Agreeing With Krugman on China - Truly Scary

Paul Krugman is the economist/columnist that I love to hate. He is probably brilliant in some way that I cannot understand, because I almost never see it in his work at the New York Times. He is a Nobel Prize winner, but I often wondered if his award was not politically motivated, in much the same way that Obama's clearly was. I was surprised to find his analysis of China's economic situation quite penetrating. I had argued against Glenn Beck and others that China was not the formidable foe they thought. My unlikely ally in this regard is Krugman. Some key points.

Still, even the official data are troubling — and recent news is sufficiently dramatic to ring alarm bells.

The most striking thing about the Chinese economy over the past decade was the way household consumption, although rising, lagged behind overall growth.

. . .China increasingly relied on trade surpluses to keep manufacturing afloat. But the bigger story from China’s point of view is investment spending, which has soared to almost half of G.D.P.

. . .it [the motivation for this investment] depended on an ever-inflating real estate bubble. Real estate investment has roughly doubled as a share of G.D.P. since 2000, accounting directly for more than half of the overall rise in investment.

Do we actually know that [Chinese] real estate was a bubble? It exhibited all the signs: not just rising prices, but also the kind of speculative fever all too familiar from our own experiences just a few years back — think coastal Florida.

. . . it’s impossible not to be worried: China’s story just sounds too much like the crack-ups we’ve already seen elsewhere.

Krugman also takes to task those who think that China's "strong, smart leaders" who don't have to bother with democratic niceties will somehow handle the situation. He points out that endemic bribery at the local level limits the central government's ability to govern. I would add that even dictatorships are subject to political pressures, which ultimately cannot be ignored.

We have a good news, bad news situation. Despite all of the troubles of the Unites States, there is no other nation close to being able to challenge our leadership, not the Europeans, not China and not Russia. However, if China also starts to suffer serious economic hardship, then a global depression seems possible.

Betting Against China

In a previous post, I took Glenn Beck to task for fear mongering on China. The crux of my argument is two-fold. First, China's demographics portend long-term problems for the nation, due to lack of young people to support retirees in a few decades and a lack of young women compared to young men that will have negative social impact. Second, China's growth is driven by the direction of credit at the national level to favored industries. Such a model is unsustainable for two reasons. Inevitably, mistakes will be made and political pressures will cause investment to be redirected.

A couple of articles in today's WSJ reinforce my points.

Beijing Directs More Funds Toward Affordable Housing

Low and behold even the dictators in Beijing aren't immune to political pressure, take note Thomas Friedman, you miserable hack. So China is worried about the political problems caused by a lack of affordable housing including middle class anger. And where is the money coming from?

Only a portion of those sums comes from spending by central and local governments, with the rest coming from bank credit and corporate investment.

That means there is $200 billion less for investment in so called strategic industries.

Inflation in Asia Strikes at Core
It's Not Just Food Prices Anymore; Too-Fast Growth Strains Countries' Capacity, Raises Labor Costs

While China is not the main subject of this article, its labor costs are rising (and common sense tells me that demographics are a factor.)

Recruiters say it is getting harder to lure workers from places like China, where rapid economic growth of recent years has pushed wages higher and created more opportunities at home.

The rising labor costs will inevitably mean that China's global competitive advantage will erode. Since their work force doesn't speak English, the international language of commerce, to the extent that India's does, they are put at a competitive disadvantage.

China Logs Surprise Trade Deficit

This headline speaks for itself. While it only refers to one month's data, the trend of a reduced trade deficit is likely to continue. Why does this matter? The trade deficit allows Beijing to hoard dollars for direct investment, which may now be curtailed.


Like an idiot, I didn't check on Professor Perry's Carpe Diem blog before starting this post. He has evidence that U.S. small businesses are reversing the offshoring trend. It seems like shipping costs and rising labor costs in China, as well as inconsistent quality are making China an unreliable business partner. The comments section is worth the read as well.

Finally a picture sometimes says it all. How much longer will Chinese tolerate growth that results in this?

Disagreeing with Glenn Beck on China

Glenn Beck has been claiming that China is overtaking the United States as a global economic power. While he makes a number of good points he and his panel of experts have missed some key issues that will inevitably hold China back. Beck's experts, Jim Rogers, global investor, and David Buckner, economist, opine correctly that future national economic trends can be traced to people and capital. They then proceed to focus on capital and forget about the people. The fear that we are being overtaken is nothing new, in the 1980s there was widespread fear that we were being overtaken by Japan; then "Japan, Inc." tanked. Before it did, I remember reading a quote in Reason from Thomas Friedman's book The Lexus and the Olive Tree, "I am not afraid of Japan or the other Asians. Our Asians will beat their Asians any day." The quote was ascribed to a Silicon Valley entrepreneur, who was making the point that we are the only country attracting brain power through immigration. It is a source of strength not matched by our Asian competitors. So while our public education system isn't really building the home grown talent we would like, a point made repeatedly by Beck, it is not the only source of human capital for our nation.

My second objection is that the demographic trend line for China is following that of Japan's, which will cause domestic tension and considerably raise their labor costs as they bear the burden of an aging population. Consider the following demographic profiles from Simon Bond's blog:


Because of its one child policy, China is following Japan in having an aging population that lacks younger workers to support the pension benefits of their forebears. The United States has a problem, but not nearly as severe. Note too that India, with its English speakers, flatter population profile and commitment to education is a much greater long term threat to our economic supremacy. Note too, that their is a large gap between the male and female populations in the 20-24 age group, with a deficit of about 4 million against 65 million males. This is certainly going to cause societal problems.

Next, China's lack of regard for the environmental effects of its industrial policy will come under pressure as its workforce becomes wealthier. This is not a pretty picture:


Two final thoughts. First, China's investment is heavily directed by the central government. Beck professes belief in the superiority of the free market system over and over on his show, but loses his mind when it comes to China. "State capitalism" will prove no more robust than socialism in the long run as an economic system. The ability of a free market economy to outmaneuver other models is already proven. The question for America is how will we preserve the light regulation needed for capitalism to work, and not allow the heavy hand of government to strangle free enterprise. Second, China is still a repressive regime, which is incompatible with the agility of mind and freedom of choice necessary to a culture of free enterprise. Without those strictures, the party loses its power. With them, it will always be chasing countries with free markets.

Personally, I think we should be more concerned with India in the long term. They are a democracy and working through their problems slowly but effectively. I wish we would be allowing their best and brightest to immigrate to our country in much more massive numbers than we currently allow, to give us a head start on the inevitable economic competition.

Glenn Beck - Genius

I have been thinking about Glenn Beck's 8/28 rally for a while. I admit to really enjoying Glenn Beck, but in the same way that one enjoys a guilty pleasure. Even some conservatives don't see him as a tower of intellect, and of course he made all the right enemies with his Restoring Honor event at the Lincoln Memorial. I have to come to see the genius of his approach. I noticed that all of the coverage on the conservative side defended Beck's event as non-political, but the left's criticism harped on the political nature of the event. I happen to agree with the left, the event was in fact political, though not in the traditional sense, and that is Beck's genius.

His calls for piety and invocation of Judeo-Christian values undermine the premises of the left's political argument which goes something like this. "The world is very complicated, and the average person can't understand it all. In order to improve the lives of all citizens only smart and expert people can properly order society; leaving to the free choice of individuals is too messy, unpredictable and ultimately will result in societal failure. Elect us and we will invoke scientific principles to establish an earthly utopia." Sound familiar?

So how does Beck rebut this? His call for a return to faith and a belief in unchanging core principles is a direct affront to this argument. The call to faith, specifically Christian and Jewish faith, is a call to religions where each individual can know the will and principles of The Almighty through the text of his Word, without the need for experts to explain how they should order their lives. That conservatives think this apolitical is a comment on their own world view. In the Babylonian captivity, the Jews came to see the Lord as a God not of a time and place, but of all the universe and eternity who was knowable to every man through a study of his word. Jesus told his followers that the Kingdom of God was at hand, meaning that God's power could work directly in their lives and promised the Holy Spirit as a means of accessing God's will and power. Christianity has undergone continual renewal ever since, with martyrs bringing the Bible into the language of the common man, and rebellions arising when the Church strayed from Biblical principles. The common thread is the presence of God as the most important fact in one's life, who demands obedience, regardless of what governments, politicians, or the culture tell one.

Further, Beck invokes the world view of the Founding Fathers, another bulwark against the arguments of the left. Their view of man as imperfect and indeed not capable of perfection, led them to frame a constitution that set the branches of government against each other, to prevent the kind of meddling that the left so loves. The very idea of limited government is in fact anathema to the left. (You can always smoke out a lefty by asking this question, "What, if any, limits on federal power are inherent in the constitution's commerce clause?" When they start equivocating because their core belief is embarrassing to them, you've found a lefty.) The core beliefs of limited government, rights of individuals, including economic ones, and democratic principles bounded by separation of powers are the core beliefs of our founders. These are fundamental to our conception of a political framework, but they are political nonetheless.

Beck's message strikes at the very heart of the progressive movement, and this is why he is so reviled. They dare not argue his ideas, so they smear him and call his followers racist. It is a strong indication that they cannot win the open debate.

I know that not all my readers are Christians, but I would ask you to consider that there are eternal principles that can not be revoked by the dictate of government or any other human institution. I believe history is on my side in this argument.