Supply-side reform must clarify the core position of the enterprise

Supply-side reform is a new idea of ​​economic governance
After entering the new normal, the downward pressure on the Chinese economy continued to increase. In the past, when faced with economic downside risks, China used to use Keynesianism for demand management. The main policy instruments were positive fiscal policies and moderately loose monetary policies to stimulate effective demand and achieve total growth. However, when there are major structural contradictions, demand management as a total amount of regulation is lack of pertinence and effectiveness. The main problem of the Chinese economy under the new normal is from the structure, not the total. Practice has proved that the effectiveness of pure demand management is getting smaller and smaller. From January to October 2015, the National Development and Reform Commission approved a total of nearly 2 trillion yuan in fixed assets investment. The central bank cut interest rates several times, but it is still difficult to change the economic downturn.
The stages of economic development are different, and the problems encountered and the countermeasures used are different. The central government proposed "strengthening the supply-side structural reform", which is intended to break the path dependence of demand management and reflect the new thinking of China's economic governance under the new normal. Judging from the actual situation in China, on the one hand, there is a serious overcapacity in domestic production, and general consumer goods are piled up on the one hand; on the other hand, consumers are hungry for the consumption demand of high-quality foreign goods, and they do not hesitate to pay attention to the global “haitao”. This reflects that the crux of the Chinese economy is not on the demand side, not on insufficient effective demand, but on the supply side. It is the change in the supply structure that cannot adapt to the demand structure due to the irrational industrial structure.

The essence of supply management is to increase effective supply.
The essence of supply management is to increase the effective supply through industrial restructuring, compress the ineffective supply, make the supply structure better adapt to the demand structure, and lay the foundation for a new round of total growth with structural optimization to promote sustained and healthy economic development. The core of strengthening the supply-side reform is decentralization and tax reduction, and it is necessary to clarify the main position of the enterprise.
In fact, both demand management and supply management are committed to stimulating production, but the starting point is different. Demand management is based on Keynesianism and advocates strengthening state intervention and giving play to the government's main role in investment. The supply school advocates the automatic adjustment mechanism of the market, and advocates reducing the marginal tax rate, leaving the profit to the enterprise, and investing in the enterprise as the main body.
The long-term implementation of Keynesianism has led the government to form a mindset that dominates the adjustment of industrial structure. In recent years, China's steel, photovoltaic, polysilicon, wind power equipment, electrolytic aluminum, shipbuilding, etc., which have serious overcapacity in China, are all industries that the government has chosen to support and subsidize. Although the government has repeatedly expressed pains and sorrows over overcapacity, when the market’s “invisible hand” really began to adjust, the government maintained its gross domestic product (GDP) growth in order to protect the “pillar industry”, and did not hesitate to invest more. The visible hand" went against the market. For example, in order to rescue the overcapacity shipbuilding industry, the Ministry of Transport and other four ministries and commissions have issued documents to encourage old ships to be scrapped in advance by means of financial subsidies. The program will be further extended to 2017 after its expiration in 2015. The “destruction of old and new” surface has increased demand, but this method of repeated demolition and construction actually creates false demand and is inevitably unsustainable. If the government knows in advance what kind of industrial structure is optimal and has more sophisticated adjustment measures than the market, then overcapacity will not occur, and even the planned economy will not fail.

The core of supply-side reform is decentralization and tax reduction.
Industrial restructuring is the process of production factors flowing in various sectors and sectors of the national economy. The essence of this is the reconfiguration of resources, which is the strength of the market. Under the guidance of the price mechanism, enterprises shift production factors from sectors with lower profit margins to sectors with higher profit margins, that is, shift from relatively surplus sectors to relatively scarce sectors, thereby determining changes in supply structure. . The market is changing rapidly, and the knowledge required for industrial restructuring is highly fragmented. Relevant companies must know more about what to produce and how much to produce at a specific time and place. The significance of competition is that it is a process of discovering and utilizing knowledge. Without the process of competition, the knowledge needed for industrial restructuring cannot be discovered and utilized. The "trial and error" behavior of countless micro-individuals determines the rise and fall of the industry and explores the path of structural adjustment. Although enterprises will pay a certain price for "trial and error", it is the decentralized decision-making of enterprises that avoids catastrophic systemic errors in the entire market. Moreover, in order to safeguard the vital interests, the company will quickly adjust the decision according to the market reaction, and will not continue to produce at a loss. The market mechanism itself is a mechanism for self-correction.
Therefore, strengthening the supply-side reform should give play to the main role of enterprises in the adjustment of industrial structure. The government should further simplify administration and decentralize, change the inertial thinking of Keynesian intervention in the economy, do not interfere with the adjustment of industrial structure in the general competitive field, and let the enterprises spontaneously adjust the structure.
Strengthening the supply-side reform should also play a positive role in stimulating the production of enterprises by reducing taxation, stimulating the enthusiasm of the public for innovation and entrepreneurship through “water release and fish farming”, and innovating supply to activate demand. The "Laffer curve" is an important theoretical pillar of the supply school, depicting the inverse U-shaped relationship between the government tax amount and the tax rate. As the tax rate increases, the government's tax revenue increases initially, but when the tax rate rises to a certain value, the high tax rate weakens people's enthusiasm for investment and consumption, thereby weakening the tax base and causing the tax revenue to fall. The curve shows that the same amount of tax can be obtained from both high and low tax rates. Lowering the tax rate will increase the after-tax compensation of labor and capital, stimulate labor and capital supply, and promote potential output growth.
In recent years, China has introduced some structural tax reduction measures, especially the implementation of “reform of the camp”, which has significantly reduced the tax burden of small-scale taxpayers. However, from the perspective of economic transformation and development needs and residents' demands, the macro tax burden still has room for downward adjustment. In the context of economic downturn, it is necessary to play a counter-cyclical adjustment function of tax reduction. Compared with the interest rate cut, tax cuts can directly reduce the production costs of enterprises and help enterprises to tide over the difficulties more effectively. For the government, tax cuts do not mean that the total amount of tax revenue is reduced, because the supply effect of tax cuts will open up new tax sources, broaden tax bases, and increase tax revenues in the long run. This is also the policy meaning of the Laffer curve.
In short, strengthening the supply-side reform is a major shift in macroeconomic policies after the Chinese economy enters a new normal. The core of it is decentralization and tax reduction, and the main position of the enterprise must be clarified. Supply-side reform will inevitably lead to structural adjustment pains, but only after this process can the Chinese economy phoenix nirvana, cross the middle-income trap, and achieve new development at a new height. (The author is a postdoctoral fellow of Renmin University of China and Industrial and Commercial Bank of China.)

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