Apocalypse later?

Each year there is a loud chorus of pundits predicting that China’s boom will turn to bust.  And each year they are wrong.  It looks like 2012 will be no different:

Property prices in China have fallen for five consecutive months, but in a strange twist the stocks and bonds of Chinese property companies have been rallying this year, as investors grow more confident the sector will see a soft landing and avoid a major bankruptcy.
The Shanghai Composite’s property subindex has gained nearly 12 percent this year, outpacing the 5 percent gain in the broader index.

Anita Yadav, managing director at the corporate bond brokerage and asset management firm SJ Seymour Group says high-yield property bonds have also rallied over the past three months and spreads aren’t as wide as they were late last year.

“Till end of last year the expectation was that there were going to be some bankruptcies, but by January this year, we realized that, yes, the market was bad, but it wasn’t going to be so bad,” Yadav told CNBC.

In a report issued last month, Standard Chartered also pointed out that there were signs of hope after the drumbeat of negative news last year. “Apartment sales have improved since the Lunar New Year break,” Lan Shen and Stephen Green wrote. “Developers are a little more confident about apartment sales, and price cuts of 10-20 percent are apparently helping to nurture demand.”

On Friday, China’s largest property developer Vanke seemed to confirm a rebound, reporting a 24 percent increase in sales in March over the previous year. It was the second consecutive month Vanke had reported a year-on-year sales increase.

The price system works surprisingly well in China, despite the half-communist nature of their economy.  Chinese buyers actually use their own money to buy homes, so in a sense the US housing market circa 2005 was much more “communist” than the Chinese market.

China boosters like Robert Fogel claim that China will soon grow to be twice as rich as France the EU.  Others pundits claim it will get stuck in the middle income trap.  Both the boosters and pessimists are wrong.  Like Japan, like Britain, like France, indeed like almost all developed countries, it will grow to be about 75% as rich as the US, and then level off.  It won’t get there unless it does lots more reforms.  But the Chinese are extremely pragmatic, so they will do lots more reforms.

China is currently a very poor country, so the Chinese model has nothing to teach the West.  If we want to learn from the Chinese culture, learn from Singapore(or Hong Kong), which is how idealistic Chinese technocrats would prefer to manage an economy; indeed it’s how China itself would be managed if selfish rent-seeking special interest groups didn’t get in the way.  But they do get in the way—hence China won’t ever be as rich as Singapore; it will join the ranks of Japan, Korea, Taiwan, and the other moderately successful East Asian countries.

This isn’t any sort of “miracle.”  Go visit China and look at the airports, roads, subways, office buildings, shopping malls, etc, that they are building.   Look at educational levels in the cities (to which they are rapidly moving.)  It would be a miracle if a country that could do those things got stuck at the middle income level.  I’ve visited both Mexico and China quite often.  Mexico is a middle income country that is currently richer than China.  But any tourist who visits both places (with eyes wide open) can quickly see who will be much richer in 30 years.  There’s no stable equilibrium where the coastal Han Chinese get fully developed and the interior Han Chinese stay middle income.  And the coastal Chinese are closing in on developed status very rapidly.

PS.  My GDP estimates for 2012 were from the year-end issue of the Economist.  They had (PPP) GDP per capita as follows:  Japan, $36,000, France, $36,220, Britain, $36,310, the United States, $49,340.   Most other developed countries are close to $36,000.  That’s “normal.”  The US is weird.

I expect China to end up in the “normal” category, mostly based on its cultural similarity to other moderately rich East Asian countries.  Outside of the US, Germany is the richest big country ($40,280), and they aren’t even close to US income levels.  Catching up to the US per capita income with a population of over 10 million?  Now that would be a true economic “miracle.”

PPS. I linked to a post by Tyler Cowen that discusses some 1992 research on growth in Singapore and Hong Kong.  At that time it was fashionable to argue that the Singapore miracle would soon peter out, as it was achieved by throwing lots of capital at the economy (as in the Soviet Union), not by boosting productivity.  I never believed that argument (which obviously proved to be wrong), mostly because I had visited Singapore in 1991.  Development textbooks go on and on about capital, natural resources, technology, education, Solow growth models, blah, blah, blah.  They miss the most important concept: Countries that have their act together.


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79 Responses to “Apocalypse later?”

  1. Gravatar of Mike Sax Mike Sax
    9. April 2012 at 10:38

    Fact is though is that China-if history is any guide-won’t grow at 12% forever. In the 50s and 60s Japan-and Western Europe-grew at double digit rates for years, thanks to our help.

    Japan in particular changed overnight. With the oil shock in 73 they went from a 16% growth rate to 3%.

    china at some point will too assuing they are “normal.” Hugh rates of GDP of 10% or more are for countries that are either underdevloped or coming off some huge shock-the US from 1933-36 had its highest GDP rates in its hisotry.

  2. Gravatar of ssumner ssumner
    9. April 2012 at 10:45

    Mike, Yes, that’s what I said–they’ll end up like Japan. There is no miracle, no model to be emulated. Just routine development.

    Actually, it’s not quite right to say Europe grew at double digit rates for years, but the thrust of your argument is correct.

  3. Gravatar of LC LC
    9. April 2012 at 11:02

    Interesting post Scott.

    What do you make of the argument Daron Acemoglu and James Robinson make, in “Why Nations Fail”, that Chinese growth is still “extractive” growth, and they will run into issues in 2 decades because the stakes and interests of elites will be hardened that no innovation based growth will occur?

    Sounds like you’re more optimistic, that Chinese institutions will evolve to allow more full competition and innovation?

    Thanks

  4. Gravatar of Saturos Saturos
    9. April 2012 at 11:07

    I think this is relevant: http://whynationsfail.com/blog/2012/4/6/the-big-mis-forecast.html. Sorry, but A&R’s blog may eventually top yours as the best economics blog on the internet. (Then Econlog, MR, Becker-Posner, Knowledge Problem. David Friedman and Robin Hanson are too broad – or in another league.)

    “… countries that have their act together.” As a libertarian (of some description), Scott, would you agree that this is basically the same as “ability to foster economic freedom”?

    On a wholly different note, Scott, could I ask you to do a post on another question I have? *crosses fingers* What are the answers to Mishkin’s 4 arguments against NGDP targeting? These are the basic objections I get from the average knowledgeable academic economist, when I bring it up. I think I already know how to respond, but I’d like to have it from you in one place. They are (from Economics of Money and Banking, 7th ed. pp. 508-9):

    1. The central bank is forced to announce a number for potential output growth. (Public thinks central bank is constraining growth.)
    2. Price information is more timely and frequent than NGDP, which needs to be collected in two seperate parts.
    3. Public understands consumer price inflation, will confuse NGDP with RGDP
    4. Inflation targeting, “as actually practiced”, allows enough short-run flexibility. (Can essentially ape an NGDP target.)

    And also, Happy Easter.

  5. Gravatar of ChargerCarl ChargerCarl
    9. April 2012 at 11:13

    Just wondering, what makes the U.S. so special? That income gap is really impressive.

  6. Gravatar of Ryan Ryan
    9. April 2012 at 11:39

    Prof. Sumner,

    I’ve never really thought to compare China and Mexico (for whatever reason), but reading your post piqued my curiosity. I’ve followed your opinion on China for the last couple of years. I’d love to read a future post exploring the China-Mexico comparison a little further.

  7. Gravatar of marcus nunes marcus nunes
    9. April 2012 at 11:42

    Right. “Countries that have their act together”. Trumps all else and actually is the reason the particular country gets more K, H, the institutions and the incentives to move ahead.

  8. Gravatar of AFG AFG
    9. April 2012 at 11:42

    Scott,

    I agree with you 100% and really like the way you framed it. A couple thoughts though:

    1. It’s too soon to declare victory. Most of the more sober minded China doom sayers (Michael Pettis, Jim Chanos, Nouriel Roubini) have explicitly said that they don’t expect the bust to come until the leadership transition 2013-4. With the public sector and the quasi-public sector taking up such an extraordinary large portion of the economy, they should have an extraordinary ability to delay, for the medium term, any sectoral adjustments that need to occur.

    In the US, property prices fell between 2006 and 2008 before the recession started. Even assuming that you’re 100% right that it was Central Bank error, why do you not think they will make a similar mistake. The PBC has less ability to react, because they have a semi-fixed currency, inflation starts out at a much higher level due to structural issues (so their will be even more opposition to easing), and we’ll freak out at further “currency manipulation.

    2. Even though you’re probably right in your prediction, history will inevitably judge you to be wrong. In the official historical record, the now “normal” asian miracle countries (Japan, South Korea, Taiwan, etc.) all had “financial crises” and “recessions” as they reached their peaks and shifted to lower growth. When growth slows, a couple banks will go bankrupt and unemployment will rise as the economy shifts a little bit from investment to consumption. It won’t be as bad as the Prophecies of doom, but they will still declare victory.

    3. You’re (this article) looking at the wrong indicators. The more nuanced story than “housing bubble!” is about local government debt and availability of loans from regional development banks. The crisis is not predicted to happen when real estate prices fall, but when investment as a percentage of GDP (particularly infrastructure) begins to fall.

    4. I don’t know if you addressed this before, but what do you think makes the US weird? I can’t imagine you believe in the “favored position at the center of Bretton Woods” story. Is it that regime stability and geography (we’re isolated from any military threat) that encourage investment? Is it just better policies? Is it historically high levels of immigration?

    I’ve heard all the typical explanations, but I am interest in how someone that believes in EMH would explain it.

  9. Gravatar of John Bennett John Bennett
    9. April 2012 at 11:47

    I was a Foreign Service Officer assigned to Korea in 1975. When I got there, both Washington and the Embassy were negative about Korea’s growth prospects. It took me less than 6 months to realize the Koreans had their act together. It wasn’t perfect, but growth of 8-10 percent showed that perfection wasn’t necessary. Still, growth had to be important and the Koreans were determined to do what was necessary to get it.

    It used an export-led strategy when their competitors were new to that game. It is harder now. Democratic practices and conflicting goals have made it more difficult as well. I would still bet on continued growth. It won’t be like in the hay days, but it remains important to voters and the choices are clear and desired by most.

  10. Gravatar of John Bennett John Bennett
    9. April 2012 at 11:51

    I was a Foreign Service Officer assigned to Korea in 1975. When I got there, both Washington and the Embassy were negative about Korea’s growth prospects. It took me less than 6 months to realize the Koreans had their act together. It wasn’t perfect, but growth of 8-10 percent showed that perfection wasn’t necessary. Still, growth had to be important and the Koreans were determined to do what was necessary to get it.

    It used an export-led strategy when their competitors were new to that game. It is harder now. Democratic practices and conflicting goals have made it more difficult as well. I would still bet on continued growth. It won’t be like in the hay-days, but it remains important to voters and the choices are clear and desired by most.

  11. Gravatar of Saturos Saturos
    9. April 2012 at 11:53

    ChargerCarl: “… what makes the U.S. so special? That income gap is really impressive.”

    Not being ruled by a bunch of dictators probably helps.

  12. Gravatar of dwb dwb
    9. April 2012 at 12:01

    here’s an interesting China question: Do you think they could they have achieved this growth if they had used strictly commodity-backed money (say, gold or rare earths?).

    I say, probably not.

  13. Gravatar of Major_Freedom Major_Freedom
    9. April 2012 at 12:08

    dwb:

    here’s an interesting China question: Do you think they could they have achieved this growth if they had used strictly commodity-backed money (say, gold or rare earths?).

    No, they couldn’t have, because the growth that would have otherwise existed would have been more sustainable, and the capital structure would have been more in line with real consumer preferences.

    I say, probably not.

    That isn’t surprising, because one of your premises is the myth that inflation generates prosperity.

    Here’s an even more interesting China question: When are you going to take your head out of the sand and realize that not all nominal growth is a good thing? That building a half finished house using a plan that requires 50,000 bricks, when the builder doesn’t know that he has only 40,000 bricks, is not good growth but bad growth?

    Just because people are moving, and just because goods and services are moving, it doesn’t mean the growth taking place is good growth. China’s growth has been bad growth. When the China bubble pops, you’re going to realize the meaning of bad growth.

  14. Gravatar of Saturos Saturos
    9. April 2012 at 12:08

    dwb, I don’t think the engineered CAS has helped though, either.

  15. Gravatar of Saturos Saturos
    9. April 2012 at 12:12

    MF, NGDP growth equals real growth plus inflation. If the government gets out of the economy, real growth is undistorted with any stable monetary policy (and if it doesn’t, then that’s your problem, not the NGDP target). Some inflation is good because of ZLBs on wage increases and nominal interest rates.

  16. Gravatar of Major_Freedom Major_Freedom
    9. April 2012 at 12:29

    Saturos:

    MF, NGDP growth equals real growth plus inflation.

    I agree, NGDP targeting that exceeds the rate of inflation does require making an estimate of real growth going forward.

    If the government gets out of the economy, real growth is undistorted with any stable monetary policy (and if it doesn’t, then that’s your problem, not the NGDP target).

    You are butchering the word “stable”. A 5% growth in nominal spending, which may require lots of monetary inflation some days, and may require decreases in money supply other days, and thus higher imposed interest rates some days and lower imposed interest rates other days (even if they are not intentional) is NOT in any sense a “stable” monetary policy. It is unstable.

    Furthermore, inflation in our monetary system enters the economy only at certain points, not everywhere at once like from helicopters. That leads to a change in the real structure of the economy. If bankers tend to get the majority of the new money first, then the economy will change and come to resemble the vision of bankers who have more money than was given to them via lending and investing from the market. If the Treasury tends to get the majority of the new money first, then the economy will change and come to resemble the vision of politicians who have more money than was given to them via taxation and borrowing.

    The reason why so many economists believe in the neutrality of money, or that “stable” monetary policy has no effect on the real economy, is because the proper comparison is counter-factuals, that is, what otherwise would have existed without inflation, but does not exist because there is inflation. If all there is to observe is the result of having inflation, people ignorantly come to focus only on what they can observe.

    Economics requires imagination, of postulating what otherwise could have existed had different choices and actions been made. Unfortunately, because the economics profession has been almost universally infested with positivist epistemology, there is a wholly unwarranted and undue importance placed on observable data, as if it is the only relevant information and only source of arguments.

    It’s like one prisoner saying to another prisoner in a concentration camp what it would be like to be free, and then the other prisoner insist that they are free, because the prisoners can move anywhere they want in their cells.

    Some inflation is good because of ZLBs on wage increases and nominal interest rates.

    It is precisely inflation that exacerbates wage stickiness and artificially low short term interest rates.

  17. Gravatar of dwb dwb
    9. April 2012 at 12:39

    @Saturos
    engineered CAS

    ?not sure what you mean.

    @MF:
    hmm. please put some more actual thought and analysis into it instead of repeating the same rants.

  18. Gravatar of Don Geddis Don Geddis
    9. April 2012 at 12:50

    M_F: dwb asked “Do you think they could they have achieved this growth”, to which you replied “No, they couldn’t have, because the growth that would have otherwise existed would have been more sustainable”.

    “More sustainable”, huh? It appears that China has had ~10% GDP growth for decades. Last annual recession looks like 1976, which followed yet another decade of growth.

    This is why you seem to be such a joke. Your statements are in contradiction to known facts, but you don’t seem to care about real-world facts.

  19. Gravatar of Dennis Dennis
    9. April 2012 at 12:54

    Lehman Brothers’ stock the week after Bear Sterns was taken over by JP Morgan.

  20. Gravatar of Benjamin Cole Benjamin Cole
    9. April 2012 at 13:00

    I am surprised that Scott Sumner does not look at mainland China through a monetary lens. Shame, shame—especially since a monetary lens provides insights into Japan. And Sumner is our best monetarist and economist.

    The Hong Kong Monetary Authority has releases a report stating that China’s central bank has a “revealed preference for growth.” Okay, so the China central bank is less worried about nominal price indexes and more supportive of growth.

    That’s important! As for centrally planned economies, they are supposed to become unhinged due to the lck of price signals for resource allocation. Look at Russia—but Russia was also very corrupt and full of alcoholics (“We pretend to work and they pretend to pay us”).

    Add on that information technology is much better today than in the 1960-80s.

    It may be that a intelligent centrally planned economy, not too corrupt, fed by an accommodating central bank, will blossom for many decades, passing everybody by, including the USA.

    I much prefer to keep 80 patent of an economy in the free, private-sector.

    As for resource misallocation: The USA ran up obligations of $4 trillion in Iraqistan, and spends $1 trillion a year on defense, VA and homeland security.

    We have vast social welfare programs that when ended seem to cause about 1/10th the misery people expected. We have huge pensions for public workers, and uniformed military employees can retire at age 38, full lifetime pennons and medical care.

  21. Gravatar of Don Geddis Don Geddis
    9. April 2012 at 13:03

    Saturos: ooh, ooh, can I play? Hopefully Prof Sumner will reveal the “correct” answers to Mishkin’s questions, but surely we should try our best first :-)

    1. An estimate of historical output growth is used to build the 5% target (= 2% productivity, 1% population, 2% inflation). But all that matters is that you (slightly) exceed potential output growth. You don’t need to forecast it precisely. That’s the point of including (mild) inflation, so that actual output can vary from year to year, and it doesn’t especially matter.

    2. If you target the forecast, then you can take action ahead of knowing exactly what the values are. It’s not as though you need to first gather all the final information, before you are equipped to respond to economic changes.

    3. Surely the general public has no idea why the Fed allows any inflation above zero. Why was the Fed ever targeting 2%? This is a matter of marketing. NGDP = RGDP + inflation, but I’m not sure what consequence the potential confusion has. That they’ll wonder why the Fed doesn’t just dial in more real growth? So we say that the Fed has no influence over real growth. All it can do, if mismanaged, is cause a reduction in real growth. It either has no effect on real growth (if run well), or else it retards real growth (if it messes up).

    4. True enough (as shown in the Great Moderation) … except when rates hit the zero bound (like now). NGDP is a strictly superior mechanism, resulting in “the same” actions during “ordinary” times, and “vastly superior” actions during crises.

    3. (b)

  22. Gravatar of Major_Freedom Major_Freedom
    9. April 2012 at 13:15

    Don Geddis:

    “More sustainable”, huh? It appears that China has had ~10% GDP growth for decades. Last annual recession looks like 1976, which followed yet another decade of growth.”

    This is why you seem to be such a joke. Your statements are in contradiction to known facts, but you don’t seem to care about real-world facts.

    How in the world are my arguments in contradiction to the facts? That China has had “10% growth for decades” in no way contradicts what I said. It is fully consistent with what I said. The growth China has experienced has been unsustainable, which is why they are now collapsing!

    The fact that the unsustainable growth took place “for decades”, as opposed to “for years”, in no way shape or form turn China’s growth from unsustainable into sustainable. There is nothing magical in “decades”.

    Remember, the world has been on a fiat standard since 1971. Even taking into account the booms in busts in the US, the US has also been on a huge 40 year unsustainable growth path that seems like real growth.

    You are only so utterly desperate to apologize for fiat money standards that you will use any baseless claim to ground your baseless belief on, this time it’s “China has been growing for decades. DECADES I tell you! DECADES!!!!! It can’t be unsustainable! It just can’t!”

    Yes, it can.

  23. Gravatar of Major_Freedom Major_Freedom
    9. April 2012 at 13:16

    dwb:

    hmm. please put some more actual thought and analysis into it instead of repeating the same rants.

    Hey this is fun. You’ve devolved this into mindless antagonism.

    dwb, please put some more actual thought and analysis into it instead of repeating the same rants.

    See? I can do it too.

  24. Gravatar of Major_Freedom Major_Freedom
    9. April 2012 at 13:19

    Oh, and Don Geddis, another thing you should learn: Communist countries almost universally over-report their performance, and unfortunately there is a huge western market for lapping up the myth that planned economies can be superior to freer markets, so the data is taken for granted.

    The experience with the Soviet Union should have given you pause in trusting data coming out of communist countries. The data released by the Soviets was believed, and yet when the wall fell, and communism fell a couple years later, and all the real information came out, it was discovered that much of the data was bogus.

    I can’t say exactly what the real rate of growth in China has been, but because a large portion of the Chinese economy is planned, that 10% growth statistic is more than likely overstated.

    You can’t just believe the data you see and then stomp your feet at me and say I’m wrong. You have to be a little more emotionally intelligent.

  25. Gravatar of Adam Adam
    9. April 2012 at 13:33

    This sounds about right to me. Except I don’t know how soon coastal China is closing in on developed status. I guess if you mean 30 years, that might do it. But maybe not.

    Granted, I’ve only visited China once, and it was limited to Shenzhen and Shanghai, but what I saw was a lot of poverty right behind the relatively shiny veneer, especially in Shenzhen. Mere minutes walk from the one of several high end shopping centers, featuring an ice rink, were some pretty poor looking areas. In a different part of town, we went into a DVD shop and were escorted to the living quarters above, where the English-language product was kept, past a large, unpleasant-smelling, pile of what seemed to be human feces where a drain should have been.

    It was kind of eye opening for me to get away from where the tourists and business visitors go and realize that even though the inevitable ground-floor shops seemed to be clean and selling appealing products, the living conditions behind them were a long way from the developed world.

    It made for an interest contrast to the Lomboghini, Porsche, Mazerati, and Lexus dealerships within blocks of the hotel.

    The other question I had was how much of those fancy airports, shopping malls, subways and office buildings were really supported by demand. The mall with the ice rink, for example, did not seem too crowded when I was there. And it wasn’t more than a few miles from at least two others featuring the same luxury brands.

  26. Gravatar of Adam Adam
    9. April 2012 at 13:37

    Saturos – As to your fourth question, I had a very brief and very informal conversation with an acquaintance who is an economist at the fed. I mentioned NGDP targeting and he said, “that’s basically what we are going with our dual mandate.”

    I didn’t push him any farther both because I don’t know what I am talking about and because it was over a polite dinner with others who were not interested.

  27. Gravatar of Major_Freedom Major_Freedom
    9. April 2012 at 13:46

    The 12% increase in property stock is in large part due to expectations that the PBOC will ease. But it is too little too late. They went from over 30% monetary inflation for a long time, down to 15%.

    Not that I trust the World Bank, but they are warning of a China collapse.

  28. Gravatar of Lorenzo from Oz Lorenzo from Oz
    9. April 2012 at 13:48

    Longtime China watcher Rowan Callick has been saying much the same thing for quite a long time now.

    He discusses what he calls the China model here.

  29. Gravatar of Morgan Warstler Morgan Warstler
    9. April 2012 at 13:52

    China is the proof that Capitalism trumps Democracy.

    You can sprinkle capitalism on anything and it will get up and walk.

    —–

    then there is this:

    http://video.pbs.org/video/1218530801/

  30. Gravatar of dwb dwb
    9. April 2012 at 14:14

    @MF

    in all seriousness, my question stemmed from a brief article I read about the history of money during the American revolution. States experimented with all kinds of backed and fiat money. They largely rejected gold and commodities because there were no mines in the US, they could not import the gold fast enough, and given the rate of growth of the colonies they found the deflation unwelcome. After the war there was inflation but this was viewed as a kind of tax to pay for the war.

    its a serious question: over time most societies have expressed a preference for mild inflation over even slight deflation (except for japan, i cannot think of others, and even the BOJ head is now starting to get flak for adopting an inflation target that is to low).

    So it begs the question – could China have achieved this growth on a commodity money (ok i gave away why i think not: not enough natural resources). It also makes me wonder whether a democracy would ever actually choose a gold standard (again, given the strong preference against deflation expressed time after time, i think not).

    Seriously, i am not insulting you, but that stuff you are reading is toxic. go and read something NOT written by whatever toxic website you are on.

  31. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. April 2012 at 14:41

    Morgan wrote:
    “You can sprinkle capitalism on anything and it will get up and walk.”

    I find it works real well as a seasoning for lamb and beef dishes.

    :)

  32. Gravatar of ssumner ssumner
    9. April 2012 at 14:57

    LC, I’m more optimistic. But then in a sense I’m also predicting failure, but failure at 75% of US levels not 50%. Where success would be something like Singapore, which has roughly equal income to the US.

    I think reforms will continue.

    Saturo, Thanks, but I’m afraid many economics blogs are already much better than mine–including some I don’t like.

    You said;

    “… countries that have their act together.” As a libertarian (of some description), Scott, would you agree that this is basically the same as “ability to foster economic freedom”?

    Partly, but partly it’s the ability to have government execute projects like subways very efficiently. So I think it’s a mistake to look at things in uni-dimensional terms. France is not especially free market, but the things their government builds are built rather efficiently. Italy is also not particularly free market, but the government is much less adept at building large projects.

    I didn’t know Mishkin had those, but they are wrong.

    1. The government doesn’t have to predict any trend growth rate. NGDP is a completely separate issue.

    2. The Fed should be targeting the forecast, so it’s a moot point.

    3. The public doesn’t understand the idea of inflation at all. Very few people understand that a deep plunge in housing prices reduces “the cost of living.” Very few understand the distinction between demand and supply-side inflation, hence they falsely think inflation reduces real income (only supply side inflation does that.) The public does correctly understand national nominal income, which is the sum of all individual incomes.

    4. The Fed should expand now if they are serious about flexible inflation targeting, but they refuse. Why?

    ChargerCarl, I can’t figure that out. I’m probably too close–I see all our flaws, whereas the grass looks greener in places like Australia. But Aussies tell me they also have lots of problems. Low taxes and a big free trade zone certainly help the US.

    Thanks Ryan, I wish I could give you a good analysis of Mexico, but I tend to fall back on the notion that certain cultural tendencies lead to bad governance, which reduces competition and efficiency. But that’s really just a bunch of hand-waving, and I wouldn’t expect anyone to take me very seriously. By the way, at the global level there’s nothing particularly unusual about Mexico. Most countries have similar problems, and even lower living standards.

    Thanks Marcus.

    AFG, You make lots of good points, unfortunately I don’t have time to address them all. Oddly, in an earlier post I said that someday everyone would claim I was wrong (when China went into recession) but I would actually be right, because the recession wouldn’t stop them from getting fully developed. You had the exact same thought, which is interesting.

    I don’t know why the US is so successful, see my comment above. But the EMH is actually a completely different issue–it doesn’t address the government interventions that reduce efficiency.

    I think growth will slow, but not as rapidly as Pettis thinks. No one should ever put Pettis in the same sentence as Chanos; Pettis is a true China expert, not a novice like Chanos and I (and probably Roubini.)

    Regarding Chinese housing debt, the central government had to bail out the Chinese banks before, and I presume they’ll have to do it again. But Chinese people often put 30% to 50% down on new houses, that does impose some market discipline. The worst loans are probably to local governments, and SOEs.

    John Bennett, I strongly agree. When you are actually there you can sense things about a country that are not apparent to people just reading newspapers. For instance, the famous story of the Chinese ghost city of Ordos (inner Mongolia) is not really typical of China.

    dwb and Benjamin, Yes, a gold standard would have slowed growth, but regarding Ben’s comment they’d have to screw up money pretty bad to have stopped growth. For instance even negative 2% inflation would have meant about 8% NGDP growth, and that’s enough to prevent the deflation from being a significant drag on growth long term. Japan did have bad policy, but it’s much easier to fall into when your trend RGDP growth is already low.

    Not saying their monetary policy wasn’t better than Japan, it was, but the big difference was the catchup growth occurring in China, which was very fast.

    Don Geddis, You get all 4 answers correct. Can I turn over my blog to you? (I am getting burned out.)

    Adam, You said;

    “The other question I had was how much of those fancy airports, shopping malls, subways and office buildings were really supported by demand.”

    In aggregate it is supported (due to the vast rural population moving to the cities), although obviously specific projects are not. But there is no sense in which China is close to overbuilding in these areas in aggregate. It will need far more offices, housing, shopping malls, subways, etc.

    You make good points about the inequality. Remember that China is still poorer than Mexico, so it’s no surprise to see squalor besides riches, although Shenzhen is an extreme case—northern China is not so unbalanced.

    The northern city of Tianjin is an interesting case. Last year it’s per capita GDP hit nearly $14,000, and it is even higher in PPP terms. They are building a giant modern city from scratch. I don’t think things like that ever happened in Mexico, which is one reason why China seems so different to me. Only a total collapse could prevent Tianjin from being a fully developed province within 20 years (say $30,000 or above per capita GDP.)

    If you’ve made frequent visits over many years, you are more likely to notice the rapid change, and be optimistic. But I don’t disagree with your comments.

    I wish I was at that dinner with the Fed official, I sure would have been interested!!

  33. Gravatar of Major_Freedom Major_Freedom
    9. April 2012 at 15:55

    dwb:

    in all seriousness, my question stemmed from a brief article I read about the history of money during the American revolution. States experimented with all kinds of backed and fiat money. They largely rejected gold and commodities because there were no mines in the US, they could not import the gold fast enough, and given the rate of growth of the colonies they found the deflation unwelcome.

    States don’t experiment, only people do. Some people wanted gold, others wanted fiat. It’s false to claim that “the people chose fiat”.

    You’re just taking various myths about a gold standard, and trying to impose those myths as legitimate reasons for abandoning gold, and therefore serving as justification for the state governments abandoning gold.

    It’s a myth that economies need local gold mines to facilitate real growth. It’s a myth the same reason a European country doesn’t have to print Euros in order to deal in Euros.

    ANY quantity of gold circulating can facilitate infinite real growth, by way of falling prices. There was plenty of gold in the US to facilitate growth, and grow it did. It overtook the UK during that time as the world’s most prosperous economy.

    Adam smith exploded the myth that countries need to import gold in order to grow, almost 250 years ago. There is no excuse for you to be repeating the same garbage 250 years later.

    After the war there was inflation but this was viewed as a kind of tax to pay for the war.

    Many were against such a tax.

    its a serious question: over time most societies have expressed a preference for mild inflation over even slight deflation (except for japan, i cannot think of others, and even the BOJ head is now starting to get flak for adopting an inflation target that is to low).

    Societies don’t prefer anything. Only individuals prefer things.

    You have a very unhealthy habit of attributing individual based actions like want, prefer, desire, choose, etc, onto abstract aggregates as if everyone chose it. That’s not how decisions are made, that’s not how economic events transpire, and you ought to stop pretending that major economic events have universal consent.

    So it begs the question – could China have achieved this growth on a commodity money (ok i gave away why i think not: not enough natural resources).

    Japan doesn’t have much natural resources, and it is growing.

    ANY economy can grow on commodity money. If there is only a little commodity money circulating, then prices will be lower, and the goods and services will be more attractive to foreign buyers. The price system tends to equalize the prices of goods and services over geographical areas (less transportation costs, etc).

    There are far fewer US dollars circulating in the US economy than there are Yen circulating in the Japanese economy. Does that mean that the US has to grow at a lower rate? No? Well then neither would an economy with less gold circulating compared to other areas.

    Gold is a medium of exchange. It doesn’t have to be in copious quantities for it to facilitate trading for all goods and services.

    You have to understand that with less money circulating, there are lower prices. There is nothing to stop or hinder real growth when there is less money versus more money.

    It also makes me wonder whether a democracy would ever actually choose a gold standard (again, given the strong preference against deflation expressed time after time, i think not).

    There is no constancy in this. It depends on what the majority of individuals want at the time.

    The true test of what people want can only be had by letting individuals choose their own money in the division of labor. Let the market decide which money will win.

    In the US, gold and silver were not abandoned by the market process. They were stripped of their monetary status by law.

    If the state, and its court intellectuals such as the market monetarists, allowed individuals to choose their own money, via the market process, then gold and silver would almost certainly become the universal money of choice.

    Seriously, i am not insulting you, but that stuff you are reading is toxic. go and read something NOT written by whatever toxic website you are on.

    Cures always seem to be poison to those like you who advocate for poison.

    The stuff YOU are reading is toxic, destructive, based on violence, and inimical to sound economic growth.

    ssumner:

    dwb and Benjamin, Yes, a gold standard would have slowed growth, but regarding Ben’s comment they’d have to screw up money pretty bad to have stopped growth. For instance even negative 2% inflation would have meant about 8% NGDP growth, and that’s enough to prevent the deflation from being a significant drag on growth long term. Japan did have bad policy, but it’s much easier to fall into when your trend RGDP growth is already low.

    That is false. A gold standard would not have “slowed growth.” It would have enabled an increase in the quantity of sustainable long term growth.

    Fiat money slows growth relative to gold.

    The US economy grew rather substantially during the 19th century, when it went from a largely agrarian society to overtake the UK as the world’s most prosperous economy. The US achieved double digit growth in a number of years back then.

  34. Gravatar of Jim Glass Jim Glass
    9. April 2012 at 15:57

    Douglas North and Co, and Daron Acemoglu and Co, all say, separately but clearly, that whether China will advance past “the wall” at $20k per capita income depends on whether the communist party gives up its monopoly power and devolves power to the vast number of independent organizations — nongovernment labor unions, businesses, schools and universities, civic groups, press agencies, etc. etc. etc — that comprise the competitive society needed for innovation and economic growth past that limit.

    This requires the communists to give up not only their power but also their ability keep reaping the vast wealth its leaders are collecting now.

    The net worth of the 70 richest delegates in China’s National People’s Congress, which opens its annual session on March 5, rose to 565.8 billion yuan, $89.8 billion, in 2011, a gain of $11.5 billion from 2010, according to figures from the Hurun Report, which tracks the country’s wealthy…. “It is extraordinary to see this degree of a marriage of wealth and politics,” said Kenneth Lieberthal, director of the John L. Thornton China Center at Washington’s Brookings Institution.

    Directing growth via investment equaling 50% of GDP is the “Tammany Hall model”, it provides fast-growing employment to constituents and fast-growing wealth to oneself. That’s win-win for the political leaders so they pursue the policy with enthusiasm.But to get past the wall that has to stop, for evident reasons. Stopping is voluntary with the political leaders, if they don’t stop and devolve power and give up their rents — via enabling the masses of non-government independent groups — then economic growth does stop.

    North / Acemoglu say “the normal course of development” is for regimes to maintain their political control and rents out of self interest, bringing growth to a halt, which is why so few nations have advanced past the wall to the first tier, and so many have slipped backwards (Argentina was richer than the USA circa 1900). They also say that having “many very smart, very capable people” in a society or working for a government has nothing at all to do with it. There are plenty of very smart, very capable people who know what needs to be done in Argentina, Columbia, Russia, Zimbabwe…

    Here is a very interesting EconTalk podcast on all this with Bruce Bueno de Mesquita, with a number of very interesting examples of how all this has worked for a lot of countries and political leaders.

    Anyhow, that’s what the development economists say these days. Personally, I have no knowledge or opinion re China in particular.

  35. Gravatar of ssumner ssumner
    9. April 2012 at 16:00

    Lorenzo, That article gets off to a bad start, as Venezuela, Syria, etc, are certainly not following the Chinese model.

    Morgan, Interesting video.

  36. Gravatar of ssumner ssumner
    9. April 2012 at 16:05

    Jim Glass, I’d expect China to reform in the future, much as it’s done in the past. It’s far from done reforming it’s economy. It’s such a big country that no single “insider” has much power over the overall trajectory of the economy. But time will tell. It’s size, and openness to trade, also makes it much more competitive than many other countries.

  37. Gravatar of Charlie Charlie
    9. April 2012 at 17:09

    “it will grow to be about 75% as rich as the US, and then level off.”

    It sounds like you have a model. Like there is some trade off between structural reforms and some political constituencies. Are you just assuming China will be “normal” or do you have a deeper sense of why the U.S. and Singapore (are there other examples, Norway?) are weird? I would just be interested to here you elaborate, possibly in another post about what political-economic environment makes the U.S. special.

  38. Gravatar of Duke of Qin Duke of Qin
    9. April 2012 at 17:16

    Mr. Glass.

    Please see Jason’s comment at the bottom of this post which also touches upon wealth in China’s National People’s Congress particularly vis-a-vis the United States.

    http://marginalrevolution.com/marginalrevolution/2012/02/china-fact-of-the-day-6.html

    The NPC doesn’t actually have any political power of any significance in the first place as all major policy decisions are made by the members of the politburo standing committee. The wealthiest members in the NPC also happened to be capitalists before they became communists. It would be akin to the U.S. House and Senate being rubber stamp institutions that invited the likes of Bill Gates or Warren Buffet as members.

    Ah the fundamental innumeracy of social scientists, it never ceases to surprise.

  39. Gravatar of Charlie Charlie
    9. April 2012 at 17:21

    Oops, I see others had the same question as me. “I don’t know for sure” is certainly a valid answer.

  40. Gravatar of Tommy Dorsett Tommy Dorsett
    9. April 2012 at 17:52

    Interestingly, the economist now has Chinese home prices 13% undervalued.

    http://www.economist.com/node/21551486

  41. Gravatar of AFG AFG
    9. April 2012 at 17:54

    Scott,

    a. That is pretty interesting. My explanation is classic behavioral economics prospect theory: People think with reference points, not absolute states of wealth. Their reference is 9-10% growth, so 5-7% is disaster, despite it still being a miracle

    b. This is a tangent, but you’ve made a a bunch of passing comments about Roubini in previous posts and I think you’ve misjudged. It’s not you’re fault, but the media’s caricature of Roubini has caused to be overly harsh of him. He is not a very good investor, but he is a damn good economist (You as an EMH believer should be sympathetic!). Most of the prediction he got wrong (about the recovery) were phrased very carefully like “35% chance of X and 30% chance of Y…” and then everyone declared him an idiot. His main point that he has repeated between 2006 and 2010 has been that condition are so unknowable and risky that you would be stupid to invest in pretty much anything.

    His timing has been terrible and his recommendations have underperformed even when he got the macro-direction right, but take some time to read his work on the US financial system in 2005-7 and on Europe in 2006!(Read this: http://www.economonitor.com/nouriel/2011/11/08/from-the-archives-jan-28-06-italy%E2%80%99s-tremonti%E2%80%99s-temper-tantrums-on-emu-in-davos%E2%80%A6a-sad-embarrassing-episode-for-italy%E2%80%A6/). I know, from first hand basis, that he is not the one at his firm that makes the specific asset class investment recommendations. He’s an economist who hired a bunch of finance people and they convinced that he could better profit from his fame if he made specific recommendations (Hedge Funds pay more than think tanks).

    Check out this quote, he use to say stuff like this all the time: “over the past three years, I’ve had about 95% in cash and 5% in equities. You’re not getting much from savings these days but earning 0% is better than losing 50%. . . . I don’t believe in picking individual stocks or assets. . . . Never invest your money as though you are gambling at the casino. Buying and selling individual stocks is a waste of time.”

    Back to the main point — I have looked up and read a lot of the famous predictions, but there is simply no one that was anywhere close to how specific and accurate his description of how those crises would play out on the micro level.Some people say he got Europe wrong, given recent events, but in his 2009-2010 articles he was very clear that if the ECB intervened in the way it ended up doing, it could effectively resolve the crises for several years. Admittedly, he underestimated the political likelihood of serious ECB intervention.

    I haven’t read enough of Chanos to defend him. I just included him, because I saw one video clip that seemed sober minded, but I very well could be wrong. However, It appears to me that Roubini and Pettis think almost identically on China – they just disagree on the political capacity of the Chinese government to make the necessary adjustments. I side more with Pettis and think Roubini’s going to be wrong about the politics of China like he was wrong about the politics of the ECB. If there is anything politicians are good at, it is muddling through.

    If you want to see Roubini’s take on China, see here: http://www.project-syndicate.org/commentary/china-s-bad-growth-bet

    I wish I could post his website’s article, but it is behind a paywall. Everything publicly available is dramatically dumbed down and the level of detail he goes into in the main article is mind blowing. The stuff the post elsewhere is all basically advertising.

    Anyway, food for thought that I thought you and your readers might be interested in.

  42. Gravatar of Morgan Warstler Morgan Warstler
    9. April 2012 at 18:00

    Sadowski,

    It is very easy to confuse Capitalism and Bacon Salt.

    And would someone please hypothesize out for me what happens economically if the Fed’s say 25% of Fed’s QE is buying Gold?

    Politically it seems like a winner. Like the Fed trusts Gold more than US paper. Gold bugs get paid off. No more Cash for Gold, just the Fed paying Grandma far more for her jewelry.

  43. Gravatar of Windy Windy
    9. April 2012 at 18:25

    Hidden away in the World Bank / DRC report 2030 in supporting report 4 (the important one about social cohesion and reform) is a vital comment
    China’s cultural development has not fully matched its economic achievements, reflecting a degree of moral anomie, distorted values of some segments of society, and lack of trust in key social services,…,over 40 percent of people not trusting public hospitals and almost two-thirds of citizens reporting that they are suspicious of the medicine industry.

    Doctors in China regularly give cancer drugs etc to kids for non-existent ailments. To jump from middle income to high income requires a professional class of teachers, lawyers, auditors, doctors who do the right thing even when it is not in their interest. The cultural revolution wiped away much of the Chinese value system and communism has not provided a credible alternative. Without a restraining value system the powerful will use their power to manipulate the market in their direction, resulting in a sub-optimal result for all. Weber had some useful things to say here about the kind of ethic consistent with a high income society.
    China’s adherence to a 19th century European aetheistic philosophy could end up holding it back from achieving 21st century prosperity.

  44. Gravatar of Lorenzo from Oz Lorenzo from Oz
    9. April 2012 at 18:31

    Scott: Rowan goes on to write This formula also entails hard work, application, policy consistency, and administrative capacity spread through the country—hurdles where followers of China are likely to fall. But for now, they’re lining up in hope and expectation. His take seems to be that China provides something for authoritarians to aim at but which most of them are not likely to manage to pull off. But China is where his knowledge base is and most of the article is about China.

  45. Gravatar of Lulu Lulu
    9. April 2012 at 18:32

    One thing that doesn’t seem to be in this conversation is the issue of asymmetry. If there’s a soft landing or sustained growth, we’re fairly well off. If on the off chance the landing isn’t as soft as the market forecast, all hell breaks loose. Considering such an event would be such a tail risk, it would , almost by definition, be lost in the forecasts. It’s especially worrying as I took a trip back to Shanghai the past week, and when even cab drivers are telling you that housing prices will never fall substantially, and when you can buy 2RMB newspapers that detail all the key housing price moves, one starts to get a bit nervous.

  46. Gravatar of Mike Sax Mike Sax
    9. April 2012 at 18:36

    Ok but you do think Singapore is a model to be emulated-I’m sure you mentioed it before but in what way?

  47. Gravatar of gnikivar gnikivar
    9. April 2012 at 18:39

    “There’s no stable equilibrium where the coastal Han Chinese get fully developed and the interior Han Chinese stay middle income. And the coastal Chinese are closing in on developed status very rapidly.”

    Not sure if I agree with this. If you take a look at Chinese official statistics, there’s been a pretty marked slowdown. The overall growth rate of China was 8.4% in 2011. The growth rate for Shanghai was 2.2%. The growth rate for Beijing was 1.7%. The growth rate for Guangdong was 7.2% and Zhejiang 5.5%. There’s been a pretty marked slowdown across the coastal, wealthier regions. Look at the data for the last three years, and you’ll see the same trend. Shanghai and Beijing growing at around 3% a year, the coastal provinces averaging at around 6%. These are rates that aren’t that much higher than what you see in some of the south east asian countries.

    While the slowdown may simply be the result of the Chinese government’s policy to focus on the interior, it may also be because the strategy of growth based on labor intensive exports is starting to run its course. That’s what happened in Mexico, Malaysia, Thailand etc. Right now, over 85% of China’s high tech exports come from foreign owned companies. However, as Chinese wages rise, they’re going to have an incentive to move to other nations. Other countries are starting to get their act together, improve their infrastructure and these countries offer much lower wages, sometimes are closer to markets, and less likely to face tariff action and China might fall into the same middle income trap a lot of other once rapidly growing countries fell into.

  48. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. April 2012 at 18:53

    Morgan wrote:

    “It is very easy to confuse Capitalism and Bacon Salt.”

    And do not forget Baconaise. Once Swedish Socialists discover Baconnaise they’ll never turn back.

    http://www.thedailyshow.com/watch/wed-april-22-2009/the-stockholm-syndrome-pt–2

  49. Gravatar of Jim Glass Jim Glass
    9. April 2012 at 19:00

    Jim Glass, I’d expect China to reform in the future, much as it’s done in the past. It’s far from done reforming it’s economy.

    Again, North, Acemoglu et al say the issue isn’t economic reform (which is easy) it is political reform — whether the leaders want economic development that comes at their personal cost. The North Korean leadership knows full well how to develop their economy starting tomorrow. They *don’t want to do it*.

    North gives empirical measures of such political development, particularly the count of free-of-government legally independent organizations. In successful economies these rise in number much faster than population and GDP per capita. If their number doesn’t increase, the economy hits a wall around $20k income per capita. When regimes consolidate power by *purging* these organizations — as communists always did, replacing them with party-run ones — advanced economies go backward, from rich to poor (Argentina), and the poor get stuck at the wall.

    E.g., North gives the USA as having about 200 such organizations circa 1800, over 25 million in 2000.

    These are the real drivers of advanced economic growth and democracy. Voting means little. Even in the USA most people don’t vote in most elections because it makes no difference. Over 95% of politicians are re-elected or unopposed, one can’t vote ‘per issue’, voters certainly don’t know what their legislators are doing, mostly can’t even name them, etc.

    But each person typically is actively represented by several “interest groups”: his employer, union, church, homeowners’ organization, kids’ scout group, American Legion hall, retirement plan trustee, etc. etc., all operate legally independently with their own lobbyists, and the politicians have to respond to them. This is the real functioning of democracy. These groups “bid away” the monopoly power and rents of the regime. It is what enables innovative economic competition. It is what *forces* the politicians to align their interests on the side of economic development.

    Without such growth of these organizations, “the normal course of economic development” is hitting the wall and stagnation, as the regime’s interests remain aligned with preserving monopoly powers and rents. And that is in fact the reality of most economies, because the great majority of govts ban, control, or regulate the **** out of such organizations. Just look around the world and count ‘em up.

    This is all as per North. I don’t know anything about China. But it’s an empirical question: Is the regime fostering the growth of such politically independent organizations? Or is it maintaining its power and rents by restricting them?

    Does anyone have an answer to that?

    The wall is around $20k per capita. China is at around $8k so even repressing the “civil society” it can grow a whole lot more, at 8% average that’s another dozen years to $20k.

    But a dozen years isn’t a lot of time to establish a civil society with all those independent organizations. If it doesn’t, I don’t know why it would be exempt from the normal course of economic development.

    I’m rooting for China, hoping for the best. That’s a very big number of people over there, an awesome amount of human welfare at stake. And communism there sure ain’t what it used to be, by the wealth and income figures of the leadership. But the govt is still institutionally communist authoritarian extractive, which has no record anywhere of voluntarily melting suddenly into distributed “civil society” economically democratic. So I’m skeptical. But we’ll see.

  50. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. April 2012 at 19:10

    I’m rooting for my cousins. I’m not trying to be racist or ideological. I’m only trying to be hopeful.

    I hope we all survive. I hope the earth is a diverse place. I hope we all have enough so we are happy. Silly me.

  51. Gravatar of Morgan Warstler Morgan Warstler
    9. April 2012 at 20:51

    Brazil hates Ben:

    http://www.ft.com/cms/s/0/4e942712-826a-11e1-9242-00144feab49a.html#axzz1rbrlCM5b

  52. Gravatar of Saturos Saturos
    9. April 2012 at 22:44

    MF,
    You are confusing money and credit, and assuming that the quantity of money drives the interest rate, when in fact interest rates are correlated with expected NGDP. Yes OMOs cause small fluctuations in short term rates due to the “liquidity effect”, but that is small compared to the Fisher effect and the nominal income effect, which would cause even bigger interest rate fluctuations if future NGDP wasn’t expected to remain on trend. Indeed if the target was credible then most of the work could be done by rising velocity, which adjusts endogenously to hit the target (as Lars Christensen has suggested). Surely you don’t believe that minor everyday fluctuations in short-term rates distort the actions of businesspeople, who are forward looking and can’t be systematically fooled by govt. policy … Bryan Caplan explains it on his personal website, look for his remarks on ABC in his “Early Writings”.

    Actually, inflation is helpful when nominal interest rates are low, as it allows real rates to go even lower, allowing greater quantities of saving and investment if people want them. And nominal wages are sticky downwards even without inflation – just ask the Japanese.

    dwb, I meant that the Chinese govt. intervenes in its exchange rate, which creates the CAS, which corresponds to an accumulation of foreign debt by the authorities. It’s like a forced savings program.

    Jim Glass, Exactly. Or as Bryan Caplan would say, the Chinese leaders are still, effectively, evil. Actually this is looking at it slightly differently. You’re saying political institutions are extractive, and will repress civil society, and they select for autocrats. Or you could say, the elites (and the mindset of the masses) still encourage authoritarianism, which is evil as are the people who believe in it, which makes the government evil. But people tend to find “evil agency” explanations scientifically unsatisfying. Anyway, I hope Scott agrees that the “ability to execute subway lines efficiently” (whether or not each specific stop is supported by demand – you’re enough of a Hayekian to see this is important, aren’t you?) comes at a cost which may not be worth it.

    I wonder if all these economists who are making predictions about the fate of countries (Scott, A&R) have any specific near-term predictions to make about North Korea?

    Also, if someday the site layout template were modified so that the comment box actually used all the horizontal space (or slightly more, like on The Economist), it would be way easier on the eyes, and the longish comments of the kind that often get posted wouldn’t look quite so much like sagas.

  53. Gravatar of Phil Phil
    10. April 2012 at 03:27

    Dear Scott,

    A quick question. I have always assumed that these figures were distorted by the status of the US dollar as the worlds reserve currency.

    If we think of a currency block as essentially every country and asset that is bought and sold in dollars, the US position makes a lot of sense. Normally, a country with a large currenct account deficit, like the US, would have its currency weaken until its capital flows reach zero. Of course, its a dynamic process and we would not ever expect to reach this equilibrium necessarily, but the US is in a special position. Because oil is sold in dollars by oil producing countries to the rest of the world, it counts as an export for the US, at least as far as effects on currency. This means that the US is able to run a large current account deficit, indefinitely, without weakening the dollar. This makes the US appear stronger on a Price Parity basis, since all foreign labour appears cheaper than it would if the Dollar was not a reserve currency. I have no figures, but I have always assumed this was the cause of most of the difference in the PPP figures for the US.

    I would appreciate your thoughts.

  54. Gravatar of Tom Tom
    10. April 2012 at 04:10

    Back on the Helicopter Drop:
    The government created the recession with ultra tight money. This tight money policy greatly worsened the moral hazard problem.”
    I’m sure this is wrong — the easy money after 2000 dot.com bubble pop led to over-investment/ mal-investment with too many US workers making $400k houses (now buyable at $350k) and furniture to fill them.

    Had the Fed been doing NGDP 2000-2008, it’s not clear to me they would have been much different than the past actually was, and the mal-investment would have still occurred.

    The Chinese, being pragmatic, are likely to try to do whatever works, especially with the Central Bank and other power centers.

    The Chinese will face a mal-investment bubble and bubble pop. Their current bubble is not yet the one — because there are still so many millions (700mil?) willing Chinese workers wanting to join the already middle class (400mil?), so there is a s yet a huge unmet demand for middle class housing.

    But on gov’t spending/ fiscal power, I suspect that increasing fiscal deficits, when brought about by gov’t funded mal-investments (like solar power companies), are bad.

    This is why tax cut based deficits are so much better — those who would otherwise pay taxes are among the most efficient and careful dollar watchers, and thus least likely to make boondoggle investments, tho it’s still very possible, like so many speculating on houses.

    Similarly, much of Republican opposition to gov’t deficits is based on the past Democrats wanting to actively spend money, rather than allow wealth creators to keep more of what they created, since Dems hate tax cuts “for the rich!”

    In China there is a very real possibility of some very rich, corrupt, gov’t official’s children making huge amounts of money thru illegal investments which nevertheless lose huge amounts of money — which the gov’t then tries to pay for. This and countless other possible sparks may result in a huge anti-(crony) capitalist backlash, to include real purges. The more the privileged gov’t folk make investments, and profits, the more likely some speculation goes bad, and then the gov’t might intervene to maintain the wealth of the Commie investor (much like Goldman Sachs?).

  55. Gravatar of Steve Steve
    10. April 2012 at 05:01

    Completely off-topic, but:

    If you have an inflation problem: price controls!
    If you have a deflation problem: raise the minimum wage!

    http://finance.yahoo.com/news/raising-floor-pay-113806995.html

    Raising the Floor on Pay
    New York Times – 1 hour 4 minutes ago

    As the nation’s economy slowly recovers and income inequality emerges as a crucial issue in the presidential campaign, lawmakers are facing growing pressure to raise the minimum wage, which was last increased at the federal level to $7.25 an hour in July 2009.

    State legislators in New York, New Jersey, Connecticut, Illinois and elsewhere are pushing to raise the minimum wage above the federal level in their own states, arguing that $7.25 an hour is too meager for anyone to live on.

    Massachusetts lawmakers are pushing for a big jump, with the Legislature’s joint committee on labor approving a measure last month that would raise the minimum to $10 an hour, which would leapfrog Washington State, whose $9.04 minimum is the nation’s highest.

    Voters in Missouri may be asked to vote on a minimum wage referendum in November.

    These moves are giving momentum to an effort to persuade Congress to embrace a higher national minimum wage. Some liberal and labor groups, capitalizing on the energy and message of the Occupy Wall Street movement, are urging Senator Tom Harkin, Democrat of Iowa and chairman of the Senate Labor Committee, to head a Congressional effort to raise the federal minimum to $9.80 an hour by 2014.

    Analysis by the Economic Policy Institute, a left-leaning research organization, suggests that raising the federal minimum wage to $9.80 would lift pay for more than 28 million Americans, increase the gross domestic product by more than $25 billion and create the equivalent of more than 100,000 full-time jobs.

  56. Gravatar of Saturos Saturos
    10. April 2012 at 05:08

    Steve,

    Isn’t it sad that an organisation with “Economic” and “Institute” in the title can get away with publishing research like that, whereas the equivalent in say Physics would be ignored, rebutted and or derided, i.e. such an institute couldn’t continue to exist.

  57. Gravatar of Why China Might Fail « Left Outside Why China Might Fail « Left Outside
    10. April 2012 at 05:13

    [...] found Scott‘s post very confusing, for many of the same reasons discussed here by Noah. [1] Scott says: [...]

  58. Gravatar of W. Peden W. Peden
    10. April 2012 at 05:23

    Saturos,

    Since labour is plainly a Giffen Good, the only reason not to raise the floor price of labour to £1,000,000 is that it would cause overfull employment.

    Just like the reason to not jump up too high is that you’re likely to fall through the ground into the planet core.

  59. Gravatar of W. Peden W. Peden
    10. April 2012 at 05:29

    In fact, I cite Stigler’s law of elasticity: ALL demand curves are inelastic.

  60. Gravatar of ssumner ssumner
    10. April 2012 at 05:38

    Charlie, Singapore has very good policy. Norway is oil-rich, so nothing weird there. Don’t know about the US–perhaps fairly low taxes and a long history of a stable and huge free market.

    AFG, You said;

    “This is a tangent, but you’ve made a a bunch of passing comments about Roubini in previous posts and I think you’ve misjudged. It’s not you’re fault, but the media’s caricature of Roubini has caused to be overly harsh of him. He is not a very good investor, but he is a damn good economist (You as an EMH believer should be sympathetic!).”

    I plead innocent. I’ve rarely criticized his economics, just his predictive ability. I think we both agree that no one can predict the stock market, so he should stop doing so. I’ve read his predictions, so there’s nothing “second hand” going on here.

    I’ve have given him a lot of praise for getting the 2008 crisis exactly right. But almost everything since then has been way off base, which makes me think 2008 was just luck. That doesn’t make him a bad economist, no one can predict markets. He should stop trying.

    Chanos doesn’t seem to know much about China, based on what I have read.

    Windy, It’s true that communism did much damage to Chinese civic values, but I see signs that things are changing. Even some of the recent negatives, such as the poor construction of rail lines due to corruption, or the failure of people passing by to help the child hit by a car, have silver linings. In both cases there was a big hue and cry all over China, suggesting a culture in the process of building civic values. In lots of countries those events wouldn’t even have made the news. The Chinese know they have a problem and are in the process of fixing it.

    Lorenzo, That makes sense.

    Lulu, Yes, there is tail risk–I agree.

    Mike Sax, I like their low tax–high saving model. Their fully funded personal SS accounts, the HSAs, their free trade and investment, their low levels of corruption, their universal health care, and many other policies.

    gnikivar, I don’t believe those numbers are accurate. Check these out:

    http://www.china-briefing.com/news/2012/01/27/chinas-provincial-gdp-figures-in-2011.html

    Jim Glass, I agree, but I also think China is gradually building s civil society, with lots of private organizations. Admittedly from a very low level.)

    Mark, I agree.

    Phil, No the reserve status really have no important effects, certainly not a PPP income comparisons, as any distortions caused by misaligned currency would be corrected by PPP.

    Tom, What easy money policy after 2000?

    I didn’t know the GOP opposed budget deficits, when did that start?

    I do agree that China has lots of corruption, as do most countries.

    Steve, yes, I have a new post.

  61. Gravatar of Rien Huizer Rien Huizer
    10. April 2012 at 06:33

    Scott,

    China is a simple Arthur Lewis process, development with abundant labor. Except, the Chinese have learnt that the Lewis process only gets you so far. They added a productivity growth process by allowing certain kinds of foreign investment (predominantly from Taiwan and overseas Chinese) that would accelerate the qualitative development of the stock of capital residentnin the country. On top of that they did not introduce liberal forms of government and maintained important barriers to entry.

    All in all, a model that should run into trade barriers but does not (not for reasons of fairness but because protective mechanisms in mass democracies should realize that China will not share the benefits from trade and will also let go of the foreign (ie non Greater China) investors when enough manufacturing has moved from elsewhere to China.

    The really interesting part is to figure out what will/can be done to keep all those non-Chinese in gainful employment . Not much I guess. Politicians will be polishing the stable doors. What happened to those 19th century Americans who understood economic nationalism? Where did things go wrong and Americans started to believe in international economists?

  62. Gravatar of Major_Freedom Major_Freedom
    10. April 2012 at 07:31

    Saturos:

    You are confusing money and credit, and assuming that the quantity of money drives the interest rate, when in fact interest rates are correlated with expected NGDP.

    I am not confusing money with credit. You just fail to recognize that a large portion of the aggregate money stock was created through credit expansion. Credit expansion is money creation.

    I am not claiming that the quantity of money drives the interest rate. I am saying that inflation, which is a dynamic concept, artificially lowers interest rates (temporarily) if the inflation takes the form of credit expansion. If the credit expansion is continuous, then rates can be held low for extended periods of time.

    Yes OMOs cause small fluctuations in short term rates due to the “liquidity effect”, but that is small compared to the Fisher effect and the nominal income effect, which would cause even bigger interest rate fluctuations if future NGDP wasn’t expected to remain on trend.

    No, the liquidity effect is dominant. You can’t tell me that it is dominated, not when M3 was exponentially rising 2001-2006, while interest rates remained low.

    Actually, inflation is helpful when nominal interest rates are low, as it allows real rates to go even lower, allowing greater quantities of saving and investment if people want them. And nominal wages are sticky downwards even without inflation – just ask the Japanese.

    That’s false. Not all saving and investment is good. Not all saving and investment should be made. An integral part of saving and investment is that it has to be the right saving and investment. Using monetary manipulation to coax additional saving and investment is what results in housing bubbles.

    Inflation is not helpful even at low interest rates. It is credit expansion inflation that is keeping those rates low in the first place!

    Nominal wages are maximally flexible in a free labor market. The solution is to abolish minimum wages and welfare and all pro-union legislation that props up wages. The solution is not to wrack the economy with more inflation.

  63. Gravatar of Saturos Saturos
    10. April 2012 at 11:00

    MF: “Credit expansion is money creation… I am not claiming that the quantity of money drives the interest rate. I am saying that inflation, which is a dynamic concept, artificially lowers interest rates (temporarily) if the inflation takes the form of credit expansion.”

    I assume you’re talking about the money multiplier, which is how bank loans add to the size of the larger monetary aggregates (expand the money supply). But now you’re confusing growth in the money stock with growth in the price level. Yes a rise in the money multiplier will raise the price level, ceteris paribus. But the money multiplier is determined by the banking system’s desired reserve ratio. It has nothing to do with an NGDP target, which anchors price levels – I don’t see how you can say that an NGDP target will cause greater fluctuations in inflation or interest rates.

    “No, the liquidity effect is dominant. You can’t tell me that it is dominated, not when M3 was exponentially rising 2001-2006, while interest rates remained low.”

    Interest rates were low because Greenspan was successfully keeping inflation on target. And there was essentially an implicit NGDP target, so that velocity always fell to offset overshoots in the money stock. So there was no reason for interest rates to rise from their low levels, set by high foreign savings.

    “An integral part of saving and investment is that it has to be the right saving and investment. Using monetary manipulation to coax additional saving and investment is what results in housing bubbles.”

    There were a lot of different factors behind the housing bubble, as Scott has explained, but low interest rates wasn’t one of them. And in a “liquidity trap”, you need to coax additional investment to avoid an output gap, though I agree it’s not as important as wages.

    “Nominal wages are maximally flexible in a free labor market.”

    They are. But real wages aren’t.

    “The solution is to abolish minimum wages and welfare and all pro-union legislation that props up wages.”

    I used to think that too. Then I read this: http://www.people.fas.harvard.edu/~kaur/papers/Kaur_JMP_WageRigidity.pdf
    So even “maximally flexible” nominal wages are still sticky downwards. That is highly inefficient, and the only way to get around it is to have inflation which allows real wages to fall where necessary.

  64. Gravatar of Saturos Saturos
    10. April 2012 at 11:07

    MF,

    And here’s another article: http://conversableeconomist.blogspot.ca/2012/04/sticky-wages-and-inflationary-grease.html

    Correction: The Conversable Economist is the other great blog out there, maybe also better than this one. (But the MoneyIllusion will change the world eventually. I have faith in this blog!)

  65. Gravatar of Major_Freedom Major_Freedom
    10. April 2012 at 11:39

    Saturos:

    I assume you’re talking about the money multiplier, which is how bank loans add to the size of the larger monetary aggregates (expand the money supply).

    Yes.

    But now you’re confusing growth in the money stock with growth in the price level.

    Hahaha, no, I am not confusing growth in the money stock with growth in the price level either.

    You keep accusing me of confusing one thing after another, and yet every time I respond with merely saying the same thing in different words, you just move on as if your accusation never took place, only to accuse me of yet another confusion.

    Here’s a thought, try to actually read what I am saying rather than what you believe I might be saying.

    Yes a rise in the money multiplier will raise the price level, ceteris paribus. But the money multiplier is determined by the banking system’s desired reserve ratio.

    It has nothing to do with an NGDP target, which anchors price levels – I don’t see how you can say that an NGDP target will cause greater fluctuations in inflation or interest rates.

    NDGP targeting does not anchor price levels. Prices and nominal spending can move in opposite directions. Prices are a function of supply and demand.

    The connection between NGDP targeting, money supply, and prices is straight forward. NDGD is aggregate spending (demand), which is determined by the money supply, and combined with supply, prices are set.

    “No, the liquidity effect is dominant. You can’t tell me that it is dominated, not when M3 was exponentially rising 2001-2006, while interest rates remained low.”

    Interest rates were low because Greenspan was successfully keeping inflation on target.

    No, interest rates were low because Greenspan was flooding the banking system with reserves, and as a result the banks continued to expand credit.

    The rates of profit exceeded the rates of interest for many years.

    And there was essentially an implicit NGDP target, so that velocity always fell to offset overshoots in the money stock. So there was no reason for interest rates to rise from their low levels, set by high foreign savings.

    False on multiple levels. One, there was no implicit NGDP target. Two, it wasn’t high foreign savings that sent interest rates low. That is a myth. If it was a higher foreign savings that did it, then there should have been a fall in the demand for consumers goods, since saving is abstaining from consumption. But if you look at the countries that invested in the US, there was no fall in consumption demand in those countries, which means it MUST have been an increase in money and spending. Greenspan was in charge of that, so he can only blame himself.

    “An integral part of saving and investment is that it has to be the right saving and investment. Using monetary manipulation to coax additional saving and investment is what results in housing bubbles.”

    There were a lot of different factors behind the housing bubble, as Scott has explained, but low interest rates wasn’t one of them.

    Low interest rates was definitely one of them. It was a necessary component in the housing boom.

    And in a “liquidity trap”, you need to coax additional investment to avoid an output gap, though I agree it’s not as important as wages.

    The output gap is a chimera. Coaxing additional investment by monetary manipulation is destructive and generates malinvestments.

    “Nominal wages are maximally flexible in a free labor market.”

    They are. But real wages aren’t.

    Real wages are just the real goods workers can buy with their incomes. It’s determined by the productivity of labor.

    Calling production “sticky” is misleading.

    “The solution is to abolish minimum wages and welfare and all pro-union legislation that props up wages.”

    I used to think that too. Then I read this:

    http://www.people.fas.harvard.edu/~kaur/papers/Kaur_JMP_WageRigidity.pdf

    “Question 3 presents a more extreme scenario—whether the worker would accept a wage cut if he had faced prolonged unemployment and was in urgent need of money. Only 38% of Orissa laborers said yes, while 79% of Madhya Pradesh laborers said yes.”

    The study uses a questionnaire format. This is what the laborers say when asked. But in the real world, where a laborer is faced with choosing a lower wage or the alternative, I defy you to find me an example of an Indian villager who actually chose death and no wage cut, over life and wage cut.

    So even “maximally flexible” nominal wages are still sticky downwards.

    Apparently 79% of Madya Pradesh laborers say they will accept a pay cut if the stakes are high, which leads me to believe 21% are either lying or don’t even need to work.

    That is highly inefficient, and the only way to get around it is to have inflation which allows real wages to fall where necessary.

    It is not inefficient if someone chooses not to work even though they have the opportunity to work.

    It is more efficient for the laborers to accept a lower wage rate, than introduce inflation and distort the economy which will only result in unemployment later on.

  66. Gravatar of Adam Adam
    10. April 2012 at 14:41

    Scott – I’m not sure you would have wanted to be at the dinner, as everyone else there was a lawyer, and we all know how pleasant that can be.

    It seems like too much to call this person a “fed official” as he is the husband of the friend, but now that I think about it, I don’t know exactly what his position is other than that he is an economist and he works at the fed. This time, at least, he did not mention writing any more papers about Japan.

    But you should be happy, and not surprised, to know that he seemed to know who you were when I mentioned your name.

  67. Gravatar of Lulu Lulu
    10. April 2012 at 20:30

    Scott, on the issue of tail risk, my concern is not simply “tail risk”, but rather the asymmetry in tail risk. The Chinese economy is not going to magically grow at breakneck pace, but it sure is able to collapse quite quickly. Also, later on in the CNBC article it outlines various sources of fragility for the Chinese housing market; what are your opinions?

    I investigated these issues in a post, and added some more anecdotal stories that ground my fear of the Chinese real estate market: http://synthenomics.blogspot.com/2012/04/chinese-housing-market-more-than-tail.html

  68. Gravatar of J.V. Dubois J.V. Dubois
    11. April 2012 at 01:13

    Very good article. I will respond just to two things mentioned in the discussion

    1) Why USA has higher income? My answer – because USA “privatized” more things then other countries, especially Europe. Generally lower taxes in USA also induce people to buy services that people in Europe often do by themselves in their “leisure”. So generally I think Americans work more but then also buy more (say’s law). Europeans work less and do some stuff at home. It is very hard to measure exact impact of such difference on wealth. Is it better if both parents work full time and then go in restaurant for dinner, or is it better to have family dinner at home prepared by one of parents who comes home earlier or works part-time or who has no paid job at all (“just” raising kids and taking care of the household)? Is it better to work more and hire somebody to watch your children or cut your lawn, or is it better to do it by yourself after work? I do no think that it is possible to measure this exactly. It is just different way of life and I do not think it can be measured in a way that people in country A are exactly by 13,47% better of then people living in completely different environment in country B.

    PS: As for Singapore – look at stats. If you compute GDP per hour worked you will see that they are at closer to east European countries like Czech republic than to USA. They work way much than people in Europe an much more then people in USA or even Japan. I am not that convinced that Singapore “did it”, the same way USA did it. Look here: http://www.bls.gov/fls/intl_gdp_capita_gdp_hour.htm

    PPS: Different structure of the GDP: GDP is very crude measure, and there is lot of articles around that are trying to compare standard of living. For instance, people in USA tend to live in larger houses/flats, they spend more on health care and education etc. How do you compare this standard of living with somebody living in small but expensive flat in Tokyo who has completely different spending patterns?

    2)”Public understands consumer price inflation” – this is completely wrong. Public does not understand what inflation is. I think it was Nick Rowe who write something about this. The most important error in thinking is that people generally believe that salary raise is due to their personal diligence and work well done, while inflation is that bad thing that “eats” from this just increase. It has to be so because that is how media describe it all the time. People fail to see that inflation means higher price of everything, including higher price of labor. Then you have non-economist people asking questions like how deflation is good since “deflation in IT industry” is so good.

  69. Gravatar of Adam Adam
    11. April 2012 at 13:47

    As to how much people work in Singapore, I once had a client there. I would routinely get emails from them in the middle of the work day on the U.S. east coast.

  70. Gravatar of Saturos Saturos
    12. April 2012 at 00:32

    W. Peden,

    I’m probably going to need to jump through the planet’s core in order to understand what plane of humor you’re operating at.

  71. Gravatar of Dhruv Sharma Dhruv Sharma
    12. April 2012 at 02:59

    Its not as simple as that.

    China lacks the proper inclusive institutions to come to income per capita levels of the east asian economies.

    Cultural reasons aside, Chinese growth is demographically unsustainable. There are only so many manufacturing workers you can pluck out of terraced farms.

  72. Gravatar of You can be a well cultured despot you know « Left Outside You can be a well cultured despot you know « Left Outside
    12. April 2012 at 07:26

    [...] and Scott‘s argument about China’s culture is going nowhere. They’ve got bogged down [...]

  73. Gravatar of Michael E Sullivan Michael E Sullivan
    12. April 2012 at 08:17

    How much of the difference between singapore/HK and China is due to different management, and how much is simply that singapore and HK are city states, rather than large countries.

    How Singapore or Hong Kong compare to, say, Tokyo, or Seoul metro is a better measure of what their legal, government and business culture structures are worth.

  74. Gravatar of Majorajam Majorajam
    12. April 2012 at 10:52

    Don’t look now, but the property developer canaries in the coal mine are starting to knock off. The longer China sustains the most prodigious investment bubble in human history, the more severe will be the retrenchment when the ultimate day of reckoning comes.

    It amazes me that we have evidence of entire cities of buildings with nary an occupant, while the world’s largest shopping mall is a ghost town, and still the see no evil hear no evil types are blind and deaf as posts. Did you learn absolutely nothing from the last 10 investment bubbles???

  75. Gravatar of ssumner ssumner
    12. April 2012 at 11:05

    Rien, I hope that was sarcasm, you’re way too smart to be a protectionist.

    Adam, Thanks for that info, it’s good to know people pay attention.

    Lulu, First let me say that I don’t think anyone can predict markets. Second, any market that is very explosive on the upside will have occasional sharp price breaks. Third, China’s long term trend toward urbanization will probably keep short term price drops briefer than what we saw in America. (Until they are more developed–like Japan.)

    JV, I agree with almost everything you say, but wonder why you see Singapore as an outlier. Americans pay less taxes than Europeans, and work harder. Singaporeans pay less taxes than Americans, and work even harder. It fits the model, doesn’t it? I’d add that Singapore is far from finished, their GDP per person will rise at least 10% to 20% above US level, within 20 years. Fifteen percent of their population is millionaires, and it’s rising fast. Their economy has no public debt problems. It’s way healthier than the US economy.

    I agree the public doesn’t understand the CPI–there must be a typo in what I wrote–I’ve made the same point.

    Dhruv, I don’t see much of a limit there–soon China will be moving from a manufacturing to a service-oriented economy.

    Michael, That’s actually a complicated question, which depends on population sorting issues, but you might well be right.

  76. Gravatar of J.V. Dubois J.V. Dubois
    13. April 2012 at 02:33

    Scott: Yes it fits the basic micro model “if you tax something, you will get less of it”. But it does not fit the model that there is something truly exceptional in USA in terms of productivity. If you look at the statistics, countries with quite different models reach the same level of income per hour worked – USA, Germany, France, Netherlands etc.

    It is good to hear that you believe that Singapore will reach the same productivity level as USA quickly, but I do not know why. If you look at the trend from the US bureau of labor statistics I linked, in between 1995-2010 Singapore reached similar gains in productivity per hour worked than Japan or Finland and it was actually lower than gains in USA or Sweden. (this is the link: http://www.bls.gov/fls/intl_gdp_capita_gdp_hour.htm)

    And the last think: Singapore is very weird. Government has assets of approximately 60% of GDP but not through taxes but through shares in companies (via sovereign funds Temasek). The net profit of this fund (according to wikipedia) for the year 2008 was 22,5 bln SGD, or about 10% of the Singaporean GDP. And all that was without Singapore having any major mineral riches as it is for instance with Norway

    So let me ask you this question, is it that different if Singaporean government decides that for the time being it will invest its income on markets instead of using it to finance public projects? If investment is just delayed consumption, this government investment is inevitably just delayed government consumption. It is as with Nick’s “we owe it to ourselves” example. The only difference is that countries such as USA decided not to hold any wealth and give it to our fathers or grandfathers. Government in Singapore decided to give that wealth to their children and grandchildren. But this is government redistribution all the same, only via inter-temporal veil.

    Or let me show you another example. Imagine country A which uses taxes for every parking on public land such as sidewalks etc. Then we have the country S that will put all the real estate into a parking state company and this company will gather the same income as in country A but not in taxes but by offering commercial parking services. So we have two countries where people pay the same amount of money for the same service. But one of those countries is celebrated as libertarian role model because it has lower tax rate. But it does not mean anything for people actually living in that country, they pay the same as those poor people living under constant threat of iron tax fist in country A.

  77. Gravatar of ssumner ssumner
    13. April 2012 at 09:34

    JV,

    1. I never said there was anything exceptional about US productivity, I said GDP/person was exceptional.

    2. I never said Singapore would catch up to US productivity, I said its GDP/person would exceed ours very soon. Some estimates already show it higher.

    3. I never said Singapore was a libertarian paradise. I said I preferred systems where people were forced to save a lot to systems where people are forced to pay high taxes.

    BTW, Hong Kong has had very similar economic success as Singapore, with very similar tax rates. The big difference is that Hong Kong has far less of the paternalism you see in Singapore. So I am inclined to think low taxes are the key, and Temasek, etc are sideshows.

  78. Gravatar of J.V. Dubois J.V. Dubois
    13. April 2012 at 10:43

    Scott: Sorry if mo comments ended up as too confrontational, there really does not seem to be a difference in what we are saying. For me it is just interesting that in the end many countries that have completely different economic models end up with quite similar productivity.

    As for forced savings vs taxes, maybe I do not understand it that well. I would think that it matters more what are those taxes used for then if they exist in the first place. Generally since I=S it means that if government invests in something (like infrastructure) it is just other form of forced savings in my eyes – somebody somewhere is forced to save (and as Nicke showed with OLG model – if “somewhere” is in foreign country it just means that it turnes to “at some time” for country who borrowed). It is all just about deciding who is forced to save. And honestly from liberal point of view I do not see that imposing such costs on other people in my generation is better that throwing them on my parent or children generation.

  79. Gravatar of TheMoneyIllusion » Maybe next year TheMoneyIllusion » Maybe next year
    18. October 2013 at 05:09

    [...] Each year I do a post about the Chinese crash that did not occur.  Early 2012: [...]

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