Apocalypse delayed, once again.

Time for my annual post pointing out that the China bears were wrong once again.  Chinese growth is picking up again, headed for about 8% to 8.5% this year.

The Chinese people tend to make relatively large down-payments on new houses.  As with all markets, mistakes will be made.  But there’s no reason to believe, ex ante, that people sitting in an armchair over in America are better judges of the value of Guangzhou or Wuhan real estate that the Chinese investors themselves. And that will remain true regardless of whether Chinese property prices rise or fall over the next 12 months.

Foreign Policy did a recent survey of opinion of the prospects for China’s growth:

I answered “neither” and “It already has.”  The first answer was the consensus, and the second put me in a distinct minority.  A minority of one to be precise.

What makes me such a China bull?  Why am I such a supporter of their government’s policies?   I’m not bullish, I think China is a pathetically poor country, poorer than Mexico.  I think the government is repressive and inefficient; I don’t support their policies.

Many people have trouble understanding the distinction between levels and rates of change.  China used to be far more repressive and far more inefficient. During its transition to the current policy regime, it grew extremely fast, yet remains poor.  That’s what you’d expect.

It is very difficult to make PPP comparisons, which are highly subjective.  When I travel around China it seems to me that their cost of living is roughly half of US levels.  More than half in the cities and less than half in the countryside.  The Economist magazine recently did PPP comparisons for most major countries, and estimated wealthy Taiwan’s cost of living to be less than one half US levels, but China’s to be much higher than 1/2 US levels.  I find that extremely implausible. But of course the bundle of goods consumed in each place is so vastly different that any comparison will be based on a set of arbitrary assumptions.   If you applied the Taiwan/US price ratio to China, its GDP for 2013 (including Hong Kong) would be nearly $20 trillion, far higher than the $16.3 trillion for the US.  So it’s anyone’s call.  But I believe China has the world’s biggest economy right now. It leads the US in food consumption, energy consumption, exports, construction, manufacturing, and a lot of other categories.

Some day China will have a recession.  And when it does the China bears will insist they were right all along.  And the press will believe them.  But of course they will have been wrong all along.  A prediction of something that is inevitable (eventually), without a date attached, is completely and utterly meaningless.  The China bears will be right if China gets stuck in the “middle-income trap”—which I think is very unlikely.  How many countries with the following characteristics have gotten stuck in the middle income trap?

1.  A relatively homogeneous population, with parts of the country already closing in on high income levels.

2.  Booming exports of IT goods.

3.  A manned space program.

4.  A history of being the most advanced country in many technologies during the Dark Ages.

5.  A relatively high average IQ, FWIW.

6.  A culture that has a reputation for being entrepreneurial and very hard-working, as far back as David Hume.

7.  Surrounded by culturally similar countries that did NOT get stuck in the middle income trap (although N. Korea has yet to leave the low income trap.)

8.  A government that has been driven by pragmatic reformist ideology for nearly 30 years.

9.  A culture with an intense desire to overcome earlier humiliations and become a world leader.

10.  A very high saving culture, even discounting the saving forced by government.

Yes, it MIGHT get stuck, but is that really the most likely long-run equilibrium?

PS. Some China bears question the GDP data.  Obviously that sort of data will be flawed in all sorts of ways.  But consider data on trade, which rose from roughly $500 billion trillion in 2001 to $3.87 trillion in 2012.  Does that seem consistent with a country averaging 10% RGDP growth?  It does to me.  I travel to China fairly often, and it sure looks like a fast growing East Asian economy, even in the interior of the country.  If not, it’s a helluva massive Potemkin village.

PPS.  I’m not saying that I endorse all the arguments on my list of ten Chinese characteristics.  I put them there to cover a wide variety of factors that I’ve seen others discuss.  I happen to think a country can reach developed country levels without a high IQ, for instance.

PPPS.  The answer to my “how many countries” question is none—with Russia coming closest.


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42 Responses to “Apocalypse delayed, once again.”

  1. Gravatar of Krzys Krzys
    24. February 2013 at 09:54

    China has a booming it export sector? You mean all those iPhones with Chinese value added of maybe 2% percent?

    Vanity projects like the space programs a measure of success? Then India and Pakistan and North Korea are also on their way.

    4 seems really relevant. Greece will be a budding superpower soon enough, too.

    How did 9 work out for Europe and Germany ?

  2. Gravatar of marcus nunes marcus nunes
    24. February 2013 at 10:39

    Scott
    What do you think of Pettis story?
    http://www.mpettis.com/2013/02/21/a-brief-history-of-the-chinese-growth-model/

  3. Gravatar of Scott Sumner Scott Sumner
    24. February 2013 at 11:21

    Krzys. So what’s your answer? How many countries meet all ten criteria, and got stuck in the middle income track? You didn’t provide a number.

    Last time I looked Germany and Greece were developed countries. Or did I misread their GDP/capita data? And Greece was not an intellectual leader 1000 years ago. And regarding Germany, I said “culture” not leadership.

    And yes, China has a “booming export sector” Sorry to disappoint you. And the Chinese VA for iphones is not 2% of their export price.

    And India, Pakistan and N. Korea do not have manned space flight–sorry to tell you that.

    BTW, if you’d bothered to read the entire post you would have noticed that I don’t endorse the view that all 10 factors are important, I pointed out that lots of other people do think they are important.

    I must say it’s difficult to write a comment where every single point is factually wrong, and where you miss the entire point of the post, but you’ve succeeded!

    Marcus, I tend to agree with his view that China has lots of problems, but I’m more optimistic about it’s growth potential than he is. I expect much more than 3% RGDP growth in the near future.

  4. Gravatar of Geoff Geoff
    24. February 2013 at 11:40

    Dr. Sumner:

    “As with all markets, mistakes will be made. But there’s no reason to believe, ex ante, that people sitting in an armchair over in America are better judges of the value of Guangzhou or Wuhan real estate that the Chinese investors themselves. And that will remain true regardless of whether Chinese property prices rise or fall over the next 12 months.”

    If American armchair investors have superior information than Chinese investors, are better integrators, then there is a good reason to believe that American armchair investors are better judges of value, at least constrained to a particular period of time, than Chinese investors.

    And vice versa.

    If mistakes can be made, then there is no reason why it can’t be the case that Chinese investors make more forecasting mistakes than American investors, or vice versa.

    “But I believe China has the world’s biggest economy right now. It leads the US in food consumption, energy consumption, exports, construction, manufacturing, and a lot of other categories.”

    I believe European and American territories combined have the biggest economy in the world.

    I also believe that European and American and Chinese territories combined have the biggest economy in the world.

    I also believe that European, Asian and North American territories combined have the biggest economy in the world.

    I think country comparisons are arbitrary. They depend on imaginary boundaries established by historical conquests.

    There are people wealthier than me in Zimbabwe, and there are people poorer than me in Luxembourg.

    I think the most pertinent comparisons are the degrees of economic freedom that various territories benefit from. These are much more reliable indicators of how accurate the reported statistics are relative to real world human desires and goals.

    I don’t trust Chinese statistics. Communist nations have notoriously inaccurate information. According to North Koreans, their dear leader once had 18 holes in one during a day of golf.

  5. Gravatar of Geoff Geoff
    24. February 2013 at 11:50

    “A prediction of something that is inevitable (eventually), without a date attached, is completely and utterly meaningless.”

    I predict that the price of sugar at an arbitrary future date is going to be a function of the supply of and demand for sugar at that future date. I can’t know what the particular supply of sugar will be at that arbitrary date, and I can’t know what the particular demand for sugar will be at that particular date, but I do know the law that will establish the price of sugar at that date.

    Is this meaningless?

    I think it’s more accurate to say that these statements are “useless for short term forecasting for the purposes of earning a profit.”

    Economic science isn’t the art of entrepreneurship. Economists should be more humble.

    Economists who are entrepreneurs, now that’s something else.

  6. Gravatar of Krzys Krzys
    24. February 2013 at 12:43

    People might think a lot if those factors are relevant, but why would you think that?

    The parable of Germany is that ambition and resentment can find its expression in highly destructive way. It cost 100 million dead to bring Germany to heel and make that country a proper citizen of Pax Americana. On top of that, Germany was a scientific leader before and during its ascent ( as a quick perusal of the list of noble prize winners from the first half of 20th century will attest). China, on the other hand, has nothing (currently) to offer in terms of technological/scientific advancement, which the said iPhone neatly illustrates. So what’s the value added ? 5%?

    The bigger point is that surrounding countries became highly developed by becoming well behaved members of Pax Americana. It’s not so clear china has any interest in becoming one. This is the biggest danger to the ascent of china. Not to mention that the life on the technological frontier is very different and requires different development strategies, which is to say the current success might tell you little about the future.

  7. Gravatar of Suvy Suvy
    24. February 2013 at 12:53

    The reason I’m so worried about China is that the size of their banking system has massively increased while their non-performing loans are running at historically low levels and have been falling for the past few years. I’ve looked at estimates for how fast their private sector lending is growing and I’ve seen estimates around 10-20% every year. To me, all of those things are unsustainable and could cause some major problems down the line. It seems like a lot of people in China are borrowing that shouldn’t borrow and a lot of people are lending that shouldn’t be lending. It seems to me like you’ve got a lot of growth built on unsustainable growth in credit.

  8. Gravatar of JL JL
    24. February 2013 at 13:02

    Scott,

    It is often said that China will become old before it becomes wealthy.

    What do you think of that?

    Also, if China were to reach western per capita GDP, then it would, by definition, become about 30% more wealthy than the US, EU, Australia, Canada and Japan combined.

    I don’t see that happening, geopolitically speaking.

    PPP-wise, Chinese citizens might reach the same level of consumption as we do.

    But in terms of wealth and power, I think the western world (Europe and its ex-colonies) will form an alliance to contain China and maintain the status quo.

  9. Gravatar of ChargerCarl ChargerCarl
    24. February 2013 at 13:42

    I think a lot of the china pessimism we hear is just wishful thinking. People are scared of china–and I think rightfully so–and will grab onto any piece of information or shred of hope that will assuage their fears of world dominated by the CCP.

  10. Gravatar of ChargerCarl ChargerCarl
    24. February 2013 at 13:43

    I think a lot of the china pessimism we hear is just wishful thinking. People are scared of china–and I think rightfully so–and will grab onto any piece of information or shred of hope that will assuage their fears of a world dominated by the CCP.

  11. Gravatar of Ashok Rao Ashok Rao
    24. February 2013 at 13:43

    JL –

    What do you mean you don’t see that happen “geopolitically speaking”. Geopolitics (well, good geopolitics) won’t really stop economic growth. The only way the US can hinder Chinese growth is to stab themselves first.

    Western alliance can’t maintain status quo. US might still be a superpower, but it will be one in retreat. Your comment sounds a nostalgia for an era bygone. (I’m not saying I have any affinity for Chinese influence, I just think it’s inevitable).

    Scott –

    Where do resources come into all this? As cost of coal and oil soar (due to demand and increased sourcing costs), the US will become self-sufficient and China will not only be old, but left in the dark ages of dirty technology, very volatile to world prices.

  12. Gravatar of maynardGkeynes maynardGkeynes
    24. February 2013 at 13:57

    It’s not clear to me on what aspect of China you are a “bull.” GDP? per capita income? political organization? social welfare? social stability? I look at the Chinese government, and more broadly, modern Chinese society as an abysmal failure with respect to providing to its people the basic essentials of a free society and an allocatively efficient economy that we in the West take for granted. Ok, so a bunch of plutocrats can afford to pay $1,500 for a bottle of Lafite, a lot of heavy construction is going on, and some, but not many, basic social and health services are provided to people who were so desperately bereft before, that any improvement at all would look like progress. So far, it sounds a lot more like Stalinist Russia in the 1930s than we what in the West would consider something to be bullish about.

  13. Gravatar of Justin Irving Justin Irving
    24. February 2013 at 13:59

    Agree completely. If China could only be as corrupt and inefficient as Taiwain in 1995 it should easily hit $20k per head GDP. The leadership would have to go mad for the exchange rate GDP to hold below Americans for another 10 years. Its gonna happen. Mainlanders are revoltingly chauvinistic when you ask the right questions, but its not clear that they have unreasonable geopolitical aims, or that the democratic world couldn’t box them in. America, Australia, Taiwan, Japan and Singapore can make one hell of an allied navy.

    BTW, you have guts for mentioning IQ.

  14. Gravatar of Apocalypse delayed, once again. | Fifth Estate Apocalypse delayed, once again. | Fifth Estate
    24. February 2013 at 14:48

    [...] See full story on themoneyillusion.com [...]

  15. Gravatar of Steve Steve
    24. February 2013 at 14:56

    OT but interesting
    De-populating of pets, more recession fallout:

    Research at the time suggested, as Mr. Kasper put it, that “people will always spend money on pets because they view them as part of the family.”

    That belief has been tested. Not only are there fewer dogs — from 2006 to 2011, the number of dogs in the country dropped for the first time, albeit slightly, to 70 million from 72 million, according to the American Veterinary Medical Association Sourcebook survey — but the amount owners paid to vets fell, too. Owners reported they spent about $20 less a year in inflation-adjusted terms in that five-year span.

    The declines are more significant when it comes to cats. About 36.1 million households owned at least one cat in 2011, down 6 percent from 2006. During that period, the number of cat visits to the vet declined 13.5 percent. In the business, this is known as “the cat problem.”

    The horse market has suffered the most. Pet horses are expensive, and the market for them since the start of the recession has been crushed. Thoroughbred racing, meanwhile, has been hurt by the expansion of casinos, reducing the number of horses in need of veterinary care.

    “The estimates are that the horse population is down about 30 percent since 2008,” says Dr. Stuart E. Brown of Hagyard Equine Medical Institute in Lexington, Ky. “Traditionally we have hired five to seven new grads to our internship program. Lately, it’s one or two.”

    http://www.nytimes.com/2013/02/24/business/high-debt-and-falling-demand-trap-new-veterinarians.html?pagewanted=all&_r=0

  16. Gravatar of 123 123
    24. February 2013 at 15:30

    China bears say risks of a recession in China are underpriced. Bulls say otherwise. Last year’s growth is irrelevant in this debate.

  17. Gravatar of TallDave TallDave
    24. February 2013 at 18:06

    Acemoglu’s thesis explains why China will probably, but not inevitably, get stuck around Mexican PPP GDP per capita. At the present time, nearly all of China’s growth is planned. That is to say, there is no creative destruction of the kind that threatens the elites — the elites are by and large the ones getting rich.

    But we’ve seen this kind of extractive growth before, most notably in the Soviet Union. China’s semblance of markets leave it two plausible paths forward: more inclusive democratic reforms that lead to a more inclusive less corrupt economy, or retrenchment to ensure the elites lose neither their increasingly lucrative businesses or the political power that allows them to keep hold of them. The latter seems a lot more likely today, simply because it’s the path of least resistance as there is no empowered class who would benefit from creative destruction, a la England 1688.

  18. Gravatar of Lorenzo from Oz Lorenzo from Oz
    24. February 2013 at 18:26

    In the rise of China arguments (and I agree that some profound falling over is highly unlikely), what people typically miss is the rise of India. India lags considerably, but is clearly also on a profound upward trajectory. So, its capacity to balance China is likely to be considerable.

    As for getting old before they get rich, as Niall Ferguson points out, China has no state-run old age pension system. Why should the regime care if there are a lot of poor old people to whom it has no financial obligations?

  19. Gravatar of Krzys Krzys
    24. February 2013 at 18:29

    Chinese growth is all extractive? This is simply insane. The Chinese growth is the greatest success of the western model of open markets and the industry if the ordinary Chinese. The major political success of the system was to get out of the way. The integration of a billion Chinese into the global economy lifted hundreds if millions out of grinding poverty. How can that be described as extractive?

  20. Gravatar of TallDave TallDave
    24. February 2013 at 18:45

    Krzys,

    I wouldn’t say “all” of their growth is extractive. OTOH, would anyone care to argue that the level of extraction is comparable to any modern rich economy? That’s why I say they probably get stuck somewhere around Mexico.

    I agree China’s growth is a huge success story for markets, but you have to remember this is mainly because they started out very, very poor. Becoming as rich as Mexico will be an incredible accomplishment for them. But I don’t think their present political model will allow them to move much farther forward than that.

  21. Gravatar of Rob Rob
    24. February 2013 at 20:58

    I live in Beijing and I have to agree that if you where to take into account just how large the informal sector is, China probably has the largest economy in the world. Also to me the PPP estimates always seem really odd, living in Beijing is more than twice as cheap than living in northern Virginia (my other frame of reference) and all of my Chinese friends constantly complain about how expensive Beijing is in comparison to their home towns or cities. My best guess is that the PPP estimates use an overly westernized basket of goods(Leading a more or less western life is quite expensive).
    I really loved Coase’s and Wang’s treatment of Chinese growth and development. Explanations as simple as “it’s not a democracy or “inclusive” therefor it must stop growing” I think greatly oversimplify matters. My personal opinion is that they will continue one party rule, and while it will never be as good as the rule in Singapore, they will most likely manage to continue reforming. The idea that all the growth comes from central planning is crazy, China has too much involvement in the market for sure, but its growth has primarily come from allowing markets to operate, the high growth rates are what you would expect a la conditional convergence. I also really am not a huge fan of using the Soviet Union as an example of extractive growth, GDP certainly went up but I don’t know in what meaningful way you can say they actually grew, did quality of life increase? Did they actually produce more, or just produce things that they got to count higher in GDP? When G is a big portion of GDP, GDP is not always a very accurate reflection of the true state of an economy. For real examples of state led growth I would probably point to oil producing nations.
    I guess China is ethnically pretty homogeneous, and they certainly share a common Chinese identity, but to be honest I find it one of the least homogeneous countries I have been to. Each region has many of its own customs, regulations, and perhaps most importantly they all speak different regional dialects which are essentially impossible for Chinese from other regions to understand. One part I found particularly true to life from How China Became Capitalist was their discussion of the many capitalisms, and the fairly decentralized nature of China.

  22. Gravatar of Alexei Sadeski Alexei Sadeski
    24. February 2013 at 23:55

    Lorenzo,

    You obviously don’t watch South Park. Old people will invade your town and blow you away if you ignore their political interests.

    Scott,

    Think the Pax Americana is threatened?

  23. Gravatar of KS KS
    25. February 2013 at 00:50

    Question 11.) How many countries named China have fallen into the middle income trap?

    Answer: None, therefore, China will not fall into the middle income trap.

    These criteria are not sufficient for developed status, neither individually nor collectively. In fact, many of them seem totally irrelevant to the modern economic development. Others seem to apply only to China or to be so specific that they lack predictive power. For example 4.), although China was a leader in 11th century technology, WTH does that have to do with its prospects for development today? Why does the 11th century matter and not the 1st century, or various other epocs?

    Needless to say, I find Sumner’s argument unpersuasive.

  24. Gravatar of Ryu Ryu
    25. February 2013 at 04:55

    Hi Scott,

    I agree with you on China’s growth potential. But it seems to me China’s current credit-driven growth model is not sustainable (e.g. http://www.gurufocus.com/news/205735/gmo-white-paper–feeding-the-dragon-why-chinas-credit-system-looks-vulnerable).

    With the financial sector still not allocating resources efficiently, could it be possible that targeting NGDP when times are bad might only makes things worse? I agree that China is continuing with its reforms, but not sure if the reforms will be fast/substantial enough to help offset the vulnerability created in the financial sector.

  25. Gravatar of errorr errorr
    25. February 2013 at 07:13

    I think there is only one unique factor that could leave china in the middle income trap… that is the one child policy. The other rapidly industrializing countries had the normal demographic boom for longer. I would be worried that china is still middle income when the old age time bomb goes off.

    Short run I think Scott you are absolutely right. Long run I see India as the biggest winner. By mid century they will have surpassed China in population and gdp. Thay is assuming that the corruption continues to slowly abate.

  26. Gravatar of ssumner ssumner
    25. February 2013 at 09:07

    Kryzs, You are still misreading my post. I never claimed China would become as rich as the US, indeed elsewhere I’ve argued that is unlikely to occur. So life on the technological frontier has no bearing on anything I said. Greece is a developed country, but struggling with life on the technological frontier.

    Suvy, Yup, current trends are susustainable, and could cause problems down the road. So what? Isn’t that also true of Greece?

    JL, It will become developed first.

    Rao, They’ll need to do a lot of conservaton–and I predict they will.

    Maynard, It’s all relative. Compared to the US it’s a disaster. Compared to China circa 1960 it’s paradise, and getting better every year.

    Justin, You said;

    “BTW, you have guts for mentioning IQ.”

    Doesn’t everyone agree that better educated people are likely to produce more? My only reservation about this factor is that even countries with low IQ can develop, by raising their average IQ. But if they already have high IQ, surely that’s a plus?

    123, That’s a hypothesis that can never be tested—hence uninteresting.

    TallDave, You said;

    At the present time, nearly all of China’s growth is planned.”

    If you mean centrally planned, that’s flat out false. BTW, China today is totally different from the China of 20 years ago. And the China of 20 years ago is totally different from the China of 40 years ago. Why assume China will suddenly stop reforming, particularly at a point in time where the new government is trying to speed up reforms?

    The Soviet Union was never anything like the modern China, at any time in Soviet history. If you don’t believe me, visit Wenzhou or Shenzhen some time.

    Krzys, You said;

    “Chinese growth is all extractive? This is simply insane. The Chinese growth is the greatest success of the western model of open markets and the industry if the ordinary Chinese. The major political success of the system was to get out of the way. The integration of a billion Chinese into the global economy lifted hundreds if millions out of grinding poverty. How can that be described as extractive?”

    Finally we agree on something. There are extractive elements to the growth, but it’s far more than that, as you say. BTW, in the past few years rural incomes have been rising faster than urban incomes, reversing the trend of the 1990s and early 2000s

    Rob, Great comment—I completely agree.

    Alexei, I’m not sure what pax Americana is, but I suppose I do expect the world to continue getting more peaceful, if that’s your question.

    KS, I believe there are studies showing a correlation between economic development circa 1000 and today. (Not sure about the exact date.)

    Ryu, Yes the current model is unsustainable (also true for the US).

    errorr, In other posts I’ve argued India will become number one around mid-century.

  27. Gravatar of Ray Lopez Ray Lopez
    25. February 2013 at 09:36

    Scott sez: “Time for my annual post pointing out that the China bears were wrong once again. Chinese growth is picking up again, headed for about 8% to 8.5% this year.” but today’s news sez: “China’s HSBC Flash PMI for February falls to 50.4 from 52.3 previously and against expectations for 52.2.” Oops! Scott was fooled by randomness. Wait another month or two and let’s see.

  28. Gravatar of Brock Brock
    25. February 2013 at 11:04

    Hey folks, knowledge: http://www.levyinstitute.org/pubs/wp_715.pdf

    “Tracking the Middle-income Trap: What Is It, Who Is in It, and Why?”

    124 countries studied, 1950-2010. There are two income trap levels. China has already surpassed the lower one, and is currently in the second one. The question is: Will it get stuck there?

    Answer: Not very likely.

    Short version: China’s economy is too diversified, and builds products that are to complex, to be in the same category as Saudi Arabia. It is clearly another East Asian nation on the same path as Japan, South Korea, Taiwan, and Singapore. Their economy is highly integrated into the global economy on multiple levels (electronics, heavy manufacturing, construction, aviation, automobiles, white goods, business and IT services (India is the leader here, but China does well too for some things), etc. etc.) and growing increasingly complex with time.

    And it is the export basket that matters. Not the government. South Korea and Taiwan had pretty crappy governments too at this stage in their growth cycle.

    If anything causes a problem for China, it will be managing the eventual transition to a higher-income country with better government. China is huge, and the regions are incredibly diverse. It has a history of breaking up into smaller rival states, and could do so again. If Beijing cannot maintain control, there’s really nothing that unites Shanghai to Guangzhou.

  29. Gravatar of Brock Brock
    25. February 2013 at 11:14

    “6. A culture that has a reputation for being entrepreneurial and very hard-working, as far back as David Hume.

    8. A government that has been driven by pragmatic reformist ideology for nearly 30 years.”

    These are the only two that really matter.

    “9. A culture with an intense desire to overcome earlier humiliations and become a world leader.”

    This is a reason for doubt. Jingoistic nationalism comes easily to the Chinese, and could easily lead them into a war.

  30. Gravatar of Collin Collin
    25. February 2013 at 11:17

    A couple thoughts:

    1) What if China is at USA 1923 or Japan 1983 after several decades of export growth and the economy really goes booming another 6 – 10 years? China still seems to fast forwarding straight into Japanese lost decade & falling population.

    2) What will happen to the world once the commodity boom (outside of oil/gold) slows down? China has heavy investments in Africa and South America. What happens if these investments are threatened by falling commodity prices but the workers don’t want wage cuts? This used to drag the USA into a lot military battles decades ago.

    3) I still don’t see how libertarians like China outside the fact the workers take such small wages. Most of the largest businesses are state run or very closely aligned with the government. (They reak of Frannie all over the place.) Also, the local governments and factories sound like the kind like minor league Tammy Halls.

    Maybe China has gone through the 1907 Panic or the S&L crisis and the Roaring Twenties are coming.
    I would say Ch

  31. Gravatar of 123 123
    25. February 2013 at 12:19

    “123, That’s a hypothesis that can never be tested—hence uninteresting.”

    It is hard to test the ex-ante mispricing of risk. But permabears who are the heroes of the press may be the true heroes if they correctly identify the mispricing of risk. It is the only area that I know where the press and public opinion sometimes gets risk and probability related reasoning right.

    Yet sometimes the ex-ante mispricing of risk is so huge, and ex-post rewards of so enormous, that there is no doubt that some bears were right, a good example is Paulson’s big short.

  32. Gravatar of Tom Tom
    26. February 2013 at 07:41

    http://www.tianjinecocity.gov.sg/

    By the end 1996, lots of folks thought the US dot.com bubble stock market was “irrationally exuberant” (like Greenspan).
    By 2003, lots of folks like the Economist thought that US housing was in a bubble destined to pop.

    I’m pretty sure that China has been in a bubble, and is in a bubble, and that at some point the bubble with either a) pop hugely, or b) plateau nationally by popping in a few geo-areas and in a few industries, with much slower (less than 4%) overall growth.

    An economic bubble pop might well lead to a “re-cultural revolution” / “Giant Leap Onward” kind of mass killing of the corrupt elite who are getting capitalist-pig rich while so many Chinese workers are stuck in the polluted filth of overworked sweatshop no-career city jobs. Male students and recent grads, without girlfriends or much hope of getting one, (some 80 girls who are 20 for each guy who is 20? what are recent numbers? http://www.allgirlsallowed.org/gendercide-china-statistics In 2007, the national government estimated that China has 37 million more males than females. By 2020, the Chinese government estimates that there will be at least 30 million men of marriageable age that may be unable to find a spouse.

    So let’s say I put the huge blowup risk at 33% but the non-national multi-geo bubble pop changes, which indicate continued overall growth tho at varying speeds at 67%, over the next 4 years.

    Is 4 years a small enough time frame to be meaningful (as compared to “sometime”)? If 4 years is too long, what is the longest time that counts?

    And I wish more of us were using more probabilistic estimates, because in most cases that’s what why are disagreeing about (the China bears thinking of higher likelihoods of problems, and possibly other problems.)

    I think China’s leaders are already starting to clean up China from the overly eco-unfriendly development it’s been going thru the last 40 years. Recall that Eastern Europe became anti-commie partly because of the terrible pollution.

    Tiny typo, should rise from 500 billion, not trillion:
    which rose from roughly $500 trillion in 2001 to $3.87 trillion in 2012

  33. Gravatar of Tom Tom
    26. February 2013 at 07:47

    (and I talk about typos, oops): 100 girls for 121 guys, birth rate of 1.21 in 2008.

    the bubble will either a) pop … big, or b) lots of little pops.

  34. Gravatar of ssumner ssumner
    26. February 2013 at 08:20

    Ray, That number means almost nothing–the markets are a much better indicator.

    Brock, Very good points. If China does stumble into war, it will be a setback. But middle income stagnation is not caused by war.

    Collin, You said;

    “I still don’t see how libertarians like China”

    I like China, but hate the Chinese government. I think most other libertarians feel the same.

    If China ends up like Japan that would be a huge success.

    123, I strongly disagree that Paulson was “right.” He was lucky, as we’ve seen in the years since.

    Tom, I did a post about the 2003 Economist article–it was almost completely wrong. But that didn’t stop the Economist from claiming they were right–which I found quite revealing. There is no good evidence that US stocks were overpriced in 1996.

  35. Gravatar of 123 123
    26. February 2013 at 09:35

    Scott, I’m not saying Paulson is always right. But he was right then. At the time, markets were priced as if the probability of the housing crash was zero.

  36. Gravatar of TallDave TallDave
    27. February 2013 at 11:52

    Scott,

    If you mean centrally planned, that’s flat out false.

    Well, sure. The planning in China isn’t the Soviet variety, it’s more of a “limited markets” kind of planning, with the state keeping its fingers in all the pies but allowing some economic incentives to work — because right now that benefits the elites.

    But how did those ghost cities get built? Why the near-total disregard for the environment? Why the military posturing, the collapsing bridges, the vanity projects like high-speed rail? The answer is, because they lack inclusive political institutions.

    Why assume China will suddenly stop reforming, particularly at a point in time where the new government is trying to speed up reforms?

    Well, I certainly hope they don’t, and I think there’s maybe a 1 in 4 chance they won’t, but at some point soon their growth must butt up against two factors: the end of easy catch-up growth, and elites who are becoming entrenched (and rich) under the status quo who will resist creative destruction that further growth requires.

    The Soviet Union was never anything like the modern China, at any time in Soviet history. If you don’t believe me, visit Wenzhou or Shenzhen some time.

    Sure, I didn’t mean to imply they were, just that we’ve seen growth without political inclusiveness before — easy to forget today that a lot of people thought the USSR would achieve economic parity with the USA by the 1990s. But such growth tends not to last.

  37. Gravatar of TallDave TallDave
    27. February 2013 at 12:16

    BTW, something a lot of people don’t realize: China actually still passes that old Communist staple, the 5-Year Plan.

    The Fifth Plenum in October 2005 approved the 11th Five-Year Economic Program (2006–2010) aimed at building a “socialist harmonious society” through more balanced wealth distribution and improved education, medical care, and social security. On March 2006, the National People’s Congress approved the 11th Five-Year Program. The plan called for a relatively conservative 45% increase in GDP and a 20% reduction in energy intensity (energy consumption per unit of GDP) by 2010.

    http://en.wikipedia.org/wiki/Economy_of_the_People%27s_Republic_of_China#Phase_One:_reform_in_the_countryside

    I suspect what will happen over the next ten years is that China’s leadership will transition to governing as socialist-corporatists — they’ll employ lots of people in makework in order to stay in power, while less efficient state-owned enterprises will be protected. Hopefully, some day (probably after decades of stagnation), the people will demand national elections.

  38. Gravatar of W. Peden W. Peden
    27. February 2013 at 13:52

    TallDave,

    “they’ll employ lots of people in makework in order to stay in power, while less efficient state-owned enterprises will be protected.”

    That sounds familiar.

  39. Gravatar of W. Peden W. Peden
    27. February 2013 at 14:02

    Scott Sumner,

    “I like China, but hate the Chinese government. I think most other libertarians feel the same.”

    That’s certainly exactly how I feel.

  40. Gravatar of Saturos Saturos
    28. February 2013 at 02:36

    I liked the post, but I still don’t get why Scott is disagreeing with everybody else on China surpassing America. Obviously it hasn’t on a per capita basis, as Scott himself said, and obviously that’s what the question’s asking about.

  41. Gravatar of Mike Mike
    1. March 2013 at 15:39

    It’s the same reason people were bearish on Jeremy Lin even though he put up statistics not seen since Jordan. Americans are scared especially they aren’t doing well themselves. And have always been at best ambivalent towards Chinese immigrants. To quote Rick Ross, “We takin’ ova…”

  42. Gravatar of EU survey shows how much people dislike inflation EU survey shows how much people dislike inflation
    19. May 2013 at 15:47

    [...] gdp as a way of thinking about monetary policy, gobbling up only the items on Swedish liberalism, Chinese economic growth, and Asian cinema.  The best case you can make for their response is that they understand they [...]

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