Why you should believe the Chinese GDP data

[There’s a much better China post just put up at Econlog.]

Here’s a typical news story about China:

Red-handed: China province admits faking economic data

A Chinese official has admitted his province falsified its economic data for years, state media said Wednesday, vindicating long-held suspicions that China has been cooking the books.

So why do I believe the Chinese GDP data?  Lots of reasons:

1.  This headline refers to provincial data.  For years, if not decades, the Chinese central government has admitted the provincial data is inflated.  For any given year, if you take an average of provincial GDP growth rates you end up with a figure that is substantially above the national growth rate.  How is that even possible? The answer is simple; the national government knows the provincial data is inflated (as provincial officials are given promotions based on success in boosting GDP) and hence the national figures are developed using a completely different data set.

2.  How plausible is it that Chinese GDP would keep growing at the same astronomical rate, year after year?  Not very, but that’s not what the data shows.  RGDP growth has slowed from over 14% in 2007, to 10.6% in 2010, to about 6.7% today.  In contrast, US GDP growth has stayed right around 2% every single year since 2010.  It’s true that quarter-to-quarter changes in China are small, but that’s partly an artifact of their smoothing technique (reporting year over year figures) and partly due to China’s size and high degree of diversification.  Also keep in mind that if the level of Chinese growth were inflated by, say, 13.7% every single year, due to reporting biases, then the growth rate would not be distorted at all.  You need increasing distortions to consistently inflate growth.

3.  Everywhere you look, you see micro level data that tells a story of extraordinary growth.  China going from a trivial part of the global economy, to a place that absorbs almost 1/2 of global output of key commodities.  A place where auto sales have exploded:

Screen Shot 2017-01-18 at 9.59.30 AMNote that these figures would be almost impossible to fake, as they are also available broken down by company.  Would Ford, GM and VW be telling their stockholders completely phony stories of massive auto sales growth in China?

Everywhere you look you see a similar story, an explosion of urbanization.  Infrastructure built at a phenomenal rate.  The China I visited in 2009 was a completely different country from the China of 2002. Here’s an example:

To appreciate the extent of China’s high-speed rail ambitions, take Mr Gu’s dreams and multiply them many times over. Less than a decade ago China had yet to connect any of its cities by bullet train. Today, it has 20,000km (12,500 miles) of high-speed rail lines, more than the rest of the world combined. It is planning to lay another 15,000km by 2025 (see map). Just as astonishing is urban growth alongside the tracks. At regular intervals—almost wherever there are stations, even if seemingly in the middle of nowhere—thickets of newly built offices and residential blocks rise from the ground.

Ditto for the world’s largest expressway system, built almost overnight.  Enormous growth in subways, airports and other types of infrastructure.

Yes, there are sectors like steel and coal that have recently struggled, but there are also sectors growing faster than average, such as services, which is now more than 1/2 of GDP.

Obviously I don’t know that RGDP growth in China is exactly 6.7%, but I also don’t know the exact growth rate in India, the US, and especially in Ireland.  All GDP data is flawed.  But when you look at the spectacular changes occurring in China, a figure of 6.7% seems very reasonable.

PS.  The Economist article on China’s high-speed rail is excellent, with the first half devoted to its successes and the second half to its wasteful excesses.  They consistently have some of the most balanced pieces on China.  If you simply read China bulls or China bears, you will have no idea what’s actually going on in the country.

 

 

The “leave” campaign was built on lies

The leave campaign to force Brexit was built on a set of lies, such as the claim that leaving the EU would free up 350 million pounds a week for the NHS.  This was an imaginary number pulled out of thin air, as virtually everyone now agrees.  There will be little or no benefit to the UK Treasury.

Today another lie was exposed.  Leave campaigners like Boris Johnson assured us that the UK would remain within the EU single market.  Theresa May has now admitted that it will be a hard Brexit, with Britain leaving the single market as well as the EU customs union.  Of course there is talk of setting up new trade arrangements (which I applaud), but that’s all very speculative.

It’s no surprise that the campaign was based on lies, that’s standard operating procedure for right-wing nationalist/populist campaigns.  Trump did exactly the same.  Here is a typical Trump lie:

“The EU was formed, partially, to beat the United States on trade, OK?” he asked rhetorically. “I don’t really care whether it’s separate or together.”

And here’s what really happened:

After World War II, the United States and its allies attempted to create a new world — one defined by rules and order, in which such a devastating war could never happen again.

Do you recall those dystopian novels where they postulate a history where the US lost WWII, and is a colony of Germany and Japan?  I feel sort of like we’ve entered one of those, where a Russian agent has become President of the United States:

Donald Trump just lobbed a grenade into the normally staid world of European-American diplomacy, using a joint interview with two of Europe’s biggest newspapers to call NATO “obsolete,” predict that the European Union would fall apart and announce that the US wouldn’t really care if it did, and threaten to potentially start a trade war with Germany over BMW’s plans to build a manufacturing plant in Mexico. . . .

Bashing NATO and the European Union, and alienating Germany, is a plan for tearing apart US relations with the EU — for weakening the agreements that underpin America’s status as the sole superpower and that maintain peace on the European continent.

It also means that Trump is talking about radically reshaping US foreign policy in a way that would significantly boost Putin’s influence while leaving America’s allies scrambling to figure out where they stand and how much they can trust in the future stability of an international system that has brought unprecedented economic strength and stability to the continent for decades.

“What Trump proposes is [American] geopolitical suicide,” Daniel Nexon, a professor at Georgetown who studies great power politics, writes at the Lawyers, Guns, and Money blog. “Make no mistake: you should be very worried right now.”

The article then points out how Trump is undermining the economic, political and military agreements that have led to the best period of world history since 1945.  It concludes with this warning.

There is only country that benefits from all of these moves: Vladimir Putin’s Russia.

Putin’s fundamental foreign policy goal is to restore Russia’s place as one of the world’s most powerful and influential nations. To do so, he wants to restore global politics to the way it was in the 19th century — when European countries saw each other as rivals rather than partners. This kind of “balance of power” world order would allow Russia to divide European powers by forming selective partnerships with some against the others — thus restoring Russian greatness.

Putin’s Russia is too weak, in political and military terms, to accomplish this on its own. The logical end point of Trump’s stated policies, regardless of whether that’s what he intends, is a fractured Europe that would be far less capable of standing up to Putin.

“Every [foreign policy] position Trump takes, starting from total ignorance around [a] year ago, is on Putin’s wish list,” Garry Kasparov, the Russian chess master and dissident, tweets. “Brexit, Ukraine, NATO, EU, Merkel.”

Trump’s stated policy ideas, if implemented, would have the effect of accomplishing much of what Putin has dreamed of, but that the Russian leader may have never have thought possible.

Now, with Trump taking office in a few days, it all seems very frighteningly real. Trump is proposing isolating America from its allies, and isolating these allies from each other. The only power that benefits is Russia, perhaps America’s most significant strategic rival. There is a country that Trump may soon make great again. The problem is that it’s not the US.

We now live in a bizarre alternate reality where Merkel is treated like an enemy and Putin is treated like a friend.  Is this what Americans were voting for?  On the other hand, you can’t say voters weren’t warned.

Remember those people who said Trump’s campaign was just an act, and that he’d be “Presidential” after the election?  Trump may not be a Russian secret agent, but he is sure doing a good job or impersonating one.  Some people say that maybe Trump is smarter than the rest of us.  Maybe he has a secret plan to fix what’s wrong with the world.  Yeah, that’s possible.  But it’s also possible that he’s exactly what he seems, a complete lunatic.

PS.  Here’s Tyler Cowen:

A willingness to think things through from scratch is in some ways admirable, but dangerous in matters of foreign policy and nuclear weapons, where predictability is at a premium.

Also dangerous when tinkering with the pro-trade consensus that has served the world so well since 1945.

PPS.  I’m now going on record predicting that Trump’s promise to abolish Obamacare will be exposed as a lie, within 12 months.  I also don’t expect to get the tax cut he promised me.

American pickers

Back before 2009 I still had a life. One feature of my earlier life was an interest in collectables.  When I was younger I was fortunate to meet a lot of eccentric people who had an obsession with collectables such as antiques (broadly defined). Even after coming to Boston, I would go to the Brimfield, MA antique show about once a year, where about 5000 sellers congregate in large fields just west of Boston. When you luck out, this activity offers the thrill of a treasure hunt.

I wonder if non-collectors have any idea just how big this subculture is.  The activities are mostly unreported, but if correctly measured would surely be a non-trivial share of GDP. It’s hard for me to tell just how large, as I probably know an above average number of obsessive collectors.  (I used to rent out my attic apartment to one.) These people basically devote all of their discretionary income to amassing a large collection of stuff.

There was a line in a French movie that always stuck with me.  A Frenchman with unusually good taste would travel around the countryside looking for undiscovered artists.  One day he bought a few paintings from an unknown artist with Cezanne-like talent.  His friend complimented him; pointing out how much money he could make selling these paintings.  He responded something to the effect “I don’t collect to sell. I sell to collect.” That reminds me of some of the obsessive collectors that I’ve known throughout my life.

There is a show on the History Channel called “American Pickers”, which follows two fanatic (but lovable) collectors as they travel America’s “Blue Highways”, looking for treasure to buy.  (One man’s junk is . . . . )  Tonight’s episode (9pm eastern time) is called “Catch-32” and features two segments.  The second segment involves these two guys visiting my brother, who lives in Wisconsin.  (You may recall that a few years ago I posted a picture of a dragon that is right in front on my brother’s house, which he and his partner created.  Mark lives in an old brick building that used to be an auto dealership in the early 1900s.  The inside of his “house” is full of interesting antiques, although not necessarily the sort of antiques you’d see in an elegant shop on 5th Avenue. Check out the episode if you have a chance, I certainly plan to.  (It will also be rerun quite often.)

There are days I wake up wishing I had his life. (I wonder if he occasionally feels the same way.)

PS.  I suspect that many academics don’t know anything about this subculture.  For instance, I read professors saying that we don’t need cash any longer; it’s only of use to criminals.  But I can’t imagine going to Brimfield without a wad of Benjamins in my pocket.  Serious collectors carry far more cash than I do, in case they find a diamond in the rough and the seller isn’t taking checks.

PPS.  I have a new post on monetary policy denialism over at Econlog.

PPPS.  Many years ago I was with my brother when he found this old barber’s chair from 1887:

Screen Shot 2017-01-16 at 11.52.37 AMLater he restored it, and gave it to me as a gift.  Here it is today:

Screen Shot 2017-01-16 at 12.04.48 PM

There are two kinds of people in the world; those who can recognize nickel plating, and those who cannot.

 

Excellent!

Here’s the Donald:

LONDON, Jan 15 (Reuters) – U.S. President-elect Donald Trump said he will offer to end sanctions against Russia in return for a nuclear arms reduction deal with Kremlin chief Vladimir Putin, The Times newspaper reported.

In an interview with The Times of London, Trump said he wanted nuclear weapons arsenals of the world’s two biggest nuclear powers — the United States and Russia — to be “reduced very substantially”.

“They have sanctions on Russia – let’s see if we can make some good deals with Russia. For one thing, I think nuclear weapons should be way down and reduced very substantially, that’s part of it,” Trump was quoted by the newspaper as saying.

Trump also criticised Russia for its intervention in the Syrian civil war, describing it as “a very bad thing” that had led to a “terrible humanitarian situation,” The Times said.

And people complain I never say anything good about Trump.

Am I changing my tune?  Or is he?  Here’s Trump a couple months ago:

Almost any list of America’s top foreign rivals would include Iran, Russia and the government of Syria.

Sunday night, Donald Trump spoke approvingly of all three.

Trump infuriated Republican insiders—and contradicted one of his own senior foreign policy advisers—when he suggested that those three governments are playing a positive role in Syria’s civil war.

I’m sure there’s an ingenious secret plan behind all this—run a campaign on the exact opposite of what you plan to do.  I eagerly await Trump’s immigration amnesty announcement.  Seriously, when he does something sensible, I’ll give him credit.

PS.  Bob Murphy has a hobby of spotting contradictions—he’ll have lots of fun with Trump.

PPS.  The nuclear arms thing also seems different from what he’s been saying, although in that case I suppose you could argue his views were always conditional on Russian moves.  I don’t recall his exact promises during the campaign. Also good to see he isn’t willing to remove sanctions without something from Putin—I had the opposite impression, maybe from his alt-right fans.

About that 2016 recession, and our elitist media

Here’s a prediction made back in January:

Based on today’s GDP release, it appears that the US economy is slowing but not near any sort of massive collapse.

Peter Schiff begs to differ.

The CEO and chief global strategist for Euro Pacific Capital, and noted perma-bear, said that serious economic destruction is just a few months away.

“I think the Fed is going to have negative interest rates before the election because we’re going to be in a serious recession,” Schiff told Business Insider on Friday.

In fact, Schiff said that we may already be in recession and this one is going to be a doozy.

“We’re in worse shape now than we were in 2007,” he said.

And here’s a prediction from early 2012:

While Bernanke delivered calm to bond markets on Monday in a speech that promised “continued accommodative policies,” the violence of the sell-off speaks to Schiff’s argument.  “We consume more than we produce and we borrow abroad, but we are never going to be able to pay them back,” says Schiff.

The controversial investor and commentator expects a massive crash over the next two to three years as a bond market bubble, coupled with the U.S. dollar, collapses under the weight of excessive debt.  Schiff, like PIMCO’s Bill Gross, doesn’t believe in the current deleveraging cycle.  While households have reduced their leverage, government debt has ballooned on the back of stimulus programs, but, argued Schiff, the government’s debt is the people’s debt, thus overall leverage has actually increased.

If you google Peter Schiff, it’s gloom and doom all the time.  Even worse, when I debated him a few years ago he turned out to be one of those conspiracy theorists who thinks inflation is far higher than the government claims, which of course implies RGDP growth has been negative since 2009, despite roughly 200,000 new jobs every month.  So why does anyone pay attention to him?  I suppose some would claim that he predicted the 2008 recession.  But if you are predicting recessions over and over again, then it stands to reason that when a recession does occur you will have predicted it.  So that doesn’t answer my question.

Some will claim that I’m being an elitist, insisting that the press only pay attention to credentialed economists.  Actually, I don’t have any problem with the press paying attention to well-informed people, even if not an economist.  Matt Yglesias often has good posts on the economy.  Interview him instead of Schiff.

I think it’s the press that is being elitist.  Economics reporters are in awe of wealthy people in business and finance (but not entertainment), and think they are a good source of ideas.  But they are not.  It’s elitist to think that Schiff’s comments are worth reporting while my plumber’s are not worth reporting.  I’m sure there are 1000s of plumbers who “predicted” the 2008 recession.  So why not interview them?  Is it just because they are not rich? Isn’t that elitist?  And why not interview LeBron James on the economy? He’s rich. Isn’t it elitist to assume that Schiff knows more business cycle theory than James?  (I’d guess that neither knows any business cycle theory).  Or how about a guy who owns a 7/11 store?  The press is simply not interested.  A union leader?  Not interested.  You need to be rich and in business or finance.  Business and finance have absolutely nothing to do with economics, but most reporters don’t seem to know that.

(I think this is part of the reason Trump was successful.)

So am I saying that the press should just completely stop reporting what Peter Schiff has to say?

Yes, I am.  It’s elitist to give rich people like him a mouthpiece.  I’m not saying that only experts should be interviewed—it’s fine to interview the average man on the street.  But Schiff is not the average man on the street.  He’s not average and he’s not an expert.  So what is he?