Reply to Yichuan Wang

[I just noticed that Matt Yglesias did a reply that is superior to mine, so I suggest you read his instead.   But I hate to throw away my own typing . . . ]

A few days ago I asked the following:

So here’s my question for all of you China skeptics that insist they are building way too much housing, infrastructure, heavy industry, etc.  What precisely do you want them to build more of?  And what are the 100s of millions of Chinese living in tiny ramshackle homes to do?  Sit tight for a few more decades while resources pour into nice urban services for the pampered elite?

And then Yichuan Wang replied as follows:

I want them to start building leaf blowers, so we don’t have so many Chinese people in the low productivity position of sweeping streets. I want them to start building farm equipment, so we don’t have so many Chinese farmers tending the fields. I want them to build more laundry machines, to free the rural Chinese from scrubbing clothes on washboards. I want them to build electric stoves, so my Grandpa can put away the coal fired outside oven. I want them to build computers that can deliver cheaper education to the masses.

Instead of just focusing on “building,” I want them to invest in human capital, so productivity can be at a level that we don’t need “make work” jobs. I want them to build more schools and hire better teachers, so classes aren’t as large and you’re not damned if you can’t make it in a top elementary school. I want productivity to be high enough that high end stores don’t need more clerks than actual customers.

I want these things among many others that will only be more obvious in a freer market.

First a bit of context.  Despite my sloppy wording, I was actually pushing back against two claims; that China is devoting too few resources to consumption, and too much to housing.  Although Yichuan’s answer is certainly more persuasive than my post, I’m still not fully convinced:

1.  Several of the items mentioned are investment, not consumption.  These include schools and farm equipment.  No argument there.

2.  Why not go beyond leaf blowers and buy US-style machines to clean streets?  China’s already much too dusty and Beijing now has these machines.  Of course that would be investment as well.  Yichuan wants higher productivity.  So do I.  You get that via investment (and market reforms.)

3.  I noticed that almost the entire Yangtze River delta is covered in new homes.  As far as I know the homes built by those millions of farmers are not subsidized.  They are purchased by farmers from local private sector contractors.  Applying the doctrine of revealed preference, it seems that almost every farmer in that part of China wants a new house at fair market prices. 

4.  Yangtze River delta farmers are rich by the standards of rural China, but less so relative to urban China.  Thus as more and more Chinese are moving into the income levels seen in the rural Yangtze delta, I’d expect an explosion of housing construction, even if China had a 100% free housing market.  The hard truth is that the Chinese people are currently willing to pay very high prices for houses, relative to the cost of production, and realtive to their incomes.  Are the Chinese people “wrong” to be willing to pay so much?  Yes, other investment opportunities are limited.  But it’s not at all obvious to me that these distortions are the main factor pushing up home prices.

5.  I’m not sure the more ramshackle rural homes in the poorer parts of China are set up to take modern home appliances, but that’s just speculation.  In general, new home construction tends to trigger demand for more home appliances.

6.  Like Yichuan, I’d like to see the market allocate resources in China.  In fact, to a surprisingly large extent it already does so.  But I share his concern that the government is probably mis-allocating a lot of capital on showy projects (like manned space flight) that are less useful than new schools.  I was not trying to argue that the Chinese government allocates resources efficiently.  That’s a different question from whether China invests too much, or from the question of whether China builds too many houses.

7.  Chinese car and motorcycle ownership rates are soaring, and yet highway accident deaths are plunging (from 81,000 in 2007 to 62,000 in 2011.)  Could that be due to their massive highway building program, involving lots of divided highways?

8.  Subways are extremely crowded in China.  In a few decades China will have dozens of cities that “need” subways just as much as New York, Tokyo, London and Paris “need” subways.  I can’t even imagine those four cities without subways.  But here’s one problem; today New York is too rich to build a subway system–wages are too high.  If China doesn’t build subways when it’s a developing country, it might later find itself too rich to build the system when it is desperately needed.  Global real interest rates on long term bonds are near zero (think in terms of the opportunity cost of all the capital tied up in China’s holdings of US T-bonds.)  One could argue that it’s a good time for China to build lots of subways, and also borrow lots of money from the West to build lots of schools.  But maybe not, there is that looming demographic/pension/health care nightmare.  In other words, I have little confidence in my opinion of what China’s government should be doing in the area of investment, and I have only slightly more confidence in Yichuan’s opinion.

PS.  I am not able to access Yichuan’s blog in China, so I linked to a Tyler Cowen post where I found the above quotation.

PPS.  I am reading Ronald Coase’s excellent book on China, and hope to do a post soon.



10 Responses to “Reply to Yichuan Wang”

  1. Gravatar of Saturos Saturos
    28. August 2012 at 20:39

    Should Yichuan be proud that his blog is blocked by the Chinese authorities, whilst yours is not? (Or does him being non-rez Chinese qualify him automatically?)

    The question is not whether the Chinese economy allocates resources quite efficiently, everyone here seems to agree it doesn’t, but whether the housing vacancy phenomenon should be interpreted as a clear sign that it doesn’t. So your 1st two points don’t establish that there isn’t too much housing relative to other output. About the farmers’ revealed preference, for that to work, there has to be a competitive supply side where the market *could have been* producing other things (eg. leaf blowers) but the fact that it is putting out houses shows that people do in fact prefer them. If the market is distorted “one level up”, so that the capacity to produce (or to enter the market for producing) leafblowers is not there (as opposed to just subsidizing housing supply), then even revealed preference doesn’t prove that the Chinese economy fully satisfies all the utility it can (depends what you have to choose from). So I find Matt’s more general a priori argument for the necessity of housing more persuasive. Ironically, the Austrians would argue (a priori) that there is no correct a priori argument for any particular production, as it is true a priori that only the market “knows” (or should that be “market”) what optimal production is.

    More generally, I think Tyler is reverting to some Austrian instinct whenever he touts his “Austro-Chinese” business cycle theory. The Chinese economy is still plenty unfree, so it “ought” to “pay the price” for that at some point, or alternatively it can’t really be doing as people think it is (even after correcting for people who don’t realize how poor China still is), and that must show up in an obvious way eventually. I.e. China is a (lesser) Soviet Union overhype story. In fact I don’t think you even can really support Austrian theories without taking on the Austrian (highly charged/ideological) mentality. Tyler pretends to be ecumenical as he promoted these ideas in the NYT, but he has to have some poignant sympathies, or you can’t even believe these things.

    ” today New York is too rich to build a subway system-wages are too high”

    but that should be interpreted as: “the opportunity cost of subways is too high (relative to the imputed value of another subway). Is that true for China too? It’s not that Chinese workers don’t have other useful things to do; their labor is cheap because their physical product is low, which surely holds for subway-making too. So it’s not at all obvious that subways are more desirable in China than New York (except through a priori arguments like Yglesias’), and skeptics would argue that we don’t really know unless the market is free. (Of course if an unfree market is relatively bad, then GDP figures can’t be used to prove that, as they too reflect the distortion. We have to rely on the kind of anecdotalism you used earlier.) But it isn’t clear whether it’s appropriate to argue that present underuse of state-directed construction shows its inefficiency.

    P.S. what do you think of ModeledBehavior’s argument (on Twitter) that it is inefficient (or perhaps irrational) for Evan Soltas (and I guess also Yichuan) to be going to college? There was a reference to Mark Zuckerberg’s opportunity cost of college.

  2. Gravatar of Jim Glass Jim Glass
    28. August 2012 at 22:33

    New York is too rich to build a subway system-wages are too high.

    That’s not why NYC would not build a subway system from scratch today (I say as a NYCer).

    Subways make no sense logistically for cities constructed and laid out after the arrival of the automobile — they are huge money-losing boondoggles for those cities.

    Subways work in NYC (London, Paris) because they were built *before* the arrival of the automobile. NYC grew organically along the subway lines, with population and city centers of all kinds located on the lines or within walking distance of them. And, and of course, once built along the lines all those city centers stayed on the lines.

    The (explosive) development and expansion of NYC along the subway lines in the first decades of the last century is really a fascinating story. But the operative word is “lines”. NYC and other such pre-auto cities were built on the *lines* of trains that connected them.

    Cities built after the arrival of the auto were built on plains, in flat-land. They’ve grown on the principle of lateral transportation, not linear transport. They do much, much better with buses, vans, vehicles that can operate in any direction, point-to-point, instead of only along lines. Trying to retrofit subway systems into them on the dream that they will somehow function like NYC’s is hugely costly naiveté.

    I don’t know about the layout of Chinese cities or how this would relate to them, but this is sure how things work here.

    Hey, I live in lower Manhattan right where all the subway lines come together, connection central, I can get anywhere on them, use them all the time — and still pay a small fortune to keep a car here. Sometimes there is just no substitute for point-to-point, taking a direct route when the subway line would run you through a neighboring borough, having a trunk to carry things in, being able to pack the kids’ friends in the back seat. That’s why even in NYC subway demand today is nothing like it used to be in the old days.

  3. Gravatar of Jan Jan
    28. August 2012 at 23:27

    Scott, just remotely access your Univesity network in the US with VPN and you should be able to read whatever you want. I did it myself very recently, it is astonishingly easy to get around the Great Chinese Firewall.

  4. Gravatar of Saturos Saturos
    29. August 2012 at 00:03

    Ooooh, forgot to ask, did you guys discuss this stuff when you met in Shanghai?

  5. Gravatar of Ben J Ben J
    29. August 2012 at 03:58

    Inefficient for them to go to University? Didn’t we all agree that uni (Saturos, I know you’re Australian mate) is mostly a signalling process?

  6. Gravatar of John Thacker John Thacker
    29. August 2012 at 04:27

    Scott and Jim Glass,

    regardless of how rich NYC is, there’s no getting around that building mass transit is far more expensive per mile in NYC (and most everywhere in the US) than in other rich cities and countries. In the case of NYC, it’s something like five times as expensive.

    China could perfectly be able to wait to build a subway, so long as it doesn’t adopt dumb rules. Indeed, waiting can be a good idea if the worry is that archaic work rules will get fixed in place if something is built now.

  7. Gravatar of RPLong RPLong
    29. August 2012 at 05:29

    Why do people insist on ignoring the Chinese elephant in the room? China’s main problem is that cadres and insiders are the only ones who are allowed into the elite jobs. I personally know dozens of Chinese expatriates living abroad not because they want to but because they cannot find suitable work in China. The jobs exist, but they all go to insiders.

    That is China’s problem. It’s social, not economic.

  8. Gravatar of ssumner ssumner
    29. August 2012 at 06:19

    Saturos, The non-availability of certain blogs is unrelated to politics–it has something to do with which platforms are avaiable here. Yichuan can explain it. I get Krugman but not Mankiw, and Krugman is very anti-China.

    Those two guys should not go to college, they should start right off with grad school! Seriously, I think they are making the right choice.

    Jan, If I knew what terms like “remotely access” “university network” and “VPN” meant, it might be easy for me. But alas . . .

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