This graph in the FT caught my eye:

The graph shows two measures of the rate of increase in the “cost of living” in China.  The blue line is the government CPI, while the red line shows the results of public opinion surveys.

At first glance they look pretty similar, but check out the two scales.  Chinese CPI inflation has been running at about 2% in recent years, while the public’s estimate of inflation is around 6%.  The gap was even bigger in the (booming) early 2010s.  So what’s going on here?

This is just one more illustration of my claim that inflation is a pretty meaningless concept.  To economists, it’s the increase in the price of a bundle of goods, adjusted for quality changes.  To the public, it’s the increase in the cost of “living the way we live now.”

Thus if a nice flat panel TV cost $600 today, and a nice black and white TV cost $300 back in 1967, then the public would say that the TV part of the cost of living has doubled, while economists would say that the price of TVs has plunged by something like 90%, because the quality improvements have been so massive.

[In 1967, I frequently had to shake the antenna on top of our TV set, to prevent constant flickering and “snow”.  I didn’t even know that the Wizard of Oz was a color film until I saw it in the theatre at age 35.)

Alternatively, the public would say that Christmas today is about equally merry as in 1967, while economists would say that today’s Christmas is far merrier due to technological progress.

Here’s my take on the Chinese data.  The top line is strongly correlated with growth in NGDP per capita, i.e. average income.  If Chinese living standards are rising rapidly each year, then this factors into what people feel they need to earn to “keep up with the Zhangs”.  They are interested in knowing how much it costs to have a middle class Chinese lifestyle.  Indeed this concept may be even more important in “communist” China than in supposedly materialistic America.

On closer inspection, however, the rise in the perceived Chinese cost of living is a bit less that the rise in NGDP.  And I think that’s due to lifecycle effects.  Thus the older Chinese don’t need all the fancy new gadgets that millennials buy, and hence their cost of living rises a bit less rapidly than the overall rise in NGDP/person.

I’d expect that surveys of American perceptions of inflation would show something similar; a subjective inflation rate that is above the official CPI, but below the growth rate of NGDP/person.  Does anyone know of such a survey?

PS.  The FT article says the Chinese economy is accelerating into 2018.  It looks like those who predicted that the Chinese “bubble” would burst will be wrong for the 40th year in a row.  Indeed 2018 looks like a relatively strong year for the entire global economy.

PPS.  Check out the new Tianjin library:

Merry Christmas and a Happy New Year to all my readers.

The Financial Times has several interesting pieces on recent trends in China:

Chetan Ahya, an economist at Morgan Stanley, said that alongside the decline in the Gini coefficient, China has also improved another measure of inequality, the rural to urban income ratio, from a low of 29.4 per cent in 2004 to 37 per cent by 2016.

The rapid rise in rural incomes means Morgan Stanley now predicts that China will reach the World Bank’s high-income threshold of $13,700 a head by 2025, two years earlier than its previous forecast.

Alongside rising wages, Mr Ahya said equality was also being aided by gradual, if slow, reform of China’s hukou system, which has restricted access to public healthcare, education and housing for the many millions of migrant workers who have flocked to China’s major cities.

The existence of this system meant that, “on an underlying basis, income inequality was actually higher” than the Gini measure suggested, Mr Ahya argued. However, with cities with populations below 500,000 now fully open to migrants, those with populations up to 5m having to accept urban residency applications after five years of social security payments, and Beijing having set a target of giving urban residency status to 100m migrants by 2020, this impediment is starting to be removed.

There is also progress on the environment, something I noticed the last time I went to Beijing:

A lower Gini coefficient also helps de-risk investment in China, Mr Bakkum argued. “The current leadership understand that social inequality and environmental problems can lead to social unrest.”

As an example, he cites the notoriously bad air pollution problems in Beijing, which now finally seem to be being addressed. “They have focused a lot on the environment in Beijing in particular and you can see the difference. The risk of big social unrest because of the environment has come down.”

Another FT article suggests that the Chinese are beginning to heed my “more money, less credit” suggestion:

China’s central bank injected $47bn into its financial system, its largest intervention in nearly a year, in an effort to calm investor fears that Beijing’s crackdown on debt-fuelled growth would put a brake on the country’s rapid expansion.

Please don’t take any of this as an endorsement of the recent political trends in China, which has followed the sort of anti-intellectual nationalism that we see in Russia, Turkey, Poland, Hungary, Philippines, India, and yes, another former leader of the “free world”.

Speaking of China, this is a smart move by the GOP–at least in political terms:

The U.S. Justice Department has threatened to sue Harvard University to force it to turn over documents as it investigates whether the Ivy League school’s admission policies violate civil rights laws.

Citing a 2015 lawsuit that charges the school’s affirmative action policies discriminate against Asian-American applicants, the federal government in a letter set a Dec. 1 deadline for Harvard to hand over documents on its admission policies.

I don’t have an opinion either way on whether this is good public policy, but the Dems are foolishly throwing away votes in the Chinese community by ignoring this issue.  It may not have shown up in the polling yet, but there is a strong move toward the GOP among educated Chinese-Americans, and it’s driven almost exclusively by perceived anti-Asian racism at elite universities.  This should be a strong Democratic issue, as the GOP generally doesn’t believe in these sorts of anti-discrimination lawsuits.  The fact that it’s the GOP doing this and not the Dems is  .  .  .

Sad!

PS.  The article points out that Brazil has made more progress against “inequality” than China, as seen by the more rapid decline in its Gini coefficient.  So in which country are the poor doing better?  (Hint, compare recent GDP growth rates.)

It’s intellectually fashionable to be pessimistic, so let me push back with one of my occasional contrarian posts.  I’ll try to defend Fukuyama’s “End of History” hypothesis one more time.  Let’s start with peaceful:

1. A new study shows that the Kellogg-Briand Pact (1928), which outlawed war, has been highly effective. If you took history in high school, you might recall your teacher make fun of the touching naiveté associated with this utopian treaty.  Well it looks like Kellogg and Briand might get the last laugh.  First a bit of background.  The act was intended to change the rules of war.  Previously, countries were allowed to keep territory they conquered.  It was wars of aggression that were outlawed, not civil wars, not wars to prevent proliferation of WMD, not wars aimed at preventing genocide.  And wars of conquest (which were common throughout almost all of human history), have almost stopped happening (with Russia’s recent acquisition of the Crimea a notable exception, and even that was not particularly violent.)

So the world is getting more peaceful.

2.  It’s fashionable to say that freedom is a western concept, and Fukuyama’s prediction doesn’t apply to the rest of the world.  People point to China’s one child policy, or Saudi Arabia’s unwillingness to let women drive.  I’m with Zhou En Lai; it’s too soon to say.  China recently abolished its one child policy, and today Saudi Arabia granted women the right to drive.  Maybe progress will stop and no more freedoms will be achieved in the non-Western world.  But my hunch is that modern technology will gradually make the world more liberal, by beaming images of successful western societies to everyone who has a smart phone.

So the world will get freer, even if the past decade has been a mixed bag.

3.  Here’s Tyler Cowen expressing pessimism about economic progress in poorer areas:

Increasingly, it seems that many parts of the Western world might never “catch up,” including Greece, southern Italy, much of the Balkans and much of Latin America, in addition to Puerto Rico. One of the pleasing features of the 1990s, in retrospect a delusion, was the notion that proper policy and good multilateral institutions would bring most of the world into consistent, steady-state growth at a higher rate than what the wealthier countries could manage.

I agree with most of what Tyler said about Puerto Rico, including his view that’s it’s future currently looks quite bleak.  But I find this paragraph to be far too pessimistic, and not even consistent with the data:

a.  Since 2000, the developing world has grown faster than the rich world.  Yes, that’s partly China, but it also includes lots of other populous Asian countries.  And Asia is perhaps 70% of the developing world.  Parts of Africa have also done pretty well since 2000.  But what makes this claim especially dubious is his reference to “proper policy”.  Most of the developing world rates far below the US in economic freedom (including freedom from corruption).  And those few countries that score high on the good policy scale (such as Chile and Estonia) have had a pretty good couple of decades.  If you want an African example, compare the growth rate of Botswana and Zimbabwe in recent decades.

b.  Yes, there are good reasons (including culture) to be pessimistic about the near term prospects of Greece and southern Italy.  But in 1970 there were good reasons (including culture) to be pessimistic about Ireland.  You might say that the Irish were always capable of much better, as evidenced by their success in America.  But Greeks and southern Italians have also been quite successful in America.  You might argue that corruption will keep Greece and southern Italy poor.  Yes, but for how long?  China is much more corrupt than Singapore, and much poorer.  But Singapore is also ethnically Chinese, and rooted out corruption through a determined effort of the government.  Corruption is not baked into the genes of the Chinese people.  Might the Chinese government be able to root out corruption? I don’t know, but the current leadership seems to be making an effort.

My point here is that “never” is a really long time.  If Tyler had said that Greece and southern Italy would remain relatively poor for another 80 years, I’d have no reason to disagree.  But another 80,000 years?  Who knows?

In the early 1940s the Kellogg-Briand Pact look like a pathetic failure.  Now it looks like a success.  Yesterday, it looked like Saudi women would remain oppressed.  Today there seems to be hope that they might start achieving more equality.  The arrow of history is still pointing toward more wealth, freedom and peace.  The real risk we face is not stagnation, but rather a sudden crisis that catches us unaware, like terrorists getting a WMD.

HT:  Scott Alexander, who also linked to this mind-boggling article:

The number one food exporter in the world is the United States. The number two food exporter in the world is the Netherlands, 1/270th the size and mostly urban.

Update:  Maybe not–check out comment section.

Pity poor New Hampshire:

Liu Qiangdong is making up for lost time — and with vertiginous speed.

Again, like so many of China’s new titans, Liu’s family was so poor that until he went to university aged 18 he only tasted meat once or twice a year. His family, peasant farmers in arid coal country, 700km south of Beijing, had a few rice fields but they also had to hand over the crop to the government; these were the dire days after the Cultural Revolution. “From June until September we were able to eat corn — cornmeal porridge for breakfast, corn pancakes for lunch and dry cornbread for dinner; cornbread so tough it made your throat bleed,” he tells me. “The other eight months we ate boiled sweet potato for breakfast, sweet potato pancake for lunch and dried sweet potato for dinner.”

Now he is 43 and worth nearly $11bn.

Yes, that’s anecdotal, but consider this:

Virtually every Chinese millionaire or billionaire is self-made because capitalist reforms to the centrally planned communist economy only began in the early 1980s and did not really take off until the 1990s. But the modern super-wealthy often turn out to be descended from an earlier capitalist class. Richard [Liu] is no exception. Before the 1949 revolution his family were wealthy shipowners who transported goods along the Yangtze river and the ancient imperial canal from Beijing in the north to Hangzhou in the south. They lost everything when the communists took over and were forcibly resettled at least twice. One academic survey found more than 80 per cent of Chinese “elites” (those with income at least 12 times higher than the average in their area) are descended from the pre-1949 elite. Richard puts this down to “family culture”.

“My parents and grandparents taught us a lot — not Chinese or maths but a sense of values, of how you should be and how you should treat others,” he says. They also drilled into him the knowledge they had once been very rich but everything had been taken away — a lesson all too relevant even now.

You often hear a debate about what would happen if everyone suddenly lost everything, and the entire population was equally poor.  Liberals claim that people like Bill Gates become rich because they come from upper class families, with all sorts of advantages.  Conservatives claim that even if income were made 100% equal, within a few years the rich would regain their position and the poor would fall back.  Mao’s China provided a near perfect test of this theory, and we now know that the conservatives are right about this issue.  The cream does rise to the top.

Of course this is not true in every single case.  Sometimes highly talented people have bad luck and end up homeless.  Occasionally an idiot will win $100 million in a lottery, or maybe even get elected President.  But on average the more talented, more ambitious and harder working people will tend to succeed.  Being born white in America does give a person some advantages, but that doesn’t really explain very much.  Certainly not income gaps between American whites and Asians, or between Christians and Jews, or between immigrant blacks and American born blacks, or between Korean-Americans and Laotian-Americans, etc., etc.

PS.  RIP Cassini.  This is my all-time favorite NYT article, and it contains almost nothing but pictures and a video. In my view, Saturn (and her moons) is the most beautiful object in the Solar System.  This is also worth examining.

PPS.  RIP Harry Dean Stanton.

The WaPo is reporting that Vietnam is moving toward a pro-China position, out of desperation:

Vietnam’s fierce rivalry with China often exceeds any lingering resentment against the United States, which is now seen as a crucial counterweight to Beijing’s ambitions.

Yet the suspending of the Repsol drilling project has provided wary Vietnamese with a reason to believe their government is capitulating behind the scenes. Neither the Spanish company nor the Vietnamese government has offered an explanation for suspending offshore activities.

“There are so many rumors swirling around Repsol, as there always are when it comes to China and Vietnam. But there doesn’t appear to be any reason to do what they did other than pressure from Beijing,” said a prominent member of the international business community who frequently interacts with officials representing the three countries involved, who spoke on the condition of anonymity because he is not authorized to publicly speak about political matters.

If Vietnam did privately back down, he said, it has not been left with much choice since President Trump took office. “The U.S. really left Vietnam at the altar when it canceled TPP. What are they supposed to do?” he asked, referring to the Trans-Pacific Partnership, the trade deal that included Vietnam and explicitly excluded China. Trump had slammed the deal as a job-killer during the presidential campaign, and he withdrew from the pact just days after taking office.

At least we have a reliable ally in South Korea.  But for how much longer?  Here’s the Guardian:

Donald Trump has asked aides to prepare for US withdrawal from a free trade agreement with South Korea, it was reported on Saturday – a potentially stunning development at a time of tense confrontation with North Korea.

. . .

The decision is not final yet, and several leading members of the Trump administration are seeking to dissuade the president, according to the Washington Post, but the report added “the internal preparations for terminating the deal are far along and the formal withdrawal process could begin as soon as this coming week.”

Withdrawal from the 2007 trade deal (known as Korus) with one of Washington’s closest allies in Asia would be only the latest of a series of zig-zagging interventions by Trump amid the looming nuclear missile crisis that have caused bewilderment and alarm in the region.

.  .  .  withdrawal would be in line with campaign promises to tear up trade deals Trump has presented as disadvantageous to US workers. He has already ruled out joining the Trans-Pacific Partnership (TPP) . . .  as well as the Transatlantic Trade and Investment Partnership with Europe, and he is threatening to pull out of the North American Free Trade Agreement (Nafta).

Ian Bremmer, the president of the Eurasia Group, a political risk research and consulting firm, said that if Trump went ahead and withdrew from the agreement, “it would be a significant loss of US influence in Asia – nearly on par with withdrawal from the TPP”. . . .

“China would be the big winner, with [South] Korean president Moon [Jae-in] harder pressed to maintain present levels of security cooperation with the United States. If China is your key economic partner, there’s a lot less reason to listen to Washington.”

Putin’s gamble backfired.  Once it became clear that the Russians tried to influence the election, Congress turned against the Kremlin. The sanctions will stay in place.   China’s turned out to be the big winner from Trump’s stupidity.  Steve Bannon also looks like a fool, as the Trump/Bannon policy regime is delivering exactly the sort of Chinese hegemony that Bannon warned us about.

PS.  Perhaps Trump will put tariffs on Chinese steel, thereby assuring that Chinese manufacturers have a cost advantage over American companies that rely on our high priced steel.  Or maybe he’ll start a war with N. Korea.  The possibilities are endless when you are dealing with a mentally unstable president.