Archive for the Category China


Seeing Lu Mountain

Brad DeLong has a post discussing a debate between Paul Krugman and Roger Farmer:

I find myself genuinely split here. When I look at the size of the housing bubble that triggered the Lesser Depression from which we are still suffering, it looks at least an order of magnitude too small to be a key cause. Spending on housing construction rose by 1%-age point of GDP for about three years–that is $500 billion. In 2008-9 real GDP fell relative to trend by 8%–that is $1.2 trillion–and has stayed down by what will by the end of this year be seven years–that is $8.5 trillion. And that is in the U.S. alone. There was a mispricing in financial markets. It lead to the excess expenditure of $500 billion of real physical assets–houses–that were not worth their societal resource cost. And each $1 of investment spending misallocated during the bubble has–so far–caused the creation of $17 of lost Okun gap.

(You can say that bad loans were far in excess of $500 billion. But most of the bad loans were not bad ex ante but only became bad ex post when the financial crisis, the crash, and the Lesser Depression came. You can say that low interest rates and easy credit led a great many who owned already-existing houses to take out loans that were ex ante bad. But that is offset by the fact that the excess houses built had value, just not $500 billion of value. I think those two factors more or less wash each other out. You can say that it was not the financial crisis but the destruction of $8 trillion of wealth revealed to be fictitious as house prices normalized that caused the Lesser Depression. But the creation of that $8 trillion of fictitious wealth had not caused a previous boom of like magnitude.)

To put it bluntly: Paul is wrong because the magnitude of the financial accelerator in this episode cries out for a model of multiple–or a continuous set of–equilibria. And so Roger seems to me to be more-or-less on the right track.

DeLong is certainly right that the housing bust is far too small, but it’s even worse than that.  The vast majority of the housing bust occurred between January 2006 and April 2008, and RGDP actually rose during that period, while the unemployment rate stayed close to 5%.  So it obviously wasn’t the housing bust.  On the other hand you don’t need exotic theories like multiple equilibria—the Great Recession was caused by tight money.  It’s that simple.

Or is it?  Most economists think that explanation is crazy.  They say interest rates were low and the Fed did QE.  They dismiss the Bernanke/Sumner claim that interest rates and the money supply don’t show the stance of monetary policy. Almost no one believes the Bernanke/Sumner claim that NGDP growth and/or inflation are the right way to evaluate the stance of policy.  Heck, even Bernanke no longer believes it.

And even if I convinced them that money was tight they’d ask what caused the tight money, or make philosophically unsupportable distinctions between “errors of omission” and “errors of commission.”

In previous blog posts I’ve pointed out that it’s always been this way.  If in 1932 you had said that tight money caused the Great Depression, most people would have thought you were crazy.  Today that’s the conventional wisdom.  If in the 1970s you’d claimed that easy money caused the Great Inflation, almost everyone except a few monetarists would have said you were crazy.  Now that’s the conventional wisdom.  Even the Fed now thinks that it caused the Great Depression and the Great Inflation.  (Bernanke said, “We did it.”)

The problem is that central banks tend to follow the conventional wisdom of economists.  So when central banks screw up, the conventional wisdom of economists will never blame the central bank (at the time); that would be like blaming themselves. They’ll invent some ad hoc theory about mysterious “shocks.”

The other night at dinner my wife told me that the Chinese sometimes say, “If you cannot see the true shape of Lu Mountain, it’s because you are standing on Lu Mountain.”

In modern conventional macro, most people look at monetary policy from an interest rate perspective.  That means they are part of the problem.  They are looking for causes of the Great Recession, not understanding that they (or more precisely their mode of thinking) are the cause.

Only the small number of economists who observed Mount Lu from other peaks, such as Mount Monetarism or Mount NGDP Expectations, clearly saw the role of central bank policy.  People like Robert Hetzel, David Beckworth, Tim Congdon, etc.

PS.  Before anyone mentions the zero bound, consider two things:

1.  The US was not at the zero bound between December 2007 and December 2008 when the bulk of the NGDP collapse occurred, using monthly NGDP estimates.

2.  Do you personally support having the Fed use a policy instrument that freezes up exactly when you need it most desperately?  Or might the problem be that they’ve chosen the wrong instrument?

PPS.  Yes, not everyone on Mount Monetarism saw the problem, but as far as I know no one on Mount Interest Rate got it right.  Perhaps Mount Interest Rate is Lu Mountain.

PPPS.  To his credit, Brad DeLong thought the Fed should have promised to return NGDP to the old trend line.  If they’d made that promise there would have been no Great Recession, just a little recession and some stagflation.

Report from China

My wife is currently in China, and reported back on recent changes:

1.  Young people in Beijing now carry little cash, and use their cell phone to buy things.

2.  They like to order take out.  It’s often cheaper to use your cell phone to order delivery of a cup of coffee, than to buy one at Starbucks.  Must be nice.

3.  The apartment buildings have individual storage boxes for delivery packages.  The delivery person has the code to open it and leave a package; you use your cell phone to open it and pick up your package. Maybe this high tech stuff is also common here, I’m totally out of touch.  But China wasn’t like this back in 2012, our previous trip.

4.  A Uber-type taxi company is very popular, quick to arrive, and extremely cheap.  It’s first come first serve.  (Last time I was there regular taxis were also cheap, but hard to get.)

5.  She went to a wedding costing $65,000.  I asked if the family was rich, and she said “no.”

6.  One restaurant she attended required all patrons to put their cell phones in small paper bags on the table while they ate dinner.  The goal was to get them to talk to each other, rather than play with their phones.

7.  The police are cracking down on drunk drivers, and as a result people have dramatically cut back on drinking at restaurants.  Many Chinese are now afraid to have even a single drink during dinner.

8.  Services are still really cheap for the locals.  One very nice banquet she attended in a private dining room had 26 dishes, and cost a total of $130 for 13 people.  That includes tax (there is no tipping in China.)  The Chinese Groupon program allows thrifty people to enjoy lavish dinners at even lower prices.  If you are a tourist visiting China you will probably not see these prices; you will pay Western prices for dinner. (Unless you are a famous blogger with unusual restaurant evaluation skills.)

9.  But you will see very low prices for subways, taxis and many other services.  In 2014 3.41 billion rides occurred on the subway, most of any city in the world.  The fare was 32 cents.  (This year it was increased.)  Beijing is expected to add 7 new or extended subway lines this year.  Hey NYC, how’s that Second Avenue line coming along?

10.  Her mom’s maid takes high-speed rail home on holidays.  (700 miles in 4 hours) That’s right, the system “only the rich” would be able to afford.  (Or so they said as recently as 2010, which is like a generation in Chinese terms.  And let’s not even talk about Amtrak today.

Beijing’s official GDP per capita is $16,150, but the actual figure is probably closer to $30,000, in PPP terms.  I would put the odds of Beijing/Tianjin/Yangtze Delta/Pearl River Delta getting stuck in the middle-income trap at roughly zero.  But those regions represent 15% of China. For the rest of Han China, I’d say the odds are 3%.  For western China, 20%.

PS.  Timothy Lee interviewed me for an article on currency manipulation.  Here it is.

PPS.  I have a new post at Econlog criticizing the absurdly high taxes on state lotteries, focusing on the impact on inequality.

The Economist dispels some China myths

A few years back I commented on a “Ghost Cities” story on 60 minutes:

They pointed to a “ghost town” development in Zhengzhou, which is capital of a province of 90 million people.  I’d expect its current population (4 million in the urban area) to grow to 10 to 20 million in a few decades.  How much longer will that development seem unneeded?

Here’s The Economist:

WHEN “60 Minutes”, an American television news programme, visited a new district in the metropolis of Zhengzhou in 2013, it made it the poster-child for China’s property bubble. “We found what they call a ghost city,” said Lesley Stahl, the host. “Uninhabited for miles and miles and miles and miles.” Two years on, she would not be able to say the same. The empty streets where she stood have a steady stream of cars. Workers saunter out of offices at lunchtime. Laundry hangs in the windows of the subdivisions.

The new district (pictured), on the eastern side of Zhengzhou, a city of 9m in central China, took off when the provincial and city governments relocated many of their offices there. Then, high schools with university-sized campuses began admitting students, drawing families to the area. Last autumn one of the world’s biggest children’s hospitals opened, a gleaming facility with cheery colours and 1,100 beds. Chen Jinbo, one of the area’s earlier residents, bemoans the lost quiet of a few years ago. “Rush hour is a hassle now.”

The success of Zhengzhou’s development belies some of the worst fears about China’s overinvestment. What appear to be ghost cities can, with the right catalysts and a bit of time, acquire flesh and bones. Yet it also marks a turning-point for the Chinese economy. Zhengzhou still has ambitious plans, not least for a massive logistics hub around its airport. With such a big urban area already built up, though, vast construction projects have a progressively smaller impact on the economy. The city’s GDP growth fell to 9.3% last year from an average of more than 13% over the preceding decade. The downward trend will continue. As the capital of Henan, one of the country’s poorest provinces, Zhengzhou had anchored the country’s last, large, fast-growth frontier. Its maturation signals that the slowing of China’s economy is not a cyclical blip but a structural downshift.

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Of course there are actual ghost towns in China, such as Ordos, and more are likely in smaller cities.  But overall the problem was exaggerated by the media.

Until recently China could grow its way out of debt trouble. That is no longer an option. With deflation arriving and the economy weakening, nominal growth is a third as fast as a few years earlier. In the year to the first quarter of 2015, nominal GDP grew by only 5.8%. The financial system is also far more complex than it was in the late 1990s, the last time China had a surge in bad debts. State-owned banks accounted for almost all lending back then. Since the financial crisis their share has fallen to less than two-thirds. Loosely regulated “shadow banks” make up much of the rest.

That NGDP growth rate is not unreasonable, but China needs to be careful not to allow NGDP growth to slow too rapidly.  That could trigger a debt crisis.

A much-needed shift towards consumption-led growth is just getting under way. Investment accounts for 50% of economic output, well beyond what even Japan and South Korea registered in their most intensive growth phases. Without rebalancing, overcapacity in industry would only get more severe, further undermining the return on capital. At last, there are glimmers of hope. Investment growth has halved in recent years but consumption growth has held steady; in future, as China’s growth slows, consumption should contribute a bigger share of it (see chart 3).

.  .  .

Still more important is a change in economic structure. Services took over from industry a couple of years ago as the biggest part of China’s economy, and the gap has widened. Last year services accounted for 48.2% of output; industry’s share was down to 42.6%. Services are more labour-intensive, which brings two benefits. First, China is now able to generate many more jobs at lower levels of growth. Though growth dipped to its slowest in more than two decades last year, China created 13.2m new urban jobs, an all-time high. Second, the strong jobs market has allowed wages to keep on rising at a steady clip, a prerequisite for getting people to consume more.

Even in Gushi, a county officially classified as impoverished, people throng to clothing stores, beauty parlours and the town’s one foreign restaurant (a KFC). Like many there, Zhang Youling, 43, spent much of his adult life away, going to where the jobs were. He worked as a builder in Beijing, a courier in Shanghai and an ice-cream wholesaler in Zhengzhou before returning to Gushi to be with his wife and two children. For the coming summer, he has set aside 6,000 yuan ($970) to take them to Beijing on holiday. “We used to save everything. These days we have the confidence to spend some of what we earn,” he says.

That last paragraph may not seem surprising to a westerner, but to anyone who spent time in China in the 1990s the idea of a migrant worker family blowing a thousand bucks on a family vacation is utterly mind-boggling.  Living standards are rising very fast.

Monetary policy is virtually unrecognisable from five years earlier, when the central bank controlled all key interest rates. Funding costs throughout the economy are now more market-based. Banks compete for deposits with an array of investment products; households place 30% of their savings in bank-account substitutes, up from 5% in 2009. Official deposit rates are still fixed, but regulators have given banks flexibility (currently, a 2.5-3.25% range) and hint at full liberalisation within a year.

The government has also relaxed capital controls. Companies previously needed approval for overseas investments above $100m; late last year the threshold was raised to $1 billion. In recent months, capital outflows have surged. Some say this is because Chinese are losing faith in their country. Regulators are far more sanguine, pointing to it as a sign of a better-balanced economy. The alternative—trapping money in China at artificially low interest rates and encouraging wasteful investment—was bound to be more destructive.

With so many downbeat stories in the media, thank god for the Economist, where you can get some accurate information about China:

China has also disappointed those hoping for bold reforms of sluggish state-owned enterprises, but smaller shifts may help. By injecting assets from unlisted state parents into listed subsidiaries, groups such as Citic will face closer market scrutiny. At the same time, the government is loosening its grip on other important levers. It has simplified the process for registering new companies. Entrepreneurs can now, for instance, use non-cash assets as capital. They created some 3.6m firms last year, up by nearly 50% from 2013.

Reforms are themselves generating new risks. A bull run in the stockmarket over the past six months is beginning to resemble the asset bubbles that often arise when countries plunge into financial liberalisation. But keeping the previous economic system in place would be more dangerous. It would make growth faster in the short term but at the cost of ever more debt, heightening the risk of an eventual crash. Taken together, the policy shifts should smooth China’s transition to slower but more resilient growth.

The transition will take time. For now, investment still accounts for half the economy. In Zhengzhou, a layer of construction dust covers much of the city’s southern half. Along with building a vast new airport terminal, workers are digging tunnels for five new subway lines. Traffic is snarled for hours in the evening as trucks haul pillars into place for elevated highways. The pressing concern for residents stuck in the congestion is not economic collapse but rather the continued headaches of growth, even if it is a little weaker than last year.

Take a look at the traffic jam in this photo, and think about the fact that in the 1990s, or even the early 2000s, essentially nobody in Zhengzhou even owned a car.

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How many more populist “victories” can we survive?

Here’s Salon on the Greece government’s “victory” last February:

One week after Greece’s leftist government reached a new debt deal with its creditors, Paul Krugman argues in his New York Times column today that left-wing criticism of the deal is misguided, obscuring larger victories secured by Greek negotiators.

And here’s Paul Krugman in 2012 on Argentina’s “remarkable success.”

Matt Yglesias, who just spent time in Argentina, writes about the lessons of that country’s recovery following its exit from the one-peso-one-dollar “convertibility law”. As he says, it’s a remarkable success story, one that arguably holds lessons for the euro zone.

I’d just add something else: press coverage of Argentina is another one of those examples of how conventional wisdom can apparently make it impossible to get basic facts right. We keep getting stories about Ireland’s recovery when there is, in fact, no recovery — but there should be, darn it, because they’ve done the “right” thing, so that’s what we’ll report.

And conversely, articles about Argentina are almost always very negative in tone — they’re irresponsible, they’re renationalizing some industries, they talk populist, so they must be going very badly.

In fairness, they did have a very strong cyclical rebound after easing monetary policy (an issue on which I agree with Krugman.)  Where I disagree is his tendency to sort of wave away supply-side concerns—which are what matters in the long run.  It looks like the long run has arrived, as the Argentine economy has sputtered over the three years since he wrote this post, and 2015 will be downright ugly.

From the same post, Krugman has good things to say about Brazil’s slightly more moderate, but still hopelessly statist policy regime:

Just to be clear, I think Brazil is going pretty well, and has had good leadership. But why exactly is Brazil an impressive “BRIC” while Argentina is always disparaged? Actually, we know why — but it doesn’t speak well for the state of economics reporting.

Why was Argentina disparaged?  Perhaps because some of us don’t have a “in the long run we are all dead” Keynesian obsession with the demand-side.  We saw problems down the road. BTW, the Argentine president who created the disaster died in 2010, leaving his wife to inherit the mess “in the long run.” Brazil has also done very poorly in the three years since Krugman praised its (incompetent) leadership, and the forecasts reported in the next link call the outlook for Brazil’s economy in 2015 “grim.”  Nor will boosting AD perform miracles, Brazil and Argentina already have lots of inflation.

Here’s the outlook for the key economies in Latin America next year:

Many Latin American economies will continue to face increasing growth divergence this year, which is neatly defined by the two oceans that envelop the region. The Atlantic-facing economies of Argentina, Brazil and Venezuela—the largest members of the Mercosur bloc—will contract 0.2%, 0.9%, 5.5%, respectively, according to LatinFocus Consensus Forecasts panelists. On the other side of the continent, Chile, Colombia, Mexico and Peru—which make up the Pacific Alliance—will expand 2.9%, 3.4%, 2.9% and 3.5%, respectively.

Let’s see, I’m trying to remember which side had the more statist policy regimes, the Atlantic or the Pacific bloc?  The next paragraph answers the question:

This division has little to do with the western countries’ orientation toward a more dynamic Asia and the eastern countries’ exposure to the European economies, which are still weak. In fact, the growth divergence is mainly the result of the substantial differences in each country’s economic policy during a decade-long economic boom, which was fuelled by high commodities prices and strong inflows of foreign direct investment. Throughout the boom years, Atlantic countries spent more and saved less, while the Pacific-facing countries invested more. Moreover, many governments in the Atlantic-facing countries implemented more interventionist economic policies, which put a dent in businesses’ profits and discouraged investment. Conversely, countries bordering the Pacific undertook agendas of economic reforms, which investors welcomed.

But that doesn’t make any sense. How could the Pacific countries be doing better, when they relied more on the brain dead supply-side approach of the GOP?  Of course Krugman told us that Chile’s supposed free market success is just “Fantasies of the Chicago Boys.

But there’s another point: the economics of Chile under Pinochet are a lot more ambiguous than legend has it. The way the story is told now, the free-market guys moved in, liberalized, and then there was a boom.

Actually, as you can see from the chart above, what happened was this: Chile had a huge economic crisis in the early 70s, which was, yes, partly due to Allende and the accompanying turmoil. Then the country experienced a recovery driven in large part by massive capital inflows, which mostly consisted of making up the lost ground. Then there was a huge crisis again in the early 1980s — part of the broader Latin debt crisis, but Chile was hit much worse than other major players. It wasn’t until the late 1980s, by which time the hard-line free-market policies had been considerably softened, that Chile finally moved definitively ahead of where it had been in the early 70s.

There’s no question the Chicago Boys screwed up in the early 1980s, by ignoring Milton Friedman’s (and Paul Krugman’s) advice to float your currency.  But what about that supposed “softening” of free market policies?  Here’s the Fraser Institute rankings of economic freedom in Chile (index number out of 10, and then global ranking), since the Chicago-style reforms began in 1975:

1975:    3.60  (71)

1980:   5.38  (48)

1990:    6.78  (27)

2000:   7.41  (33)

2010:   7.94   (7)

If there are “fantasies,” it’s the idea that Chile became less market-oriented after the late 1970s.

Perhaps Brazil could try some Paul Romer-style charter cities on its poverty-stricken northeast coast.  You know, the kind of free trade zone that was adopted by another country advised by Friedman at about the same time he advised the brutal Pinochet regime. This regime was far more brutal, and yet oddly Friedman got no criticism from the left for his advice, perhaps because the left was embarrassed by the fact that so many of their famous intellectuals had praised the regime over the previous decades, as they killed tens of millions of people.  Have you guessed which one?  Hint, it’s right after Chile in alphabetical order.  And the main street in its biggest free trade zone went from looking like this in 1981:

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To this in 2013:

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Brazil might want to contact Mr. Romer.

Life expectancy in Shanghai

Here’s Paul Krugman:

I’m being flip, but the AQI in Delhi was 263, which is serious don’t-breathe-too-hard territory; actually, on day one I blithely tried my usual morning routine, and really felt the difference. Hong Kong was better but having an unusually bad stretch, and Shanghai was back to the air apparent. No big deal for me, of course, but the health costs to those who live there must be immense.

The pollution is quite bad in Shanghai, but I wonder about those health costs.  Are they truly “immense?”  Here’s a list of life expectancy of some countries.  Japan leads the world, and Iceland leads Europe.  Of course Iceland has virtually no air pollution.  I also included some other East Asian countries:

Japan   84.6

Singapore  84.0

Hong Kong  83.8

Iceland   83.3

Shanghai  82.3

Beijing  81.3

Korea   81.0

Taiwan  80.6

US  79.8

Denmark   79.5

If the health cost of air pollution is immense, why is Singapore’s life expectancy only 0.2 years above highly polluted Hong Kong?  Also keep in mind that the Chinese smoke at a very high rate, which could easily take a year off their life expectancy, even with no air pollution.  And if the cost is truly “immense,” what adjective would describe the health cost of all that cheese, butter and bacon consumed by the Danes?

Every few years I spend a month in Beijing, which is much more polluted than Shanghai.  After the first day you never pay any attention to the pollution, except that it makes the city look uglier. The severe pollution in Beijing probably does slightly reduce their life expectancy, although the fact that Shanghai is richer and has a milder climate may also explain part of the difference.  But I get really annoyed when I read press reports like this one:

They’ve learned too that in the two decades from 1981-2001 the life expectancy of the 500 million Chinese living in the north was a full 5.5 years shorter than that of their fellow citizens in the south. The reason? Heavier coal use for heating during the north’s frigid winters.

That’s not at all what the study they refer to (by Chen et al) claims.  Andrew Gelman and Adam Zelizer have an excellent paper that uses the Chen et al study to look at the broader issues of statistical significance.  Here’s a graph from the study they criticize.  I don’t see any difference in life expectancy between the north and south of China.  The finding is based on the assumption that the data should be fit with a cubic model rather than a linear model.  Here’s the graph showing where the 5.5 years comes from:

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How much confidence can we have that the cubic model is correct?

And this is even more dubious:

Now that we know China’s air pollution problem is impacting the air here in the United States, it’s important to understand what that pollution is doing to public health in China.

According to a new study, it could be taking up to 16 years off people’s lives.

I’ll end with some sensible suggestions from the Gelman/Zelizer paper:

4.3. Skepticism without nihilism

The current rules of publication seem to us to be simultaneously too loose (in the sense of accepting the highly questionable analysis indicated in Figure 1) and too restrictive (in essentially demanding statistical significance, obtained some way or another, as a condition for acceptance).

.   .  .

We have the impression that research journals have an implicit rule that under normal circumstances they will publish this sort of quantitative empirical paper only if it has statistically significant results. That’s a discontinuity right there, and researchers in various fields (for example, Button et al., 2013) have found evidence that it introduces endogeneity in the forcing variable.

PS.  I do wish the Chinese government would institute changes in local governance and/or property rights that would reduce pollution.  It’s not as bad as is claimed, but it is still a problem.  Gelman and Zelizer also emphasize that the are not questioning the claim that China has a severe air quality problem, merely the reliability of the 5.5 year estimate widely cited in the media.