Skip to comments.China Derangement Syndrome - Once again, an economic yellow peril is exaggerated.
Posted on 11/24/2011 10:00:44 PM PST by neverdem
The 1979 book Japan as Number One: Lessons for America, by East Asia scholar Ezra Vogel, stoked fears that the United States was about to be outcompeted by the land of the rising sun. And why not? The U.S. had just suffered through a decade of stagflation and was about to enter what was then the worst recession since the Great Depression. By the late 1980s, the case seemed ironclad. "I don't mean to be an alarmist, but I get the uneasy feeling that America is history," wrote Robert Kuttner, then the economics correspondent for The New Republic, in the Los Angeles Times in May 1988. Evidence for this decline and fall? "The total value of stocks listed on the Tokyo stock exchange is now $3.54 trillion dollars, compared to $2.34 trillion for the New York Stock Exchange."
In his 1988 book Trading Places: How We Are Giving Our Future to Japan and How to Reclaim It, former Reagan administration trade negotiator Clyde Prestowitz warned, "The power behind the Japanese juggernaut is much greater than most Americans suspect, and the juggernaut cannot stop of its own volition, for Japan has created a kind of automatic wealth machine, perhaps the first since King Midas."
Two decades later, we know that the panic over Japanese economic competition was greatly exaggerated. Today the total value of the New York Stock Exchange is nearly three times that of Tokyo's. Japan is not Number One. In fact, as of last year it became Number Three, behind China.
Twenty-five years ago, Japanophobes (or should they be called Japanophiles?) were fretting about the differential economic growth rates of the United States and Japan. At times in the 1980s, Japan's gross domestic product (GDP) was growing at nearly 10 percent per year, whereas American GDP was increasing at a merely respectable 4 percent. (All figures are unadjusted for inflation.) Had the growth rates continued at those levels after 1988, Japan's overall economy would have caught up to ours within 10 years.
Instead, the Japanese financial bubble burst. In 2011 the country's GDP in current dollars is $5.5 trillion, compared to the American total of nearly $15 trillion. Per capita GDP (adjusted for purchasing power, a measure of what it costs to purchase similar baskets of goods and services among countries) for Japan is $34,000, compared to $46,000 for Americans. Japan has suffered through two decades of stagflation, and you no longer hear anyone recommending that the U.S. adopt Japanese-style top-down industrial policy as an economic panacea.
So now comes China. "We are getting our clock cleaned by Chinese state capitalism," wrote Robert Kuttner, now editor of The American Prospect, earlier this year at The Huffington Post. Massachusetts Institute of Technology economist Simon Johnson piled on at the annual conference of the American Economic Association, declaring, "The age of American predominance is over. The [Chinese] Yuan will be the world's reserve currency within two decades." The conservative Citizens Against Government Waste even aired a television commercial featuring a Beijing economics class in 2030 in which a professor explains how America became indebted to China. The professor concludes, "So now they work for us." The class chuckles knowingly.
This gloomy message of American decline relative to China appears to be seeping into popular consciousness. An April 2011 poll by Xavier University found that "a stunning 63 percent believe that the Chinese economy is more powerful than the US economy."
"The U.S. could lose its status as the world's biggest economic power within five years," reported The Daily Mail in April. The Mail article was based on calculations released by the International Monetary Fund projecting that total Chinese GDP, adjusted for purchasing power, will surpass U.S. GDP by 2016.
Can that be? Let's do the math: China's total GDP is around $6 trillion today. Assuming 10 percent GDP growth for the next 20 years, China's GDP would rise to $40 trillion. If the U.S. economy grew at, say, 3 percent a year, total GDP would be $27 trillion. Back in 2007, before the financial crisis, the investment bank Goldman Sachs issued a report projecting that Chinese GDP would be $26 trillion in 2030, compared to $23 trillion for the U.S. It bears noting that current Chinese purchasing power per capita is about $6,000, compared to $46,000 for Americans.
But it is unlikely that China's economy can sustain 10 percent annual growth for two more decades. Economic history suggests that once countries catch up with leading economies in terms of technologies and business management, growth slows down. Consider what would happen if Chinese growth slows to 5 percent. Assuming sustained respective 5 percent and 3 percent growth rates for China and the U.S. for the next two decades, China's total GDP would reach just $16 trillion, not $34 trillion. In 30 years, it would grow to $26 trillion, by which time U.S. GDP would be $36 trillion. In 40 years, China's GDP would be $42 trillion, compared to our $49 trillion. All in all, it would take China a half-century to catch up.
Just to be clear: Anyone who thinks that they know what purchasing power parity might be between any two countries by 2060 is seriously deluded. Calculations like thesemine and Goldman Sachs'can only provide rough possible scenarios for the economic future.
Of course, theres no guarantee that U.S. growth will remain steady at 3 percent. As the recent history of Japan shows, it is possible to adopt economic policies that produce decades' worth of economic stagnation. In that case, China's GDP may well surpass ours sooner rather than later, although perhaps not for the reasons alarmists predict.
Then again, China has already picked most of the low-hanging fruit, economically speaking. Future productivity increases will not come from merely copying technologies developed in other advanced countries. Furthermore, continued rapid growth depends on the kind of innovative management that can thrive only in open societies. Unless China makes the transition to an open society, its future is not growth but stagnation and political disillusionment. And if it does make that transition, then China will be a partner, not a rival.
It would be wonderful for China and the whole world to see China open up politically. Christians are a silently growing portion of China, and the Lord may grant them to be a sane influence there, ironically around the same time as they are declining in influence in the United States.
I believe Reason acknowledges this. China has to open up politically. It’s in the last paragraph or so.
It isn’t in the cards—China historically looks inward not outward. I see a break up of the Chinese Nation and Civil War, followed by a toppling of the elites in the Communist Party—people who have rejected the qualities of egalitarian Communism for Capitalism that makes a few rich and the masses poor. Marx is spinning in his grave. They will go back to something more like the Nationalist Party and a Neo-Nazi like system—its that or bring back the Emperors.
The only way they'll "open up politically" is if you use a nuclear-powered can opener. They're just about as radical and zealous as the Mullahs in Iranthey want communism to take over the world, literally.
China has to open up politically
One thing this study completely misses - it’s based on a 3-4% GDP growth for the US. We’ve had 3 years in the negative or sub-2% range, and we’re going to have that for the next 3-4 years. That cuts the timeline down from 20 years to just 6 years before China passes us.
Doesn’t take very long at all, when your “competition” is doing 8-10% per year and you’re struggling to just hold at zero.
There is a demographic bomb which cuts in several directions. The country is undergoing a 19th century transition from farm to town while it confronts a self-induced shortage of women. The leaders of the country are confronted with the imperative to produce tens of millions of jobs a year or face increasing civil unrest.
A second anomaly is the general dissatisfaction across the vast country with the corruption and inefficiencies of the economic system leading to riots somewhere in China virtually 24/7. The leadership of a top-down economy must either loosen its grip and risk having these uprisings grow out of control or tighten its grip and risk shutting down entrepreneurship, innovation, capital formation, and the growth which it desperately needs.
A third anomaly is the corruption which is not just throughout the economy but represents the way of life. The central government finds that it cannot properly control its provincial party functionaries and bankers whose interests are often at variance with the central planners. Therefore, like our soldiers in Vietnam who lied to Secretary of Defense McNamara about body counts, the provinces lie to Beijing sending reports up the chain which will keep Beijing off their backs. Therefore, there is no real transparency and nobody knows truly what the numbers are even if they wanted to make them known.
A fourth anomaly is the fact that China has traded its environment for economic growth in a desperate attempt to keep pace with its demographic bomb. The ability to exploit the environment for growth is coming rapidly to an end and with it one can expect an end to rapid growth.
China must ultimately convert from a mercantilist export economy to an economy more oriented toward consumption and therefore self-sustaining. The problem is that if central planners make one misstep the whole process comes apart.
For example, if central planners do not tighten enough the inflation rate in China will run away. If they tighten too much, it crashes. They must do this in the absence of transparency so it becomes doubly difficult to centrally plan. They must do this while risking the deflation of the real estate bubble which, when it occurs not if, will be absolutely devastating. They must do this in the face of varying demands, undoubtedly shrinking demand, from their markets in America and Europe. Europe is disintegrating and Germany, according to Goldman Sachs, just went into recession. China faces the problem of shrinking markets as it tries to transition to a self-sustaining economy.
International competition is also cutting in Chinese manufacturing domain.
There are many more problems such as dishonest books in provincial banks and a series bogus accounting principles done by the central planners to take nonproducing loans off the books. These shenanigans must ultimately have their day of reckoning.
It is absolutely foolish to project a straight line growth in the Chinese economy. One can only think of the analogy of the manufacture of a pencil to show the folly of top-down planning for a controlled economy. Virtually anyone of these anomalies or some other black swan event could send China into a vortex.
That is not to say that China will not be a superpower, it already is, and it is not to deny that its trajectory is up while ours is down. It is say that only a fool projects straight lines.
How much does modern China care about ancient Chinese history now? It seems the Communists have cut them off from the ancient philosophy (which overwhelmingly rejected anything like modern communism), and so they are shallow. This could work to good as well as ill for the advent of a newer philosophy.
“.....if [China] does make that transition [to an open society], then China will be a partner, not a rival.”
Germany and Japan made that transition.
Why not China?
They are VERY slow and VERY hierarchical. Rife with corruption.
They think they are very smart strategically, they think Americans are lazy.
They are arrogant.
They do not understand some things that are essential for success.
They have had an enormous advantage up until now because of the nature of the way things work there and the way things work in the large free market economies and in the third world.
The conventional wisdom of “big” investors has propelled them and held back America up until now.
Just view this program to get an idea about this...
Arrogant big investors (those who are wealthy or who manage large funds) are scared silly of unrest amongst the world’s poor. They seek to parrot their feelings and project sympathy for and unity with them. They actually do not have to worry about that, it is a fearful kneejerk reaction on their part. Instead, they should be worrying about a few dramatic imbalances in their own financial world that they have caused - while working in concert with politicians - by kneejerkily getting way too involved with said politicians. While they cluelessly blabber instead of unwinding positions and shutting down operations, they are creating enormous financial problems.
There is no need or responsbility for monied interests to direct and guide the world; they simply should do their job and go home. They could help by simply using their influence to pressure governments to not borrow money. But they are so “smart” in their own minds, they can’t see the forest for the trees.
$15 trillion invested in Treasuries yields a stream of future payments that come from tax dollars on the citizenry.
This basically boils down to this: monied interests, instead of only investing in businesses have taken the easy way out in $15 trillion worth of their investing strategy - they have the government collecting the interest on their bonds from the citizens.
Trouble is, they took it too far and too much debt has been issued by not only the U.S., but most goverments of the world.
Let not your heart be troubled.
I agree with the assessment. China is not a free country... though in some respects Chinese are more free than they were in Mao’s time. They can become rich, they can have a good life, they can even travel abroad. Chinese are asked in return not to challenge the Communist monopoly on political power. At the same time, a transition to democracy is inevitable and it will take a “soft” landing. The Communist leaders are well of it and the party is already preparing for that time when it will have to compete in a multi-party system.
The former, no, not exactly; they faked it very well though, for those that couldn't understand what they were looking at. The latter, there are signs of it slipping back.
Germany and Japan made that transition
Um, maybe because we keep reinforcing their communist regime?
Why not China?
Europes debt crisis takes toll in China as exports slow
(may run trade deficit soon)
People (especially GOP economists and pundits) keep assuming that we’re going to be able to recover 3%+ GDP growth per annum “sometime soon.”
That’s nonsense. The pattern of western economies going through debt deflations is that, on average, the GDP output is suppressed for about 7 years, on average, with longer episodes recently very visible.
Take Japan, for an example. Their economy underwent a debt deflation in the early 90’s. They STILL have not recovered their GDP growth of the early to mid 80’s.
From this URL:
Select January 1981 as the first point for the graph, leaving the back end as November 2011. You can see the clear “before” and “after” GDP growth patterns centered around their debt deflation and financial crisis.
Now, people like the libertarians (who presumably are against wholesale government spending, but alas, libertarians seem to be against government spending until their free trade theories cease functioning... then they’re willing to toss both sound money and government spending controls overboard) seem to deliberately ignore how much Japan has had to spend to prop up their economy to achieve only 2%+ GDP growth, on average. The debt:GDP ratio is over 220% in Japan. They’ve gone from being only 30% debt:GDP in the late 80’s to 220%+ now. And now they’re deliberately gutting the yen to prop up their export market(s), but most especially their exports to the US.
The clowns who are really out the window are those who claim that their assuming 4% GDP targets - eg, Paul Ryan. These people are living back in the pre-2000 days.
Configure this chart to ask for GDP’s from 1947 to today. You can see two real turning points in the US economy:
About before 1986, we not only had quarters where we’d have 4%, we would have quarter-after-quarter of more than 4%. We had quarters of 10% GDP growth, which are now flights of imagination any more.
After 1986, while we still achieved quarters of 4 to 5% frequently, there became no quarters of > 9% GDP growth any more.
After 2000, we see only two quarters of 5% GDP growth. Most quarters are under 4% - they’re somewhere in the 3%+.
Going forward, I would now expect the 3% quarters to be unusual, and we’re now stuck in Japan’s situation of mediocre growth, much of which is dependent upon government spending.
China doesn’t have to do any such thing.
I find it cute how these pinhead yahoos at some botique magazine published out of DC have the hubris to tell China what they “have” to do.
China needs to keep developing rapidly so that it drags people out of poverty. however, once it crosses a certain boundary, people will demand a better quality of life and more political power. Also, the demographic trend is against them -- by 2020, they should be aging rapidly and will have younger countries like india, Bangladesh etc. competing against them.
in this they share the same imperialistic ambition that the KMT had - the Middle Kingdom dominating all.
Did you actually read the article? It doesn’t even address whether or not China has an adversarial attitude, it just talks about economic reality.
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