Is China a Case for Stimulus?

Is China an example of fiscal stimulus successfully maintaining a growing economy? Tyler Cowen and Matt Yglesias offer contrasting opinons.  (A link to Cowens which also links Yglesias' blog is here.)  Cowen argues that the spending has been riddled with malinvestments and influenced by corruption so helps demonstrate an important problem with massive stimulus programs. Yglesias counters with the argument that no sector has lower productivity than the unemployment sector, so that even malinvestments are better than no investments.  He also states that no one in China is debating whether the typical household is better off than it was four years ago.

But Yglesias is ignoring a couple of points in my view. First, it is a short-run view only.  Just as I can live well by running up debt, eventually it has to stop. The same is true for nations.  Second, and relatedly, if we asked the typical American household in 2006 or early 2007 whether they were better off than four years earlier, most would have said they were better off.  Unemployment was relatively low, housing prices were high and rising, the stock market was booming, and the consumer was seen as the engine of strong economic growth. But that all came crashing down once house prices collapsed.  Given the overbuilding of office buildings and apartments in China, it is difficult to believe that a similar crash won't happen there.

A final thing to consider is the political situation in China.  The autocratic central government is very concerned about social stability.  Maintaining growth and increased GDP is crucial to prevent social unrest.  But the measures being used to maintain growth may cause even more social unrest if and when the whole thing falls apart. 

Air Quality Monitoring in Beijing

Having lived in Pasadena, California for four years, I know something about polluted air.  During a visit to Beijing with a group of students. it was clear (pun intended) that Beijing's was at a whole other level. The best description I heard from someone who lived there was "apocalyptic." The Asia Pacific edition of the NY Times has an article on the Chinese government wanting embassies to stop monitoring and tweeting on the air quality in Beijing. The picture with the article is of the Beijing I saw while there in March.  I was told by an American living in Beijing that the readings on the meters are often at the maximum--the readings are off the chart.  China's policy appears to be concentrate on economic growth and then clean up. Come to think about it, that is what most of the industrial countries today did.

China's Growth Rate is Slowing

There are stories in the newspapers today about China's growth rate is slowing down and some other concerns about their economy are discussed.  When the U.S. and most of the West had the financial crisis in 2008, China tried to set itself up as a model of how to run a successful economy.  Now some say that it may not be such a great model.  I don't know why anyone thought it was. Yes, China has been  growing at rapid rates for some time. But, it is easier to grow when you are catching up with the advanced economies. Japan did so in the 50s and 60s, South Korea more recently and now China.  Like China, Japan used more government direction than we do in the U.S., and many here thought it would be better if we had an industrial policy.  But, Japan has not been the economy we want to copy for a couple of decades now.  China will not be in the future either.

Odds and Ends

Today's New York Times has a number of interesting pieces, although not all are economics. I will begin with economics and business though.  Tyler Cowen's column is about India, and how troublesome India's slowing growth rate may turn out to be. He argues that India's economy could surpass China this century because of the differences in population growth rates for the two countries.  But, he sees the growing segments of India's economy cut-off from the rest of the country.  There is also a long article on this year's college graduates and how many are turing to internships when they cannot find jobs.

On a different note--two articles in the sports section.  One on Joey Crawford, a NBA referee for many years.  I found it interesting,especially as it relates to many of the players who have been in the league since he began as a ref. The other is on Ron Guidry and Mariano Rivera. I am not a Yankees fan, but I remember when Guidry--Louisiana Lightening--was a Yank, and I consider Rivera to be the greatest closer even in the game.  With Rivera's injury, his career could be ending, but I hope not.  Although, according to the article, Guidry would often meet with Rivera during spring training and would tell him, "One of these days, your're going to be like I am--old."  Reminds of hearing Joe Garagiola say once while broadcasting a game--You know you're getting old when son's of players you played with are nearing retirement age.

Today is Hope's graduation. Perhaps I am recognizing the aging factor more as I see another group of young men and women graduate to start their lives.  The last article I will mention is from the Travel Section and is on China.  I accompanied the Baker Scholars at Hope to China over spring break. The article is about Beijing, Shanghai, and Hong Kong. We visited the first two of those cities, and also visited many businesses in the two cities.  It was the first time in many years that I thought how great it would be to by young and starting a career today because of the excitement and change I saw in China.  At this point, I would learn Chinese before any of India's languages.

Three articles of interest

Yesterday's NY Times had several things worth reading.  A front-page article details bribery by Wal-mart in Mexico.  If accurate, there can be serious repurcussions for the company and its executives.  The company has faced criticisms from many for labor practices and for driving out of business smaller, local firms before, but this will inflame sentiment against the company even more.  Another concern may be the company's actions in China.  I am unaware of any legal issues, but the Chinese system is pretty corrupt and the opportunity to gain market share through favors to key bureaucrats exists there as well. Hopefully, the problem Wal-mart had was with the Mexican leadership and not company wide.


A column by Frank Bruni shows the effects of austerity in Portugal through grafitti on buildings there.  The use of debt to prosper for awhile comes back to haunt both people and countries in many ways.  It is a sobering examination of the aftershocks of prosperity through debt.
 
Finally, an  op-ed piece that brings us to China.  Nicholas Kriftof discusses the scandal in China around Bo Xilai.  He suggests, and I find it likely to be true, that it is an indication of more widespread problems in China.  American firms face a quandry--the market is so big it cannot be ignored but the potential problems are also huge.

China Still Relies on Connections

An interesting article in today's Financial Times concerns the fall of Bo Xilai and his relationships while still party head in Chongqing. He relied heavily on recommendations from friends and family matters rather than following the party bureaucracy or other channels. This is always a problem in political rather than business settings, although big business often likes working with politicians in this way. Competing for access to an important political figure may be better than competing in marketplace. It happens here too, but fortunately not as often as in much of the world.

John Cochrane on Geitner's Proposal at the G-20

Today's WSJ has an interest op-ed piece by John Cochrane. Secretary of the Treasury Geithner called for G-20 countries to undertake policies that would reduce external imbalances below some specified share of GDP. It appears that Geithner is most concerned about China's trade surplus with the U.S. However, the U.S. has a trade deficit with many countries other than China.

China saves a lot more that the U.S., partially because China lacks a social security system. The only way middle-aged adults can plan for retirement is by saving today. It often appears that Americans believe social security provides a better retirement than it does since so many don't save much. However, one positive outcome of the recent financial and economic crisis is that Americans are saving more and borrowing less.

Cochrane points out several problems with Geithner's proposal. First, how does anyone know the proper amoung of saving any given country should have? Second, countries at different levels of development will have different outcomes with respect to trade balances. The U.S. borrowed abroad to fund the railroads in the 19th Century. Cochrane also points out that promises to fix our long-term problems later are hardly enforceable. Finally, there is a strong notion of an ability for government and international agencies to plan the operation of modern economies.

Cochrane's piece is worth a read.

China and the U.S.

Tyler Cowen's article in today's New York Times is worth reading. Cowen refers to the symbiotic relationship between the U.S. and the U.S., as noted also in Niall Ferguson's term, "Chimerica." At the heart of the problem is the exchange rate policy of China--pegging the dollar-yuan rate so that Chinese exports remain cheap in the U.S. China maintains the exchange rate by borrowing heavily in the U.S., which helps keep interest rates low in the U.S.

Since the financial crisis and the full-fledged recession began, I fear that the U.S.-Chinese relationship has not been getting enough attention. Part of the reason may be simple--what can the U.S. do about the relationship unilateraly? The U.S. cannot China to revalue its currency. But the bail-outs of Wall Street, the continued propping up of housing markets by the U.S. government, and the call for a "jobs bill" by many Democrats, along with the push for health-care reform, drops the China-U.S. relationship down on the Administration's to-do list. I hope Cowen's article can help raise concern over the China-U.S. relationship higher on the to-do list.