author: Xue Yan Hong, from Figure title: Vision China

In the previous series of articles, we focused on the demand-side promotion of consumption (see “Increase income can promote consumption, who should pay the money?” “How important the consumption is, the bull market is just as necessary”), but a slap is not enough, consumption promotion must be on the supply side work hard.

For example, in the view of the classical school of economics, supply creates its own demand; Rothbard, a representative of the Austrian school, even believes that there is no consumption downturn, and companies only need to make their prices low enough so that they can sell Out of all their products.

Price cuts can certainly promote consumption, so why don’t companies cut prices?

Speaking of creating your own demand from supply

Before the rise of Keynesianism, the classical school of economics had always believed that “supply would create its own demand.” In other words, in the eyes of such economic masters as Say, Ricardo, and Marshall, supply and demand are balanced, and insufficient demand does not exist. of.

During the economic recession, a large number of companies went bankrupt because their products could not be sold. In the face of hard facts, why do these masters still believe that supply will create their own demand? Do they only know how to talk on paper?

It was from this issue that Keynes went deeper and wrote the greatest economics book of the 20th century, “The General Theory of Employment, Interest, and Currency”; for us, re-examining this issue will help us understand needs more deeply. insufficient.

Why supply creates its own demand, Marshall has made a clear interpretation:

“All personal income is used to buy labor and commodities. Some people often use part of their income and save part of it; but from an economic point of view, everyone thinks Part of the saved income is ultimately for the purchase of labor and commodities, and its essence is exactly the same as the part he uses.”

In other words, all the costs in the production process of a company will actually be converted into income-workers’ wages, government taxes, revenue from industry chain partners, etc., sooner or later, In the end, they will be used to purchase goods and services. In this sense, the production process not only creates goods, but also creates purchasing power for goods.

In the view of the classic school, although there are widespread situations where a single product cannot be sold, supply and demand are still balanced in terms of the economy as a whole.

Obviously, the problem lies in the mismatch of time and space. If the income generated by the production of this year’s products is saved and consumed in the following year, then the enterprise will close down next year, workers will be unemployed, and the economy will be depressed. In the next year, savers dare not consume anymore, and supply and demand reach equilibrium again at a low level. Similarly, if the raw materials for commodity manufacturing come from imports, it will create income for foreign residents. Once commodity exports are blocked, demand will also be insufficient.

Keynes’s suggestion is that when income is being saved, the government should expand spending to fill the gap, to ensure the normal operation of enterprises, and to support the time when savings become consumption again. This is the essence of Keynesianism,Rely on tangible hands to adjust domestic demand and smooth economic fluctuations.

After World War II, Keynesianism became the theoretical basis for macro-control in various countries. Under the escort of Keynesianism, major economies have ushered in a golden period of economic growth.

The cost remains high

The same problem, Keynes’ diagnosis was insufficient domestic demand, and the prescription was to expand domestic demand; Murray N. Rothbard, a representative of the Austrian school, disagreed:

“People like to use’overproduction’ to explain depression. Whether it is accepted or not, this explanation is total nonsense. Companies only need to make their prices low enough so that they can be sold. All the products are gone, so we did not find overproduction. We now see that the selling price of the products is lower than their production cost.”

According to the Austrian school, the crux of the problem lies in the inadequate decline of commodity prices. The reason for this is limited by the excessively high operating costs in the early stage. Costs remain high, product prices are not cut in place, excess inventory cannot be cleared, and enterprises are suppressed to invest, and the economy enters a cycle of contraction.

As far as our country is concerned, on the one hand, there is overcapacity and on the other hand, operating costs are rising. From the data of listed companies, since 2010, the total operating cost/total operating income of all A-share non-financial listed companies has increased from 93.1% to 95.6%; this is even more obvious for small and medium-sized and ChiNext companies. 82.1% rose to 97.3%, eroding profitability and suppressing investment willingness.

According to the 2016 project calculation of the Macroeconomic Research Institute of the National Development and Reform Commission, in 2005, the total industrial cost in China was 12.05% higher than that of the United States, and 15.66% higher than that of the United States in 2015. On the whole, the cost of electricity, taxes, and financingCosts, social security contributions, system costs, logistics costs, etc. are all on the high side.

For example, the cost of social security. The social security contributions of Chinese companies account for about 40% of the total wages of employees, more than double the international level; the comprehensive tax burden of enterprises exceeds 40%, which is about 13 to 16 percentage points higher than that of OECD countries; another example is logistics Cost, according to estimates, in 2014, the ratio of total social logistics costs to GDP in China was about twice that of the United States and Japan and 1.9 times that of Germany.

So, it’s not that companies don’t cut prices, but high operating costs, resulting in high prices. Coupled with the high degree of homogeneity of products, naturally, sales are poor. At this time, consumers do not pay, and cannot be simply attributed to insufficient demand. Only by reducing the operating costs of enterprises can we stimulate demand at a deeper level.

In 2016, the State Council issued the “Work Plan for Reducing the Cost of Enterprises in the Real Economy” (Guo Fa [2016] No. 48), and tax In terms of burdens, financing costs, institutional transaction costs, labor costs, energy costs, logistics costs, etc., the goal is to reduce costs, and strive to “a reasonable reduction in the overall cost of real economy enterprises in about three years, and a significant increase in profitability.”

Multi-pronged approach to reduce costs

Constrained by various objective factors, some costs are easy to drop or can be lowered, some costs do not rise and they are considered successful, and some expenditures require increased investment.

According to the results in recent years, the reduction in financing costs has been relatively obvious. The institutional transaction costs, tax burdens, and logistics costs continue to improve marginally. The increase in labor costs, land costs, and energy costs are gradually controlled, and R&D expenditures and depreciation expenses are still required. Continue to improve.

Financial profit distribution, reduce financing cost

Among the many costs, it is the easiest to reduce financing costs. The most affected are the lucrative financial institutions, which are small in scope, and it is easy for all parties to reach a consensus.

According to the data of A-share listed companies, the financing cost burden was the heaviest in 2015. Financial expenses accounted for 34.5% of operating profit. After that, it showed a downward trend, down to 20.3% in 2017. Afterwards, it was affected by economic growth. Corporate profitability continued to shrink, and the proportion of financial expenses began to rise, reaching 25.8% in the first half of this year.

Data source: wind, Suning Institute of Finance

This year, with the implementation of the policy of 1.5 trillion yuan in financial profit distribution, it is expected that the financing costs of the real economy will significantly improve. Under this background, the profit growth rate of financing financial institutions will still tend to decline.

Control housing prices and control rent

Since 2008, the average industrial land price of 100 large and medium-sized cities has continued to run at a high level. Data shows that the average industrial land price in Chinese cities is about 25 times that of the United States, and the United States is a freehold property. For many small and micro enterprises and life service industries, leasing costs are an important rigid expenditure.

From 2012 to 2018, the vacancy rate of high-quality retail properties in first-tier cities declined overall, and the overall rental cost increased. Since 2019, a large number of companies have withdrawn, and the vacancy rate of retail properties has increased rapidly. The rental cost has been effectively controlled, but the overall level is still at a relatively high level. In the medium and long term, only by insisting on not speculating on housing and controlling housing prices can rent be controlled.

Simplify administration and delegate power, reduce institutional costs

There are also some costs that are institutional costs, such as local protectionism, multiple supervision, chaotic standards, monopoly, unfair market access, and immature credit environment. This type of cost hinders the free flow of resources and reduces the efficiency of the market economy, mainly through “delegating management and services” (simplification of administration and decentralization, combination of decentralization and decentralization, and optimization of services) The core of the elimination is to promote market competition and promote the free flow of resources.

Other costs, slowly figure it out

Other issues such as tax burden, logistics cost, energy cost, labor cost, etc., involve income distribution, efficiency improvement, energy and environmental constraints, etc., which can only be solved slowly.

Such as R&D expenditure, capital depreciation, etc., from the perspective of transformation and upgrading, not only cannot be reduced, but also continuous increase in investment is required.

Transformation and efficiency enhancement, unleash the potential of science and technology

The essence of cost reduction is a redistribution of benefits, which determines that the space for cost reduction is limited. Since space is limited, cost reduction cannot become a protective umbrella for backward enterprises and backward production capacity.

Reducing costs at the macro level is just a cushion. Enterprise development can only rely on transformation and upgrading, and it must seek benefits from management and technology. At present, big data, cloud computing, Internet of Things, blockchain and other technologies are becoming mature, and the market has seen the huge potential of technology to empower the industry.

From the perspective of consumption promotion and internal circulation, the purpose of technological upgrading is to not only focus on making up for the shortcomings of “stuck neck” technology, but also to realize import substitution for specific technologies, but also to continuously reduce costs and increase efficiency. Cut prices to leave enough room. Many people don’t like this kind of “involution” technological upgrade, but the purpose of involution is to outrun. China’s production capacity is prepared for the world. Through technological upgrades, it is made in China to continuously reduce costs and increase efficiency. The foundation of global competitiveness.

In addition, we must always keep in mind that the value composition of consumer goods, in addition to cost, also has the brand. To promote consumption, in addition to reducing costs, we must also enhance brand value. As far as Chinese manufacturing companies are concerned, brand upgrading is no less important than technological upgrading.