2009 December 01 Tuesday
Tyler Cowen: America Threatened By China Bubble
In a column for the New York Times Tyler talks economic sense on China.
PRESIDENT OBAMAíS recent trip to China reflects a symbiotic relationship at the heart of the global economy: China uses American spending power to enlarge its private sector, while America uses Chinese lending power to expand its public sector. Yet this arrangement may unravel in a dangerous way, and if it does, the most likely culprit will be Chinese economic overcapacity.
China's macroeconomic mismanagement is on a scale similar to the US's macroeconomic mismanagement. Can we avoid a resulting depression?
Developing major economies all experience bubbles.
China has had a 30-year run of stellar economic growth. But itís only human nature for such expansion to breed too much optimism, overextending an entire economy. Americans have found this out the hard way in their own financial crisis.
History has shown that no major economy has grown into maturity without bubbles, crises and possibly even civil strife or civil wars along the way. Is China exempt from this broader pattern?
Tyler does not predict a crisis. But he thinks we should prepare for the possibility. If it happens Tyler expects interest rates to rise in the United States and for the US government's fiscal situation to become unsustainable.
I doubt the ability of the world's central bankers to manage the huge imbalances in ways that avoid a crisis. We had a crisis last fall. I suspect we will have some more such crises of a similar scale in the next decade.
A mild wind will cause further deflationary problems here.
One significant difference is that China is run by engineers while the US is run by MBAs.
I know who I'd prefer to be running a complex system.
The real point is that, at present and more so in the future - the vast bulk of Chinese GDP growth is fuelled by internal demand.
Now, 20 or so years ago the China/USA relationship was completely different.Put simply China was the underling that was desperate for dollars to finance tradea nd imported capital goods.
Now the boot's on the other foot - China has more dollars than it can ever possibly need - therefore we are seeing a realignment of China's industrial capacity to actually deliver goods that boost the long-suffering Chinese people's material standard of life eg housing, electricity, roads, rail, cars etc etc.From this huge pent-up demand - pump-primed through the initial trade boost of 20 years back, China will generate all the growth that it needs.
Foreign exchange, such as it is needed willl be continually supplied by Chinses excellence in textiles, footwear, machinery, computers and high end consumer electronics and optica equipment - of which a substantial demand will always exist.
To re-iterate the roots of this phenomenom lie in IQ levels and not the silly posturings of half-assed pontificating political pundits.
A.Prole said: To re-iterate the roots of this phenomenom lie in IQ levels...
I'm not so sure about IQ being a factor - after all, if it were a factor then how do we explain the relationship between IQ and the miserable China of 1850, 1900 or even 1950?
I think that much of China's economic dividend is caused by its move away from an extremely inefficient feudal society. That social change will continue to pay dividends for another 100 years until China's peasant class (ie cheap labour) move into lower and middle class stratums. The only thing that will bring it to a stop is if cheap human labour is entirely replaced by semi-intelligent automation.
That said, there is an IQ component. China must be on to its second or third generation raised with a reasonable daily calorie intake. No famine for a generation equates to a higher IQ for that generation.
I certainly believe the Chinese have fairly high average IQs. But I find your whole reply irrelevant. It in no way undermines Tyler's argument. Yes, more of China's growth will come from internal demand growth. But that hardly makes Tyler's comments half-assed.
Fact is, China's government created big market distortions in order to accelerate the growth of their economy. Those distortions created a bubble that is now causing large misallocations of capital. Large misallocations of capital always cause a wrenching correction at some point. Given China's big and growing role in the world's economy we are going to experience economic problems as a result of China's imbalances.
-Tyler does not predict a crisis. But he thinks we should prepare for the possibility. If it happens Tyler expects interest rates to rise in the United States and for the US government's fiscal situation to become unsustainable.-
If there is going to be a crisis? There's gonna be one in the US. Better be prepared.
You can't be a rich country without smart people, but you can be a poor country with plenty of them
You can't be a rich country without either smart people or lots of oil. But the oil only boosts wealth temporarily until either Malthusian limits or oil field depletion or both. Saudi Arabia is already much poorer per capita than it was at its peak and it will become poorer still in the future.
One thing not factored here is that as the Chinese and Indian economies continue to expand, a lot of wealth with be made in the resource rich periphery (Australia, Canada, Russia, Brazil, Chile, Kazakhstan etc) which will provide an alternative market for Chinese goods. Eventually this will soak up a lot of the demand for Chinese exports previously consumed by the US and western Europe.
No doubt the development of some of these countries will be somewhat limited by there 'human capital' limitations but they will still become quite a lot richer than they are at present. Even parts of Africa will get richer under pragmatic Chinese influence, as they did under British influence in the 19th Century.
This could take some time though, and it's quite possible there could be a big lag between falling US demand and domestic and international demand in China and other parts of the world taking up the slack.
> I'm not so sure about IQ being a factor - after all, if it were a factor then how do we explain the relationship between IQ and the miserable China of 1850, 1900 or even 1950?
Most people were malthusianly miserable before the Industrial Revolution, except aristocrats. Non-Westerners took some time to make any progress in industrializing, as did Russia. Japan lead the pack outside ethnic europe, though it was still far, far less industrialized than the US or western europe during the war. Today's prosperous northeast asia did not exist until the 60s and 70s, in some cases the 80s. All that time, China was ultra-backward under Mao's terror. China's growth started almost immediately after Deng Xiaoping rose circa 1983 and moved the country toward crypto-capitalism.
China is the only country that is very economically retarded relative to its mean IQ and mean diligence, except North Korea. As soon as China got a non-terror government it had a billion workers who would give high quality work in exchange for a pittance.