. In the old days the government just sat back, did nothing, and let the economy recover on its own.

4) Lastly, after the 2008 financial crisis most western European countries immediately implemented massive fiscal stimulus. This went on for three to four years until their debts grew so large that credit markets wouldn’t lend to them anymore, but in that three to four years unemployment reached Great Depression levels in the PIIGS nations (16% in Portugal, 25% in Spain, 28% in Greece).

With things getting worse, not better, the left blamed “draconian budget cuts.” According to them governments weren't spending enough and were actually slashing spending. For years the liberal U.S. and European press ran story after story about supposedly self-evident “massive austerity” in Europe although they never reported actual budget statistics.

Well the Economics Correspondent actually dug up government spending numbers from Eurostat which you can see below. 

Spoiler: By 2012 nearly every European government was spending more money, usually a lot more money, than before the crisis—all for stagnant populations and no inflation. And of the one country spending less in 2012 than 2007, the cut could hardly be considered in any way “draconian" (-0.9%).

In the second installment we’ll discuss the theory that explains why all these large stimulus measures have failed over and over.

ps. Note that all four of the previously cited economic depressions were preceded by asset bubble economies that were inflated by central bank cheap money policies, an important factor that will serve as part of the theory explaining why stimulus fails in the second column.
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British government spending:

2007: 544B pounds
2008: 576B pounds
2009: 621B pounds
2010: 661B pounds
2011: 681B pounds
2012: 688B pounds (+26.4% from 2007)

Source: hmtreasury

2) Spanish government spending:

2006: 378B euros
2007: 413B euros
2008: 451B euros
2009: 484B euros
2010: 485B euros
2011: 480B euros
2012: 493B euros (+19.4% from 2007)

Source: Eurostat

3) French government spending:

2006: 952B euros
2007: 993B euros
2008: 1030B euros
2009: 1070B euros
2010: 1095B euros
2011: 1118B euros
2012: 1151B euros (+15.9% from 2007)

Source: Eurostat

4) Italian government spending:

2006: 723B euros
2007: 740B euros
2008: 765B euros
2009: 788B euros
2010: 782B euros
2011: 788B euros
2012: 793B euros  (+7.2% from 2007)

Source: Eurostat

5) Greek governments spending

2006: 98B euros
2007: 109B euros
2008: 123B euros
2009: 128B euros
2010: 119B euros
2011: 112B euros
2012: 108B euros (-0.9% from 2007)

Source: Eurostat

6) Cypus government spending:

2006: 6.2B euros
2007: 6.6B euros
2008: 7.2B euros
2009: 7.8B euros
2010: 8.0B euros
2011: 8.3B euros
2012: 8.3B euros (+25.8% from 2007)

Source: Eurostat

7) Portuguese government spending:

2006: 73B euros
2007: 75B euros
2008: 77B euros
2009: 84B euros
2010: 88B euros
2011: 84B euros
2012: 78B euros (+4.0 from 2007)

Source: Eurostat

"Rising Poverty" in Milei's Argentina, Where the Annual Inflation Rate is Down 98%

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5 MIN READ - An Argentina inflation and poverty dispatch from the Cautious Optimism Correspondent for Economic Affairs (and Other Egghead Stuff).

Monthly inflation rate down 91% this year, annualized down 98%

As Cautious Rockers who have been following Argentina may have noticed Javier Milei is the first libertarian president of a major country in history. In his first year in office he’s closed thirteen government agencies, slashed federal spending, achieved Argentina’s first monthly balanced budget in over a decade, and is on track to post the first annual balanced budget in a century.

INFLATION

All these deep government spending cuts haven't been carried out for the sake of itself. Prior to his election the central government was running annual deficits exceeding 15% of GDP and ordering the central bank simply create monetary reserves to fill the gap and credit them to the federal government’s account (ie. print the money).

By comparison the Biden administration’s FY2024 deficit of $1.8 trillion is running at 6.2% of GDP, itself considered alarming, and America’s central bank—the Federal Reserve—is not allowed to simply create $1.8 trillion in new reserves and credit them to the Treasury’s General Account no matter how many Modern Monetary Theory devotees say so. In the United States the difference has to be borrowed using existing dollars. 

Furthermore, as the Argentine central government spent the newly created money, the reserves entered the banking system where they multiplied to even larger M1 and M2 balances via the commonplace process of fractional reserve lending which occurs in every country.

The endgame of 15% of GDP in new reserves for the government alone—multiplied over and over via commercial lending—was a 170% rise in Argentina’s money supply in the year before Milei’s election (as measured by M2).

It’s hard to compare the numbers to the USA where the Fed switched to a “plentiful reserves” floor operating system in 2008—something very different from Argentina—but we can go back to before 2008 for a more relevant comparison.

In December 2007 the U.S. monetary base (reserves plus currency) was $837 billion supporting an M2 of $7.484 trillion and GDP of $14.7 trillion. If the federal government ran a deficit of 15% of GDP ($2.21 trillion) and, like Buenos Aires, could command the Fed to credit $2.21 trillion in reserves to the Treasury General Account, the monetary base would increase 295% to $2.96 trillion. Assuming the same fractional reserve money multiplier, M2 would roughly quadruple the money supply in a single year whereas M2 in America normally tends to rise on average by 4%-6%.

Incidentally, decades of large fiscal deficits combined with an accommodating central bank explains why long-term prices in Argentina have risen 1,640,000,000,000,000,000% (1.64 quintillion percent) since 1960 compared to 977% in the United States.

The result of large, neverending deficits and money creation, along with the expectation that more inflation was still ahead prompting Argentinians to spend their money faster and faster (ie. rising monetary velocity), was the rampant inflation that preceded Milei.

But now that the budget is balanced and there is no longer need for the central bank to provide the government with new money, inflation has fallen sharply from (depending on what source you use) anywhere from 211% to 3,700% annually last year to 2.4% monthly today, itself a decline from 2.7% a month ago.

(The Argentina National Institute of Statistics and Census reports monthly inflation was 25.5% in December 2023 when Milei took office. Compounded over 12 months that translates to an annual inflation rate of 1,427%)

2.4% monthly inflation compounded over twelve months is 32.9% per year. So since taking office Milei has reduced the annual inflation rate from—according to official sources—1,427% per year to 32.9% and falling.

“RISING POVERTY”

Milei’s achievements after just one year aren’t going unnoticed domestically, and even the left-wing international press has been forced to admit his rapid progress in lowering inflation.

However he still has plenty of critics, mostly those ideologically disposed to socialism who will castigate Milei no matter what he does.

Milei, his critics say, has raised the poverty rate from 42% to 53% since taking office.

”Argentina records sharp rise in poverty,” –BBC

”Poverty in Argentina soars to over 50% as Milei’s austerity measures hit hard. Far-right president has been battling inflation by imposing steep cuts in spending, resulting in widespread poverty,” –UK Guardian

“Argentina’s poverty rate spikes in first 6 months of President Milei’s shock therapy,” -AP

“A year into Javier Milei’s presidency, Argentina’s poverty hits a new high,” -Al Jazeera

While the Economics Correspondent freely and gleefully admits a small number of the newly impoverished are now-unemployed government bureaucrats and employees who previously “worked” for the likes of the Ministry of Culture, Ministry of Social Development, and Ministry of Women, Genders, and Diversity, the reality is the poverty rate has not actually increased and more likely has come down. Milei’s policies have simply revealed the true poverty rate from the artificially lowered levels reported under previous administrations.

The reasons have to do with the poverty rate being counted based on income. As the central bank printed money that the central government gave away to the public, more recipients’ “income” rose above the official poverty line.

But with the massive inflation and price controls imposed by the government, most citizens couldn’t buy many basic necessities with their “income” due to price ceiling-imposed shortages. The inability to buy goods and services with “above poverty” income was not factored into calculating the official poverty rate—by design.

It’s not unlike saying Venezuela, with its shortages of milk, butter, meat, water, electricity, toilet paper, etc… is “lowering poverty” because the government is printing more money and handing it out to citizens.

For this point, the Economics Correspondent will defer to a most excellent comment he read online. Although Milei himself explained this phenomenon in a recent podcast interview, it’s hard for even him to beat the succinctness of this online commenter named J.J. Parson:

”The official poverty numbers went up when Milei removed price controls. But that wasn’t an increase in poverty—it simply revealed the actual poverty level which is masked by price controls.”

”When there was [a] price control on eggs, for example, nobody was allowed to sell eggs above that price. The result was they stopped selling eggs. You could not buy them. But government poverty statistics would say—based on the price of eggs and your income—you fall above the poverty line (those were fake statistics because of the price controls—they hugely undercounted the number of people under the poverty line).”

Kudos to J.J Parson, whoever you are.

The same phenomenon was recently reported with Milei’s repeal of rent control—also a price control/price ceiling. Back when rents were capped by the government more incomes were officially “above” the poverty line, but many people couldn’t find housing to rent with that money. One in seven apartments in Buenos Aires was being withheld from the market.

Not one in seven vacant apartments; one in seven of all apartments.

When Milei repealed rent control the supply of available housing tripled within months, meaning a huge portion of the capital’s available housing had previously been taken off the market. 

Those citizens who now have a roof over their heads likely don’t feel more “impoverished,” and the same calculus applies to tens of millions of Argentinians who previously may have had more money, but who were watching their money rapidly depreciate, who couldn’t buy many basic goods and services with that money, and who were perversely being classified as “above the poverty line” by the previous government.

A Political and Economic History of China, Part 28: The Northern Expedition of 1926-28 and Chiang Kai-shek Turns on the CCP

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6 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff chronicles the very bloody opening shot in the war between Chinese Nationalists and Communists.

Photo: from the April 12, 1927 "Shanghai Massacre." Links to more brutal photos at end of article.

By 1926 Chiang Kai-shek had gained control of the Nationalist Party (“Guomindang” or KMT) through a bloodless coup. His main rival, left-leaning Wang Jingwei, had left for France. The Soviets, who supported the Nationalists on the condition they admit the small Chinese Communist Party, felt China was not yet ready for full communist revolution and instructed the CCP to continue working with the KMT which Moscow still supported.

THE NORTHERN EXPEDITION

Given his assumption of full leadership Chiang decided the time had come to carry out the late Sun Yat-sen’s vision of defeating the provincial warlords by military force. Chiang and his new army, trained at the Whampoa Academy that he commanded, would march from Guangdong in southern China northwards, unifying the country one province at a time.

The so-called “Northern Expedition” began in July of 1926.

Chiang’s multiyear campaign enlarged Nationalist-controlled territory applying multiple strategies, each deemed appropriate for the targeted rival warlord. If a warlord felt weak and feared soldier defections to the stronger Nationalists, he would join the KMT without bloodshed.

If one warlord was fighting another, he might join the KMT in the hope their combined forces could then defeat his rival—as was the case when the “Christian general” Feng Yuxiang joined Chiang Kai-shek to battle Manchurian rival warlord Zhang Zuolin who had just handed Feng a decisive defeat.

Some warlords simply stood their ground and resisted Nationalist forces, nearly always losing to Chiang’s ever growing armies. Some battles were quite bloody and lasted several months, with KMT victories coming at considerable human cost on both sides.

Throughout the expedition the Chinese communists played their own role, organizing workers to strike, sabotage and disrupt warlord territories in the path of advancing KMT armies.

While the CCP inconspicuously took credit for these behind-enemy-lines operations, their scale was actually quite limited. Much more commonly the Communists preferred organizing worker strikes and disruptions in newly liberated KMT territory—after Nationalist armies had already conquered them.

As KMT troops fought sometimes bloody engagements to seize provincial cities and countrysides and moved on, the Communists came up from the rear and operated in a pacified environment. After Chiang’s Nationalists had done the hard work the CCP began organizing workers and peasants to strike and disrupt the businesses, farms, and economies of newly-won KMT territories.

While Nationalists were fighting and dying on the front, the Communists were recruiting workers and peasants at a dizzying pace. CCP membership, which was only about 200 at the party’s founding in 1921, had grown to several million by 1927.

Furthermore, communist activity was causing real headaches for Chinese farms, businesses, and the establishment in general. Communists were redistributing land wherever possible, “fining” and imprisoning landlords, and “canceling” debts faster than American college grads in the Biden era, all while general strikes were grinding business production to a halt.

A rift was beginning to form between the Nationalists—always a party of the established classes—and the Communists, a revolutionary party that aimed to completely reorganize society into a proletarian dictatorship. The two parties even disagreed on where to move the new Nationalist capital with Chiang preferring Nanjing and Wang Jingwei, who by now had returned from France to capitalize on the KMT left wing’s resurgence, preferring Wuhan.

THE SHANGHAI MASSACRE

As complaints poured in from Nationalist officials and businessmen from all over KMT-controlled areas, Chiang surveyed the Communists’ ballooning membership rolls and growing strength. His armies were doing the heavy lifting, liberating China from warlords often one bloody province at a time, and the Communists were moving in after the dust had settled to sow chaos and transform recently won territories into Marxist strongholds.

Thus Chiang, already distrustful of communism and the USSR since visiting Moscow a few years earlier, decided to end the Nationalist/Communist alliance. After a brief period planning his next move he launched what the CCP has ever since named the April 12 Incident—a violent purge of the CCP from the Nationalist Party.

At dawn on the morning of April 12, 1927 Nationalist troops and Shanghai gang members attacked known communist offices and hideouts all throughout Nanjing, Shanghai, and other Chiang-controlled areas. Communists were arrested and killed later in the day, many dragged out into the streets and beheaded. The number of communists killed ultimately reached into the thousands, and even communists in the left-wing stronghold of Wuhan were purged and/or executed.

Chiang was supported by establishment intellectuals and government officials who were petrified at the sight of millions of workers and peasants seizing farms and shutting down factories, sometimes violently. Business interests also supported Chiang’s purge including his old friends in Shanghai’s Green Gang who in turn provided many henchman to carry out the killings.

The Communist Party was nearly decimated with only a few key leaders escaping the purge with their lives. The Correspondent recalls reading about Zhou Enlai, who later engineered Chinese-U.S. reconciliation with Henry Kissinger in 1971, barely slipping away from the massacre.

Meanwhile the Soviets were initially undecided about how to respond. Paralyzed by what was now a power struggle between Leon Trotsky and Joseph Stalin over who would succeed the late Vladimir Lenin, the Soviets couldn’t yet bring themselves to sever relations with the KMT. 

At the same time Chiang’s son Chiang Ching-kuo, studying in Russia and semi-brainwashed by the communist environment, publicly denounced his father as an imperialist counterrevolutionary, but the Soviet Communist International (Comintern) remained unmoved. 

Years later the young Chiang Ching-kuo would regret criticizing his father and by 1975 assumed the presidency of Taiwan as one of the world’s most vocal anti-communist heads of state.

Meanwhile as the Nationalist left wing and Chiang rival Wang Jingwei floundered and the Chinese communist movement was being decimated, instructions from the Soviets reeked of delusional fantasy.

Communiqués from Stalin instructed the KMT left wing to continue seizing and redistributing land—a difficult task in itself given the havoc being wreaked by Chiang’s purge—but to leave alone land belonging to military officers. Verifying whether each plot belonged to an officer or not and disseminating instructions to peasants on the ground, all while Nationalist forces were butchering communists, was a near impossible task to carry out. Stalin also ordered a tribunal organized to punish “reactionary” officers, again oblivious to the tactical difficulties involved in identifying every officer among the confusion let alone which ones were actually “reactionaries.”

Stalin’s instructions were effectively unenforceable.

In light of the purge and unrealistic directives from an ally that seemed completely out of touch with the reality on the ground, the Chinese communists became increasingly irritated with what they viewed as counterproductive interference from Moscow. This was the beginning of many disagreements between Chinese communists like Mao Zedong and Soviet representatives like Mikhail Borodin, and the friction between CCP leaders and Soviet advisors would linger for many more years.

With the left-wing in retreat and seemingly powerless to stop Chiang’s violent purge Wang Jingwei, always the opportunist and vacillator, blamed himself for the party’s schism and announced that Chiang was right, all before packing up and moving to Europe again.

Chiang Kai-shek was once again in control of the Nationalist Party, his rival again having departed China. Most of the Communists had been wiped out. Although a few survived, their organizational framework was gone and Chiang had the support of most of China’s establishment. Frictions between what few Communists remained and their Soviet advisors were at an all time high.

The CCP would never forget April 12th and even today commemorate it as the fateful day a treacherous Chiang Kai-shek betrayed them, firing the opening salvo in what would become a 22-year on again, off again civil war.

With most of China seemingly under Chiang’s control he set out to complete the Northern Expedition, advancing further north to Beijing. In April 1928 Zhang Zuolin, the most powerful of the warlords and based in Manchuria, elected to fight but by June his army was defeated and the Nationalists integrated Beijing into their domains. Little did Zhang know that he would soon be assassinated by the Japanese that same month.

The Northern Expedition was over. Chiang had successfully reunified China’s most populated eastern provinces from Guangdong in the south to Beijing in the north. Those sparsely populated areas in the west that he didn’t control directly were still effectively subservient to him via warlord alliances and agreements.

For the first time since Yuan Shikai’s death twelve years prior it seemed China was finally unified.
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Links to more brutal photos of the 1927 Shanghai Massacre:

https://lh3.googleusercontent.com/BpBGEQYTA6gTHDXbxzZGQnmEgMd7p3ovk6Ieho887OxhTg8tPk7zkJsYvoHnEoGLgcstOpVbEUY_F79I2DYA-7_jpiLXbO2DNGF68g=s1200?

https://cdn.thecollector.com/wp-content/uploads/2023/11/shanghai-massacre-1927.jpg

https://i.scdn.co/image/ab6765630000ba8a4d4df39cd205c6c91f991918

A Political and Economic History of China, Part 27: Chiang Kai-shek Rises to Power

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5 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff continues with a history of China, this time explaining the succession of Nationalist Party leadership from Sun Yat-sen to Chiang Kai-shek.

Photo: Nationalist Party left-faction leader Wang Jingwei (left) and right-faction leader Chiang Kai-shek (right).

Let’s broadly revisit the circumstances that led up to what would soon be the Chinese Republican era’s violent climax in 1926-1928.

Revolutionary politician Sun Yat-sen’s work to overthrow the Qing dynasty teetered as the country broke down into warlord fiefdoms that often controlled weak central Beijing governments.

During the “warlord era,” Japan and the USSR in particular attempted to gain influence over China: Japan by taking territory, the Soviets by offering aid under the condition that Sun’s Nationalist Party (aka. Guomindang or KMT) accept the small, fledgling Chinese Communist Party into its ranks. The Soviets intended to eventually order the Communists to subvert the KMT from within, assume power, and transform China into both a communist state and Soviet ally on Russia’s large eastern border.

Sun, revolutionary and intelligent but too trusting and often politically naïve, had no reservations about letting the Communists into the Guomindang, but his young lieutenant Chiang Kai-shek saw danger in the Communist/Nationalist alliance.

CHIANG KAI-SHEK

As China careened into the chaotic warlord era, Sun Yat-sen decided his 1911 anti-Qing revolution had gone astray and must be righted. Instead of a united, republican, modern China the country had split into squabbling fiefdoms run by greedy, corrupt warlords.

By the early 1920’s Sun was convinced his revolution needed a strong military branch to defeat the warlords and unify the country by force. He founded Whampoa Military Academy in 1924 to train party officers for both an upcoming armed campaign of unification and later to serve in the military defense of the new China.

Sun appointed Chiang Kai-shek as the academy’s commandant.

But before we get into Chiang’s Nationalist military career we should establish a little about the man himself.

First there’s the question of his name. “Chiang Kai-shek” is Chiang’s Cantonese name. Although well known in the west, you will hear China’s one billion non-Cantonese speakers refer to Chiang by his Mandarin name: Jiang Jieshi, pronounced Jee-ahng (one syllable) Jee-eh (one syllable) Shuh.

However given that his Cantonese name has been publicized in the west for nearly a century, we’ll continue to refer to “Chiang Kai-shek” in the CO China series, just as modern day history books use it even as those same books generally use the Mandarin nomenclature format.

There are a few holes in the history of Chiang’s early life. However we know he was born in 1887 in Zhejiang province, bordering Shanghai. Like many Chinese men during the time, he became anti-Qing and highly nationalistic at an early age.

Wanting to rid China of the old corrupt dynasty and create a new modern country, Chiang decided early on a military career. He enrolled in the Baoding military academy in Beijing but transferred one year later (1907) to the Tokyo Shinbu Gakko military academy for Chinese students in Japan.

In Japan Chiang met several revolutionary anti-Qing students who were determined to overthrow the dynasty and he cut off his queue, a common act of anti-Qing disobedience. He then served in the Imperial Japanese Army (1909-1911) during which time he met Sun Yat-sen and joined Sun’s Tongmenghui anti-Qing society.

After the Qing was overthrown Chiang returned to China, working within the sometimes legitimate, sometimes not business world of Shanghai to finance KMT revolutionary activities. It was here that Chiang was mentored by Chen Qimei, fellow revolutionary and leader of the notorious Green Gang, a former anti-Qing society that raised money for the KMT through the opium trade and other lucrative vices.

Chiang’s Green Gang tutelage made him a much shrewder judge of political treachery than Sun, and the gang will come up later in the story as Chiang always maintained a relationship with his old business associates.

Finally we resume our story in 1923 when Chiang moved to Guangdong, Southern China, now the KMT’s power base although Nationalist territory was isolated, surrounded by warlord fiefdoms that controlled the rest of China.

Chiang was now one of Sun’s top lieutenants, placed in charge of developing the KMT’s new revolutionary army to defeat the warlords and reunify China. Sun sent Chiang to Moscow for three months to study Soviet military tactics where he even met Leon Trotsky. However what Chiang saw in Russia convinced him neither the Soviet system nor communism itself were suitable for China. He returned home distrustful of both, his time in Russia informing his anti-communist views.

THE CHIANG/WANG SPLIT

Meanwhile the KMT’s plans were derailed by unexpected news. In 1925 Sun Yat-sen was diagnosed with gallbladder cancer and died suddenly at the early age of 58. Without Sun Chinese reunification would have to wait until the question of new leadership was resolved.

There were a few lieutenants positioned to take over Sun’s office, but the two most powerful were Chiang, who represented the “right wing” of the party, and Wang Jingwei who represented the “left wing.” Chiang was in charge of the KMT military while Wang ran ideological and propaganda affairs.

Leaning left but not fully communist and backed by the Soviets, Wang appeared the favorite to gain control of the KMT.

Fortunately for Chiang, Wang Jingwei was a fairly weak rival. In 1926, while Wang was out of the country, Chiang announced the “discovery” of a communist plot against him and forced many of Wang’s allies out of power, even arresting some officials including a few Soviet advisors. Chiang also shut down trade union organizations and strike organizers.

All that Wang could muster in response was a few words of protest before announcing his retirement from politics and moving to France, although he would reappear a few more times over the years in failed attempts to reestablish power.

Chiang then “apologized” to the Soviets and freed their officials, but retained solid leadership of the party apparatus. He had pulled off a virtually bloodless coup and assumed full control of the KMT, even preserving a cordial relationship with and continued support from the USSR.

Meanwhile moderate KMT officials were concerned about Chiang’s heavy-handed power grab, but most remained silent since he had usurped communist leadership which they had secretly wanted ever since Sun signed the KMT-Soviet alliance in 1923.

Now in full control, Chiang set out to begin the military reunification the late Sun had coveted. He would launch it from Guangdong, southern China, historically the birthplace of so many Chinese revolutions of the past. His campaign to march north and reunite the country under a single government began in July 1926 and would become known as the Northern Expedition, a subject we’ll focus on in the next chapter.

Per-Capita GDP: U.S. States vs G7 Countries

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The Cautious Optimism Correspondent for Economic Affairs stumbled across this chart with rankings that come as no surprise.

49 of America’s 50 states produce a higher per-capita GDP (economic output) than every non-American nation of the G7. And #50 Mississippi has a higher per-capita GDP than every member except Canada and Germany.

Read on for more details, including the "no surprise" part.

The Economics Correspondent wrote last month that nominal GDP and nominal per-capita GDP are the best measure for comparing the productivity and output of nations and their people, and that’s what this chart does.

Despite all the cries that European socialized democracies, or semi-capitalist European welfare states with high taxes and heavy regulation, are just as wealthy and productive as the USA, the data say otherwise.

The results are also no surprise given data from past analyses.

Back in 2015 the Ludwig von Mises Institute published data comparing the USA and European countries but included three adjustments, all of which served as handicaps to boost the European case.

First, instead of per-capita GDP the article used per-capita income. So instead of looking at economic output the article looked at how much income citizens receive in the ostensibly more “equal” European states.

Second, the income data included all the freebies so many citizens receive in each European country like healthcare and college education, setting aside how long cancer-stricken Europeans wait in line for a chance to use their free healthcare but giving European citizens an “income” boost that Americans don’t get.

Third, the data used “median income” which addresses the criticism that U.S. “average per-capita GDP” is skewed upwards by a small number of mega-rich earners who hoard all the income from the trounced-upon masses.

The result after all these adjustments?

Median per-capita income for the United States was still higher than 22 of 25 European countries plus Australia, Canada, Chile, Israel, Japan, Mexico, South Korea, and New Zealand—basically 30 of 33 OECD countries. Even vaunted Sweden’s median per-capita income (again, including all the freebies for citizens) was lower than 38 states placing it in the poorest quartile, poorer than Georgia, Missouri, Kansas, South Dakota, and Wyoming among others.

Click chart below:

Even red-state Texas, which liberal progressives try to frame as a conservative failure, ranked higher than the same 22 of 25 European countries including Germany, France, Sweden, Finland, and the UK.

As for those three European countries with higher median per-capita income—Switzerland, Norway, and Luxembourg—they had populations smaller than Virginia, Atlanta, and Fresno, CA respectively while the United States is the third most populous country in the world after India and China.

Two also rank far higher than the United States in the Heritage Index of Economic Freedom, both placed in the world’s top five (Switzerland and Luxembourg at #2 and #5), The third, Norway, is world’s #4 largest natural gas exporter and #8 oil exporter—all for the world's #116 population, smaller than Atlanta metro.

So it should come as no surprise that when shedding the combined handicaps of “median,” per-capita “income,” and “government benefits,” and looking solely at “economic output” the USA and 49 of its states would outperform all the G7 countries.

ps. It should also come as no surprise that Washington, DC is the “state” with by far the highest per-capita GDP. Since GDP includes the dollar quantity of government purchases the nation’s capital comes out on top despite not really producing as much as most other states. Washington’s outsized role of government within its economy artificially inflates its ranking.

A Political and Economic History of China, Part 26: The Republican Era of 1912-1928, Part 2—International Power Struggles

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6 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff continues with the chaotic Republican Era of China, this time detailing foreign influence in the power struggles of the 1910’s and 1920’s including the opening chapter of the Chinese Communist Party.

Picture: Revolutionary founder of modern China Sun Yat-sen (seated) with young military commandant Chiang Kai-shek (standing, center).

After General Yuan Shikai’s death in 1916, Republican China was unable to establish an effective government. Not only was the central government’s army lacking to counter the regional warlords’ private armies, internal republican bickering and infighting produced fourteen different presidents in the twelve year period of 1916-1928.

And not only warlords vied for power in this era. Foreign governments exerted their own malign influence over China.

JAPAN

As most people know Japan invaded Manchuria in 1931 and China proper in 1937. But the fascist Japanese government had been planning these invasions for a long time, even positioning themselves for an eventual conquest of China back in the 1910’s.

As China descended into post-Qing chaos, Japan attempted to exert influence and gain pre-invasion footholds.

At the outbreak of World War I Japan declared war on Germany in a classic display of realpolitik. Tokyo couldn’t have cared less about Europe, instead leveraging entry in the war to expand its presence in Asia. 

While Germany was bogged down in the trenches of Europe, Japan invaded and occupied German territory in China’s Shandong Province. Japan also grabbed a few German territories in Micronesia which would gain notoriety during World War II: the Marshall Islands (including Kwajalein), the Carolines (including Truk), and the Marianas (Guam, Saipan, Tinian).

By making token contributions to the allied effort Japan successfully gained a permanent seat at the League of Nations. The Japanese also bribed a regional Chinese warlord into granting sovereignty over Shandong province, followed up by tacit albeit lukewarm consent from the allies at Versailles. Chinese government representatives only put up weak objections.

But the handover of Shandong unexpectedly triggered a watershed event in Chinese history: the May 4th movement of 1919.

Everyday Chinese were so incensed over their loss of territory to Japan that mass demonstrations began throughout the country. In what’s now considered the birth of modern Chinese nationalism, protestors criticized Japan, the Versailles Treaty, the allied powers, and the Chinese Republican government itself. Disillusioned with the continuing failure of China’s elites, the masses turned away from traditional Confucian deference to intellectuals, and Chinese who had formerly considered themselves “Sichuanese” or “Shanghainese” or “Cantonese” unified in a populist mindshift to being “Chinese.” 

The western powers, surprised at the level of outcry from the Chinese public, forced Japan to relinquish sovereignty over Shandong which was promptly returned to China.

However much of the social die was now already cast. Along with rejecting much of Confucian traditionalism many young Chinese were now searching outside the country for new philosophy, new ideas, and new direction.

One of the many strange and foreign ideas that found growing acceptance among everyday Chinese was the anti-imperialist credo of Marxism. In 1921 a small group of radical revolutionaries, anti-imperialist and drawn to Karl Marx’s promises of utopian equality and total peace, founded the Chinese Communist Party in Shanghai with the 27-year old Mao Zedong representing his native Hunan province.

RUSSIA/THE USSR

Vladimir Lenin and the Bolsheviks seized control of the Russian Empire in 1917 and, after a centuries-long history of border and territorial disputes in Manchuria and Xinjiang, watched with interest the chaos unfolding in China just four years later.

While attempts at establishing republican government in China floundered, none of the formerly imperialist western powers stepped up to help. Some European governments were concerned about continued reparations payments from the now defunct Qing dynasty. 

The extent of their interest in Chinese stability was usually limited to a desire to avoid total national disintegration, for that would put their business investments at risk. However, western powers also disliked the idea of a tightly unified China that might one day find the strength to say no to outside demands.

Sun Yat-sen, who by now had formed the Nationalist Party or Guomindang, looked to the foreign powers for help getting the new China on its feet, just as he had looked outside for help bringing down the Qing dynasty a decade earlier. But for the reasons just mentioned he found few takers.

The only major power that offered assistance was the Soviet Union, but as one might guess that help hardly came for free.

The Lenin government, concerned that capitalist countries might attack Russia to destroy the communist revolution in its fragile infancy, found the idea of a communist ally on its huge eastern border appealing. Ideologically Lenin also saw China as a fraternal century-plus target of capitalist imperialism and was sympathetic to Sun’s revolution to throw out the foreign Qing rulers.

Given Sun’s need for help, negotiations between Soviet and Nationalist officials led to an alliance in 1923. In exchange for financial and diplomatic assistance, the Nationalists agreed to welcome Soviet advisors who restructured the party with more rigorous discipline.

The Soviets also attached a condition for aid which would change the history of China: The Nationalists must agree to an alliance with the Chinese Communist Party and allow the small upstart movement into their ranks. 

After all, both the Nationalists and Communists were anti-Qing, both were anti-imperialist, and both wanted to build a new, modern China. To Sun, the Communists seemed harmless and possibly even a good fit.

In secret Moscow believed one day they would order the Chinese communists to usurp Nationalist leadership, take over the party for themselves, and transform China into a communist state. However the Soviets felt China wasn’t yet ready for communism—not having first passed through the key Marxist historical stages of capitalism and socialism—and for now ordered the CCP to simply cooperate with the Nationalists.

The Chinese communists, as the Soviets would later learn, had their own timetable which we’ll discuss in an upcoming chapter.

Sun agreed to integrate the Communist Party into the Nationalist Party, but one of his top young protégés—the commander of the party’s military wing—viewed the Communists with suspicion, although he didn’t yet possess the power or rank to act. 

This shrewd lieutenant was Chiang Kai-shek.

We’ll get more into the Nationalist/Communist alliance and Soviet influence ending with the 1949 communist victory later, but on a final note it’s important to contrast Sun and Chiang’s views on alliances and power which in turn informed their different views on the Communists.

For all his strengths, Sun was at heart an intellectual and often politically naïve. By contrast Chiang Kai-shek, mentored in his youth by one of Shanghai’s most notorious anti-Qing societies-turned-organized crime syndicate (the Green Gang), held more cynical and realistic views.

A story recounts how in 1920 Sun entered into another alliance with Guangxi warlord Chen Jiongming. Chiang, still a young protégé, calculated Chen had much to gain by betraying the Nationalist alliance and repeatedly warned Sun of the danger but was ignored. Sure enough Chen rebelled, shelling the Nationalist Guangdong headquarters in 1922 with Sun barely escaping with his life. Chiang, always loyal, made speed from Shanghai to rescue his master and they spent several weeks hiding out on a small riverboat during which time Chiang’s stock rose in Sun’s eyes.

Chiang viewed the communist alliance with similar suspicion. He believed, correctly, that the Communists would attempt to subvert the Nationalist Party from within and take over, but for now Sun sleepwalked into accepting Soviet demands, oblivious to the danger that his young disciple foresaw.

In the next installment we’ll discuss growing tensions between Nationalists and Communists against the backdrop of the campaign to finally reunify China.

A Political and Economic History of China, Part 25: The Republican Era of 1912-1928, Part 1—Domestic Power Struggles

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6 MIN READ - With the 2024 campaign and election over, the Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff restarts his history of China series, picking up with the chaos that ensued after the fall of the last imperial dynasty in 1911.

Attached picture: Rough outline of regional Chinese warlord control in 1925. Blue areas are controlled by Sun Yat-sen’s revolutionary Nationalist (Guomindang or GMD) party.

In July we left off with the tireless efforts of Chinese revolutionary Sun Yat-sen whose work played a role in the collapse of the Qing dynasty (1644-1911).

The Qing’s disintegration was sudden and unexpected. Sun was himself in Denver, Colorado raising money when it happened and quickly returned to China to formulate a new, more modern government to fill the power vacuum that had so abruptly appeared.

Despite his revered place in history today, it’s important to understand that in 1911 Sun was only one of many players working to topple the Qing, an alien dynasty of outsiders that had fallen out of favor with its ethnic Chinese subjects. Upon Sun’s return to China he was still not very well known. Among the candidates to lead a new China Sun was viewed as lacking the strongman character needed to rule a provisional government during such a precarious time.

After deliberation among revolutionary leaders a fairly obvious choice was made to assume that role, at least temporarily: General Yuan Shikai. 

Sun assented to Yuan's presidency for the same reasons.

YUAN SHIKAI

Yuan Shikai is a shady figure in Chinese history and likewise loathed in modern China. Dubbed the “traitor general” for:

1) Betraying the young emperor Guangxu’s plans to reform China in 1898 by ratting him out to his aunt, the powerful empress dowager Cixi. Cixi then arrested Guangxu and later had him poisoned, and

2) Betraying the anti-Qing Xinhai revolution, something we’re about to get to.

A little background on Yuan.

During the great Taiping rebellion of 1851-1864 the scholar-general Zeng Guofan commanded Qing forces so skillfully that he was awarded control over most of the postwar imperial army. Zeng’s protégé, Li Hongzhang, assumed that role shortly after when the aging Zeng, who had been brought out of semi-retirement during the civil war, called it quits.

Over the next four decades the Qing weakened and Beijing increasingly lost its ability to govern the country. Subsequently regional military governors, generals previously appointed by Zeng and Li, took greater control of their provinces. By the time of the Qing’s collapse Li’s protégé, the aforementioned Yuan Shikai, was now general of the most powerful armies based in Beijing and it was only he who could keep the semi-autonomous provincial generals (later dubbed “warlords”) in line.

So in 1912 most anti-Qing revolutionary leaders viewed Yuan as the only man strong enough to prevent China from breaking up into military fiefdoms and he easily won appointment as provisional president by vote of the new provisional senate.

In theory China would become a republic with a democratically elected parliament and president sharing power. The Nationalist Party, or KMT (known as the “Guomindang” in mandarin) held the most seats in parliament with Sun Yat-sen as party leader.

However before long it became clear Yuan was interested in neither democratic government nor power sharing. He attempted to dissolve the republican house of representatives and senate, leading to clashes with the Nationalists and other democratic reform-minded parties. In response Yuan consolidated his power by granting even more autonomous powers to his regional military allies in return for support.

In 1915 Yuan made it official by arranging a puppet council vote to “offer” him the emperorship of China which he “accepted” as head of a new dynasty. He quickly ordered jade seals and imperial robes for himself.

It seemed after all the hard work and sacrifice to rid China of the Qing dynasty the imperial monarchy had returned.

But the political backlash against Yuan’s new dynasty was so great that even many of his warlord allies protested. A few provinces outright rebelled.

Surprised by the opposition Yuan delayed his coronation ceremony over and over again, attempting to appease his detractors enough to eventually carry through with his ascension, but after just 83 days officially as emperor he “abdicated” and restored the republic—in part due to growing revolts but also because his own health was failing. 

Yuan died just three months later of uremia.

China had dodged a restoration of the dynastic system, but Yuan’s death would leave behind an even larger power vacuum than the one he had filled. Now there was no obvious choice to control the warlords and China began its descent into regional and provincial chaos.

Once again, in theory a democratically elected republican government in Beijing—composed of a parliament and president—would run China. But in practice the republican government had no effective power to control the autonomous warlords and their personal armies.

Further complicating matters was internal bickering among republican politicians and a few political assassinations. Without clear direction no elected president held power long enough to challenge the warlords let alone build a new China, and the Beijing government often became a puppet of the strongest militarist warlord cliques. By one count after Yuan’s death Republican China had fourteen presidents from 1916 to 1928, the year Chiang Kai-shek officially became president and held power until the communist civil war victory in 1949.

WARLORDS

Hence the 1916-1928 period is famously known as the “warlord era.” Multiple generals enjoyed regional authority over counties, provinces, and in some cases multiple provinces. Most craved expansion of their fiefdoms, some signed fragile alliances with one another, and others went to war.

The one constant under all warlords was general suffering of the common people. Warlords raised funds for their mini-empires by imposing direct taxation—often precocious and excessive—on the peasants. To the common Chinese villager it seemed that things hadn’t changed much from the Qing dynasty. Instead of corrupt regional Qing officials it was now regional warlords who squeezed them.

The many warlords also made for a colorful cast of characters, some whose nicknames found their way into the western press. For example there was Zhang Xun, known as the “Pigtail General” for his Qing loyalties. Zhang wished to restore the Qing monarchy and ordered his troops to retain their queues.

Then there was the “Christian General” Feng Yuxian, who converted his troops to Christianity and baptized them with a fire hose.

One of the worst warlords was Zhang Zongchang, dubbed the “Dogmeat General” because of his taste for a Chinese tonic named “dogmeat” and penchant for playing the Chinese gambling game known as “eating dogmeat.” Time Magazine called Zhang Zongchang “the basest warlord” for his brutality, eccentric personality, and lavish lifestyle—financed by the peasants he crushed under repressive taxation.

Given that the warlords enjoyed de facto control over their regions, business interests—both domestic and foreign—were forced to deal with them which usually meant paying regular bribes to retain their investments and run their operations.

The most consequential warlord-foreign investment relationship was between Japan and perhaps the most famous and powerful of all the warlords: Zhang Zuolin, who enjoyed control over all three provinces of Manchuria while engaging in power-sharing agreements with Beijing.

During the 1920’s Japan made significant investments in Manchuria, the offshoot of expelling Russia during the Russo-Japanese War of 1905. Zhang's army received financial backing from the Japanese in exchange for allowing the construction of Japanese railroads and factories.

Japan, which history now records had its eye all along on the outright conquest of Manchuria, felt Zhang was too formidable an obstacle to their plans and arranged his assassination by exploding a bomb under his railcar the evening of June 4, 1928. From there the Japanese attempted to install his more malleable, opium-addicted son Zhang Xueliang to replace him. However, the Japanese were soon surprised at the son’s resolve when he shook off his opium habit, assumed his father’s place with authority, and put up a great deal more resistance than they had anticipated.

A decade later Zhang Xueliang, serving as a general in Chiang Kai-Shek’s Nationalist army, would kidnap his own boss in an incident with huge implications for China’s future, a subject we’ll get to during World War II.

In the next installment on the Republican Era we’ll look at foreign interference during China’s early road to modernization.