Can Hu Jintao Save the Global Economy?
I’ve been fairly critical of European approaches to macroeconomic stimulus, but some pushback I’ve received forces me to acknowledge that there are real limits to what Europe can do in this regard given the institutional set-up and the ex ante debt/GDP ratios some of the major players are facing. In retrospect, the European Union’s institutional set-up involves an implicit assumption that there just can’t be a gigantic global depression. And yet there can! Given the realistic alternatives, I’m not sure that it looks like a mistake even in retrospect (which says more about the realistic alternatives than anything else) but it’s really far from optimal. Consequently, the hopes for recovery—even in Europe—largely focus on the United States. The American consumer has been the motor of demand growth over the past ten years, and the hope is that the machine can be made to work again by turning the motor back on.
Unfortunately, that seems completely unrealistic to me. If you go back in time 18 months, even people who didn’t have the foggiest inkling of what the near-future held in store for us could have told you that US consumption growth could not continue at the same pace. What wasn’t known was how, exactly, the unsustainable path was going to change. But now we know. And though one certainly hopes that confidence and consumer demand can be restored somewhat beyond the low point we’re currently facing, to actually return to the pre-crash level and trend of demand growth is hard to imagine. After all, back then people were consuming by going into debt, debt that creditors were offering them on the assumption that they owned valuable assets. Now it turns out that our assets aren’t actually worth as much as people thought. And given that reality, consumption has to track income, not fantasy asset-accumulation.
I think this leaves us, somewhat disconcertingly, with the conclusion that the fate of the world rests largely on the shoulders of China. We’ve seen over the past ten years that China has the right combination of good-enough institutions and a low-enough starting point to experience really rapid growth in productive capacity. The way the world is supposed to work is that in rich countries people already have a lot of stuff and the prospects for future growth are only middling. Consequently, people save. Those savings, in turn, ought to become investments in poor-but-growing countries where the prospects for very rapid growth (and thus a high rate of return) look better. And since there’s an inflow of investment money, the residents of the poor country, who have many more objective material needs than those of us in rich countries do, can borrow funds to increase consumption.
There’s sound theoretical reasons to think that the world should work this way. Empirically, we underwent a span from the Asian crisis through to the subprime crisis when the world did not, in fact, work like that. The underlying cause seemed to be a belief in Asia that the lesson of the earlier crisis was that you need to stockpile vast reserves. But the theory behind the “money flows uphill” period was always less clear. Now that it’s unraveled, though, we can see that it came down to the (preposterous) idea that real estate values in the United States and a few other countries (Spain, Ireland, UK) could keep rising faster than incomes forever. That was wrong. And now the question, on some level, is whether or not we can get the money flowing downhill again. Right now it’s just sort of clumping up in pools doing nothing.
23 Responses to “Can Hu Jintao Save the Global Economy?”
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March 7th, 2009 at 1:19 pm
This is definitely one of the more foreboding posts…
March 7th, 2009 at 1:21 pm
Sorry, by “foreboding” I meant “terrifying and depressing”.
March 7th, 2009 at 1:35 pm
China still has somewhere around 700 million people basing their livelihood on peasant farming. It would take an economic transition of truly unheralded proportions for that to change into some sort of consumer class very soon.
March 7th, 2009 at 1:39 pm
Here is a good article on why the asians amassed all those dollars:
http://www.nakedcapitalism.com/2009/03/former-australian-prime-minister.html
March 7th, 2009 at 1:42 pm
The worry here has to be whether an increase in Chinese demand is compatible with continued Chinese political stability. Up till now, China’s extreme economic growth has allowed institutions to ignore severe problems. Increasing demand, even demand consistent with robust growth(3-4%), might bring about a reckoning. And noone knows whether the political status quo would survive such an event.
March 7th, 2009 at 1:45 pm
International trade is not the answer. Each large economy will have to vastly increase its own internal public spending for infrastructure and other investments.
No country other than the US can make enough of a difference in trade and we are tapped-out for the next few years.
March 7th, 2009 at 1:46 pm
We can become the world’s consumer again, all we need to do is reduce our use of oil by 50%, and use some of the proceeds to buy Chinese goods. This solution actually works for another ten years. Why not go on another Chinese shopping trip?
March 7th, 2009 at 1:50 pm
I also think a broader distribution of income in the United States could help sustain a lot of consumer demand previously funded by personal debt.
And we have a winner!
March 7th, 2009 at 1:51 pm
Another big worry with this is that China seems to be in some sort of contest to see who can emit the most carbon. If they create a big time consumer class of a billion people on the backs of more and more and more coal-fired power plants and steel mills (and it’ll take a LOT of convincing to get them off that track, since their coal is cheap and available and there aren’t a lot of alternatives readily at hand) then we’re all pretty much fucked. We need to get China (and America, and India) committed to cap and trade yesterday. This was always going to be a problem but if the whole world is now hoping China gets rich quick and starts buying everyone else’s things, then this becomes priority #1 for environmentalists.
March 7th, 2009 at 2:04 pm
Obama is making a huge mistake in propping up the banks. That money is being used to pump air into a burst balloon, when the banks should just take their losses and start over from a new baseline.
That money should all be going into the real economy to create jobs.
March 7th, 2009 at 2:13 pm
The Peoples Republic of China has a $3.28T GDP. The USA has a $13.84T GDP and the EuroZone has $16.91T.
This posting by Yglesias is a prime example of groupthink. For years we have heard about the growing economic power of China, how everything is made there, how many graduates they are churning out, etc. etc. The simple fact is that most of the stuff made in China is junk – the type of things that affluent countries can’t be bothered to make. The corruption in China makes all of their big ticket items suspect in terms of quality and legality – a defective toy is one thing but a defective airplane is a whole nother.
The 400 lb gorilla in the room is the environment. China has been abusing their environment for decades and it is going to bite them in the ass soon. The US and EU has used China and the Chinese people and the Chinese environment for years, and will continue to use their cheap labor and pollute their land and water for years more.
Does Yglesias really thinks that a country with 1/4th the GDP of the US and 1/5th the GDP of the EU is going to save the Global Economy? A country where 100’s of millions live in absolute poverty is going to bail out the rich west? Get real. If Hu Jintao had the kind of power you think he does then life would be a whole lot better for the Chinese citizen.
March 7th, 2009 at 2:31 pm
I think it’s broadly correct that it makes more economic sense for rich countries saturated in capital to lend money to poor growing countries than the opposite, though I don’t think that’s a solution to our current crisis. However, even if it were, the consequences to life on Earth of continuously growing Chinese consumptions are so tremendously negative that we should be rooting for the recession.
March 7th, 2009 at 3:01 pm
China still has somewhere around 700 million people basing their livelihood on peasant farming. It would take an economic transition of truly unheralded proportions for that to change into some sort of consumer class very soon.
Thirty years ago, they had somewhere around 1 billion people basing their livelihoods on peasant farming. The transition is of unheralded proportions, but it is well underway (in India as well). It’s the great story of our lifetimes that almost no one pays any attention to.
Does Yglesias really thinks that a country with 1/4th the GDP of the US and 1/5th the GDP of the EU is going to save the Global Economy?
It’s true China’s economy is much smaller than the US and Europe on an exchange-rate basis. But there are two important considerations that show how important China is:
1) The yuan is almost certainly undervalued massively because of government controls to prop-up exports. As export demand falls away this will be much less desirable for China to continue, so we could easily see a significant revaluation of the currency which would make the economy much larger on this basis. This is also reflected in GDP measures adjusting for purchasing power parity, which shows EU GDP as ~$15B, US at ~$14B, and China at ~$7B. Smaller still, but much closer.
2) Economic growth is in many ways more important than the aggregate amount of activity, and China has been growing at 10% a year, while Western economies average 2-3%. Even given the numbers you site showing China’s economy as 1/5th the EUs, and equal amount of economic growth comes from China. So it’s not unreasonable to hope that sustaining growth in China (and India similarly) could meaningfully soften the drop in the developed economies.
March 7th, 2009 at 3:13 pm
Money flowing downhill? Yeah, right. Can we have magic unicorn ponies too? The rich are rich because they take money from other people, not give it back. If they gave money to other people, they’d be poor.
March 7th, 2009 at 3:48 pm
I wonder what magic words could turn China into the Green World Economic Savior?
It’s gonna happen. You know it is. Unless maybe you don’t want it bad enough.
March 7th, 2009 at 6:20 pm
Money will start flowing downhill when heat goes from cold to hot and water flows uphill. In other news I hear China has made great breakthroughs in their work to develop a perpetual motion machine.
March 7th, 2009 at 10:59 pm
Europeans made the institutions based on the assumption that a depression is impossible and Europeans can unmake them.
I might be willing to give Italy a pass (you haven’t seen pork till you’ve seen Italian pork and I’m not talking about prosciutto).
March 7th, 2009 at 11:09 pm
China’s power is a reflection of US power. If we have a cold, China will eventually have pneumonia. They are in no position to rescue anyone.
March 8th, 2009 at 7:24 am
This would be a phenomenally stupid way for the world to work. What do you do when you’re out of developing economies? Trade with the fish? Go to war to crush someone so they can develop again?
We need to build these things so they don’t require finite situations to function.
March 8th, 2009 at 1:09 pm
Of course, that “way its supposed to work” is based on a flat earth theory of the Macroeconomy in which economies automatically tend to full employment, so “not consuming” automatically frees resources to be used in real investment.
Without that intervention from the magic tendency to tend to full employment (magic, that is, because its built into the structure of the macroeconomic models that rely on it, rather than being a consequence of the observations of real economies), then saving is a residual rather than an act of releasing resource for use in real investment.
And, of course, there is no need whatsoever for cross-border “finance” for low income nations to engage in real investment in productive capacity. If there is opportunities for balanced trade, low income nations can sell things to high income nations and use the proceeds to buy productive equipment and hire experts in putting the equipment to use.
The unbalanced trade which opens the door for growing debt obligations by various trade deficit nations is not in service of the needs of those nations. It is in service of the power and influence of those going concerns that can mobilize financial assets and move them across international boundaries.
March 26th, 2009 at 7:10 am
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April 7th, 2009 at 2:03 pm
I’m new to this blog. Apologize for asking this though, but to OP…
Do you know if this can be true;
http://www.bluestickers.info/ringtones.php ?
it came off http://ringtonecarrier.com
Thanks