Did Financial Innovation Cause Deng Xiaoping’s Economic Reforms?
Eugene Fama makes a curious claim on behalf of financial innovation since 1980:
But suppose we buy into the more common negative current view of finance. There is still a big open question. Beginning in the early 1980s, the developed world and some big players in the developing world experienced a period of extraordinary growth. It’s reasonable to argue that in facilitating the flow of world savings to productive uses around the world, financial markets and financial institutions played a big role in this growth. Despite any role of finance in the current recession, are the market naysayers really ready to argue that worldwide wealth would be higher today if financial markets and financial institutions didn’t develop as they did?
A banker in Frankfurt put this same point to me, apparently believing it’s a brilliant argumentative trump card. In reality, it’s a bit nuts—it’s relying on a post-1980 boom that didn’t happen. The United States didn’t start growing faster in 1980:
The claim you’re supposed to make on behalf of the post-1980 US economy isn’t that it’s grown faster (it hasn’t!) but that it’s been less variable than was growth in the early postwar decades. That’s why the term “Great Moderation” was termed. Except in the wake of the current bust, it’s clear that no such decrease in variation was actually achieved. Growth has been the same as it was before, and yet median income growth has been substantially slower. In Europe and Japan growth post-1980 has been much worse than growth was in the previous decades.
The place where growth really has been much better since 1980 than it was before is China. This is not a fact to be neglected. Chinese growth has been very rapid, and very consistently maintained. And a very large number of people live in China, people who started this process being very poor. The past 30 years’ worth of economic growth in China have done an enormous amount to improve human welfare.
But the cause of this turnaround pretty clearly wasn’t financial deregulation in the developed world. It was policy shifts in China—the process, commenced by Deng Xiaoping, of moving away from central planning and joining the global economy. This doesn’t strike me as even remotely debatable. When we look at impressive growth over the past 30 years were looking at policy shifts in China, the success of container shipping, and to an extent shifts in developed world trade policy.
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Europe’s China Problem
Paul Krugman has a wise column about the havoc being wreaked by China’s refusal to let its currency get more expensive relative to the dollar. Krugman thinks we should be trying to do something about this. But as Dan Drezner observes, though China’s dollar-linkage policy is a problem for us, it’s a much bigger problem for Europe and other developing countries:
As a matter of direct economic interest, however, why haven’t the Europeans and East Asians been screaming bloody murder about this? China’s policies are forcing them to take actions they don’t want to take — so why aren’t they complaining more loudly about this?
Why?
Optimistically, it’s been my experience that members of other countries tend to have a better appreciation than America does that making loud public demands is often a counterproductive diplomatic approach. But one has to fear that the real culprit here may be the European Central Bank’s weird deflationary bias.
Chinese Democracy
Daniel Strauss asked via twitter what I think of this idea from Sidney Rittenburg:
If you had a second party alternative in China now, I think it would be an anti-foreign party. What else could you see as a platform to challenge the Communist Party, but to oppose the foreigners who are “buying up Chinese resources”?… There has to be a period of generally unfolding democracy. Not bang, all at once. And I think that will happen. I think it’s happening much too slowly.
I think it’s hard to know how exactly to evaluate that claim without specifying the counterfactual in more detail. What I do think is true is that people are sorely mistaken if they think a more democratic China would also be a China that’s less inclined to challenge US hegemony. The present Chinese leadership is almost entirely focused on economic growth and full employment as a way to stay in office. Some alternative version of Chinese politics would have more time for other projects.
Mansfield & Snyder argue persuasively in Electing to Fight: Why Emerging Democracies Go to War that countries experiencing a transition to democracy are unusually likely to start wars. Basically it’s a good way for leaders in emerging democracies to corral public support.
Robust Debate at CNAS
Andrew Exum clues us in to the big inter-office controversy at the Center for a New American Security—is counterinsurgency a dangerous distraction from the need for a war with China:
This may surprise some of you, but within the walls of 1301 Pennsylvania Ave., there is a pretty lively debate among the scholars and staff who work here about whether or not we should continue a counterinsurgency campaign in Afghanistan when we might instead be focusing on preserving our energies for rising powers. Obviously enough, those of us who work on Afghanistan and counterinsurgency feel one way (more or less), while those who work on China and the rest of Asia feel another way (again, more or less — it’s not a black-and-white disagreement)
I suppose you can therefore construct the following esoteric argument in favor of an ambitious COIN strategy in Afghanistan. Such an approach would probably be an unnecessary waste of resources in some absolute sense, but it’s a much better idea than an actively counterproductive anti-Chinese defense buildup would be. So if we assume the military-industrial complex has the ability to extract a more-or-less fixed quantity of resources out of the productive sectors of the economy, difficult COIN missions in backwater regions seems like a relatively benign application of those resources.
Joking aside, it’s worth keeping in mind when you see arguments about counterinsurgency that there are really two different debates happening. One is the debate inside the military and the defense policy establishment which is really a debate about COIN versus non-COIN military activity. Another is a debate about that pertains to the larger question of the strategic and budgetary priorities of the United States. In my experience COIN enthusiasts tend to have the better of the limited argument about the relative allocation of military resources, but generally decline to engage in a serious way with the larger question of national priorities. In other words, a debate that ranges from “we should fight a series of small wars against Muslims” to “we should prepare for a big war against China” is really seen as “lively” rather than incredibly cramped and narrow.
Financial Mutually Assured Destruction
Noam Scheiber has a fascinating article on Chinese worries about the U.S. budget deficit and American policymakers’ efforts to calm those fears. The piece doesn’t really point to a hard-and-fast conclusion about how to resolve the situation and that’s more or less the problem:
The day China consumes more, relies less on exports, and accumulates far fewer dollars as a result can’t come soon enough. There’s a certain mutually-assured-destruction quality to our current relationship–Larry Summers calls it the “balance of financial terror”–in which one false move by either side could bring down both economies, and probably the entire global financial system, too. This makes dialogue a necessity. But what it really does is make you pine for a way back from the edge.
As The Atlantic’s James Fallows has pointed out, even if both sides behave responsibly, there’s the persistent risk of miscalculation–or maybe a rumor that triggers a bond market sell-off China didn’t intend. During the cold war, the hotline Kennedy and Khrushchev established was genuinely stabilizing, but it would have been far more stabilizing had the United States and Soviet Union stopped training thousands of nuclear warheads at one another. If, to stick with the analogy, the U.S.-China relationship is only in the early 1960s, then it’s going to be a long couple of decades indeed.
It strikes me that any rational person looking at how the health care debate has unfolded is going to grow substantially more skeptical about the ability of the United States to pass major legislation in general. What’s more, if you contrast the health care situation with the relative ease with which it was possible to enact debt-financed tax cuts (in 2001 and 2003) and a debt-financed increase in Medicare spending (in 2003) you’re not going to get super-optimistic about the prospects of deficit reducing legislation passing in the future.
Trains: The Moral Equivalent of Trains
SNCF Train à Grande Vitesse, Paris (wikimedia)
Noam Scheiber has an interesting article in The New Republic laying out in some detail why even though the recession may be over real recovery is likely to take a long time. The basic issue is debt overhand. During a bubble, most people and firms began acting as if they owned lots of very valuable assets against which they could borrow money. Then the bubble pops, and it turns out that everything everyone owns isn’t worth as much as they thought. But their debts still are! That means that spending relative to income needs to become a lot lower than it was during the boom, and stay a lot lower for quite some time until things can balance out again:
Absent a strong demand for exports, the most plausible way for a country to crawl out of this kind of recession is for households to keep paying off debt until they can afford to spend again. Indeed, as Paul Krugman argued in a recent lecture series at the London School of Economics, the reason the United States didn’t slip back into depression after World War II–something many economists feared at the time–is that, 15 years after the initial crash, people had finally put their finances in order.
The trouble is that fifteen years is too long a time. What’s needed is something to spark an investment boom. Scheiber wants that to be industrial policy:
So far as I can tell, the only solution to the underlying economic problem is something that’s been a dirty word in Washington the last generation or two: industrial policy (that is, an active government role in the development of certain industries.) In his LSE lectures, Krugman quipped that “if someone could invent the 21-st century moral equivalent of the railroad, or actually even the moral equivalent of IT in the ’90s, that would help a lot.” I agree–that would help a lot. But waiting around for this to happen seems risky when the alternative is a decade of stagnation.
He thinks industrial policy can solve this problem. I think this is a bit like solving your problem by assuming a can opener. The problem with industrial policy isn’t that good industrial policy wouldn’t be a good idea, the problem is that nobody knows how to do good industrial policy on a systematic basis. If you scour world history for examples of industrial policy paying off you’ll find some, but you’ll also find tons of failures. Simply wanting it to work doesn’t resolve that issue.
That said, couldn’t the moral equivalent of the railroad be . . . the railroad. High-speed passenger rail is not, in fact, a brand new technology but from the perspective of the United States it might as well be. After all, we currently have exactly zero miles of true HSR coverage in this country. None. And it’s not even remotely a speculative technology it works perfectly well. It’s just expensive to build. Very expensive. But insofar as the idea is actually that we’re looking for very expensive medium-term investments that’s more feature than bug. For that matter, there’s also the very old and extremely proven technology of intra-city heavy rail, i.e. metro systems. Digging subway tunnels underneath developed portions of growing metropolitan areas, packing stations relatively close together, and allowing greater density to arise near the stations is an absolutely proven strategy for driving fixed investment and spurring growth. Again, the reason not to do it is that it’s extremely expensive. But if the view is that we ought to spend huge sums of money on something, this strikes me as more promising than hoping the government can direct future technological development.
Alternatively, Ryan Avent hopes Chinese demand can save the world.
Planning for the Future
Yesterday I found myself reading with interests about the Chinese government’s plans for expansion of the Shanghai Metro. Very sensibly, there’s not only an ongoing expansion plan designed to last through 2020, but there’s also an even longer-range plan looking forward to 2050. This seems like the right way to do it—everyone expects Shanghai to continue growing throughout this period, so it’s only sensible to operate with a long-run plan in mind. A plan that’s subject to revision, to be sure, but that can guide current decision-making and ensure that there’s always some more projects ready to come online if the resources become available.
What’s striking is the extent to which we don’t operate like that here in the United States. I think everyone believes that over the next couple of decades the Washington, DC metro area will continue to add population. And people likewise clearly envision there being additional square feet of office space in the District and they’re also envision an increase in the District’s population. On top of that, we’re also trying to envision a less carbon-intensive future. All this pretty clearly implies that there ought to be some sort of plan in place for building additional Metro capacity through the central city. After all, the system is currently near its capacity for moving people, and the lack of any redundancy is already hurting us badly whenever any kind of problems arise.
Of course with plans in place the question would still arise of whether or not it’s possible to find the funds necessary to execute the construction of a new core-serving line. But my point would be that first things should come first, and you should always have plans in place so that you can be prepared to make the case for funding and think logically about the design of the metro area and the role transit can play. Instead, though, when we finish building something we tend to just . . . finish . . . as if further population growth somehow took us by surprise.
Are Chinese GDP Statistics Real?
Well, I think it’s pretty clear that in an enormous, poor, authoritarian country you’re never going to get official statistics that are quite right. But there’s been a lot of disagreement since the recession really hit about exactly how unreliable Chinese economic data is. Officially, their stimulus program is working well and though growth is well down from its peak, it’s still quite robust. But there are a lot of doubts out there, but Jamil Anderlini from the Financial Times casts some further doubt.
The crux of the matter is that in addition to national economic statistics, China’s regions publish numbers. If you tally up the regional numbers, you basically always get a figure that’s higher than the overall national number, presumably because the leadership in each region has an incentive to fudge. And now:
In recent years, provincial figures have suggested consistently the world’s third-largest economy is bigger than Beijing’s published estimate, but the discrepancy appears to have widened this year.
Even state-controlled media reports and editorials have in recent days raised questions over their accuracy.
The Global Times, controlled by the People’s Daily, the Communist party mouthpiece, reported that the public reacted with “banter and sarcasm” to NBS figures showing average urban wages in China rose 13 per cent in the first half to $2,142.
John Makin has a helpful explanation of how China does national accounting statistics and how that interacts with the stimulus.
China: A Large Country With Which We Should Avoid Fighting a War
People Liberation Army Navy Sailor (wikimedia)
What Spencer Ackerman said:
John Cornyn said that we need the F-22 to fight our ally India, which is, you know, fucking crackers. According to Eric Kleefeld, he’s now clarified that to mean we need the plane in the event that we’d fight China. It’s kind of amazing that such a clarification is considered less insane.
It’s not inconceivable that at some future point the United States and China could become locked into some sort of worldwide Cold War-style conflict. But it’s crucial to recognize that a world that looks like that is going to be a stupendously bad future—in terms of economic growth, in terms of the prospects for human rights and democracy around the world, in terms of the global environment, etc.—compared to the future in which the U.S. and China are able to maintain a basically cooperative relationship. Building a dedicated “let’s go to war with China” weapons platform is going to make the conflict scenario more likely and the cooperative scenario less likely.
The Lure of the East
Eric Rauchway posted this map showing per capita Coca Cola consumption around the world in 1996:
It’s fascinating to consider how much money could be made if 15-20 years from now consumption in China and India is up to the level currently seen in, say, Brazil. Coke’s most recent annual report indicates that Chinese consumption of Coca-Cola Company products increased from eight servings per capita in 1998 to 28 in 2008.
What’s Happening in Xinjiang?
Russell Leigh Moss offers up a very helpful op-ed in The New York Times that helps lay out some of the background for recent violence in China’s Xinjiang province, spelling out the region’s native Uighur population’s various grievances. He also argues that the Chinese government has gotten really, really good at crushing unrest and there’s little reason to think the regime can be forced to change from below.
Meanwhile, National Review’s Andy McCarthy seems to have decided that since Uighurs are Muslims, violent Communist Party crackdowns must be a good thing.
U.S., Russia Agree to Large Nuclear Arsenal Cuts
Mushroom cloud over Nagasaki
One problem in the international realm is that unproductive conflicts between nations are exciting and headline grabbing, while amicable positive-sum interests tend to be a bit boring. Thus Barack Obama heading to Russia, focusing his summit activities on an issue where agreement was likely, and coming away quickly with an agreement in principle to hammer out the details of big bilateral cuts in nuclear arsenals hasn’t attracted much attention. If Obama had done something much less intelligent and gotten in a big, but ultimately pointless, public argument with the Russians about NATO membership for Ukraine or something it probably would have gotten more play. But agreement is good and conflict is bad. Leaders who seek agreement should be rewarded. And it ought to be noted that what’s been agreed to is a pretty big deal:
Arms-control analysts who support Obama’s determination to conclude a new START agreement say that the stated reductions are significant because they are realistic enough to receive the legislative-branch ratification required in both countries, yet ambitious enough to act as a first step toward Obama’s vision of a world eventually free of nuclear arsenals.
“They’ve hit the sweet spot in finding numbers that will be a significant reduction and likely to get the necessary support in their respective parliaments,” says Joseph Cirincione, president of the Ploughshares Fund, a Washington foundation focused on nuclear-weapons reduction and nonproliferation.
The numbers announced Monday, Mr. Cirincione notes, amount to a 30 percent reduction in the nuclear arsenals of the two countries that possess 95 percent of the world’s nuclear weapons.”
In other words, that’s a roughly 28 percent reduction in the total number of nuclear weapons in the world. It’s also a powerful signal to the French, British, and especially Chinese that the United States and Russia are serious about reducing arsenals and that the Obama administration really wants to pursue a nuclear-free world. The fact that the US and Russia contain such a large proportion of global nukes is, after all, a bit of an anachronism as in pretty much all other respects China has clearly replaced Russia as the number two geopolitical player and in some domains the European Union has set itself up as a more-or-less independent great power. It would be very plausible for the Chinese (and much less plausible, though still possible, for the Europeans) to decide they need to react to this situation by “leveling up” and building their own arsenal of thousands of nuclear weapons.
Steps that give the Chinese confidence that they don’t need to do that, that the US and Russia are prepared to level down, will do an enormous amount to help build a more peaceful, more secure world. Not only in terms of the US-China relationship, but also in terms of India’s thinking about its nuclear needs and therefore Pakistan’s thinking and therefore the general problem of proliferation around the world. These reductions, if they come to pass, will be a huge deal.
Tales From the China Lobby
Chiang Kai-Shek (Library of Congress)
For several decades around the middle of the twentieth century, US policy toward China was heavily influenced by the “China lobby,” an amalgamation of evangelicals interested in Chinese missionary work, businessmen interested in the Chinese market, members of the Kuomintang political elite, and Cold War ultra-hawks who pushed the United States toward heavy alignment with the KMT and policies of brinksmanship with Communist China.
Robert Farley takes a look back at their heyday:
The language that the China Lobby used to preclude US rapproachment with China will be familiar to contemporary readers; China was a rogue state that could use its nuclear weapons randomly at any given time, and as such wasn’t fit for diplomacy. At one point, Chiang Kai Shek claimed knowledge of the location of the most important Chinese nuclear facilities, and suggested that he could take them out, if only the US would loosen the leash a bit. The PRC, it seemed, was full of atheist maniacs who didn’t believe that 72 virgins would be waiting for them when they died, and consequently could do ANYTHING. Lousy atheists. Anyway, strategic considerations (and sanity) precluded any meaningful unleashing of Chiang, but the influence of the Lobby in the executive branch and in Congress helped prevent a Sino-American dialogue over Vietnam, the final status of Korea, the role of the PRC at the UN, and the potential for collaboration with the Soviet Union. When any President hinted at acknowledging the PRC, the Lobby could arm Congressional opponents with money and righteous rhetoric about the dangers of appeasing Beijing. Nixon was able to break the cycle, in part because the most vocal China advocates came from within his own party, but also because of the shifting strategic situation of the early 1970s. Concern about increasing Soviet power and the need for a way out of Vietnam eventually overwhelmed the story that the Lobby was trying to sell.
At any rate, I don’t like arguments purely by analogy, but one point I try to make in my book is that while neoconservatism is a relatively new phenomenon, the basic ideas that undergirded the neocon foreign policy approach in the early 21st century have a long lineage in twentieth century American foreign policy. And it’s a lineage of pretty consistent wrongness. The main difference is that in the 20th century these impulses were usually either checked (no engagement with the PRC, but no “unleashing” of Chiang either) or else channeled into relatively unimportant developing world sideshows (Arbenz coup, assassination of Patrice Lumumba, the contra war). Under Bush, however, this approach came to be applied to the central areas of strategic concern for the United States with catastrophic results.
Relatedly, if you want to understand the intellectual decline of the Bush family, this weird anecdote about unleashing Chiang is priceless.
China to Require All PCs Include Internet-Censoring Software
For quite a while, I subscribed to the theory that China’s capitalist development would require the diffusion of modern information technology, and the diffusion of modern information technology would necessarily tend to undermine the Communist Party’s dictatorship. But over the past few years, the dictatorship has proven itself to be much more resourceful about squaring this circle than a lot of us used to assume was possible. The key factor is that the Chinese market is so enormous that China can impose rules like this new one and know that many companies will want to play along:
China has issued a sweeping directive requiring all personal computers sold in the country to include sophisticated software that can filter out pornography and other “unhealthy information” from the Internet. The software, which manufacturers must install on all new PC’s starting July 1, allows the government to update computers regularly with an ever-changing list of banned Web sites.
This also highlights why political developments in China are so crucial for the entire world. If, say, Iran tried to do this it almost certainly wouldn’t fly. But companies will fall all over each other to cater to the Chinese market. Then, once the technology is in place other autocracies can try to piggyback on work that’s been done in and for China. But absent China, almost all of world output would be happening in democratic nations, and it would be easy to structure the global economy in the kind of way optimists were hoping it would work for China.
One Giant Leap For Chinese Naval Aviation
Robert Farley brings to my attention the news that the People’s Liberation Army Navy has reached an agreement with the government of Brazil to begin training PLAN pilots on board the Sao Paulo. This is big news. Difficult and expensive as it is to build and aircraft carrier, and the planes to fly on it, and the ships to protect it, it’s probably even more difficult to get personnel who are trained in the art of naval aviation:
Aircraft carriers represent a huge investment of time and effort. Apart from the carrier itself and the aircraft, a navy needs to assemble a battlegroup capable of protecting the carrier, and needs to master fixed wing big deck carrier operations. This last is exceptionally complicated, and its difficulty is not to be underestimated. Operating a modern aircraft carrier requires a high level of professionalism and expertise on the part of the pilots, the aircrew, and the ship’s regular complement. For example, taking off from and landing on a carrier is much more complicated than similar operations on land. Pilots also have to master a set of navigational skills that will guarantee they can find their carrier under adverse conditions. The maintenance requirements for aircraft at sea are much greater than for aircraft on land, because of the corrosive effect of seawater. Coordinating an air group at sea is difficult, and coordinating take offs and landings such that sorties can be maximized is very difficult indeed. We know all this because it took the United States quite some time to master jet aircraft operations on big deck carriers. Until the Chinese master such operations, they’re looking forward to large numbers of accidents and carriers of limited effectiveness.
The easiest way to get the job done is to get help. A handful of people training alongside a large group that already knows what it’s doing is a lot more practical than trying to train everyone up simultaneously from scratch. Right now, only Russia, the United States, France, and Brazil operate carriers that carry conventional aircraft so learning from Brazil will be very useful for the Chinese. And the Chinese have the economic clout to be useful to Brazil in a variety of ways.
Utah Governor Jon Huntsman to Represent US in Beijing
In a pretty unexpected development, the Obama administration is tapping Utah Governor Jon Huntsman to be America’s ambassador to China. One’s thoughts, naturally, flow initially to the domestic politics as Huntsman was one of a relatively small number of prominent Republicans to have avoided a turn to the far-right over the past 12 months and seemed like the guy many progressives thought could best put a politically credible mainstream face on conservatism.
In these terms, though, I think the most interesting calculation isn’t Obama’s but Huntsman’s. You’ve got to figure that Huntsman’s decided that he couldn’t possible win a presidential primary, so he’ll take the gig.
Huntsman, meanwhile, seems very well-qualified. He’s been US Ambassador to Singapore and US Deputy Trade Representative and he speaks Mandarin fluently. The United States isn’t always so good about picking diplomats with meaningful regional and linguistic background in the area they’re supposed to work in, and I tend to favor any break with that trend. Picking a Republican also signifies that for all the problems with the Bush-era foreign policy, the Obama administration recognizes that US-China relations stayed on an even keel and there’s bipartisan commitment to the idea of a constructive, cooperative Sino-American relationship.
Making China Part of the Solution
The atmosphere is a global phenomenon, so controlling climate pollution is a global issue that requires a global solution. That means China needs to be part of the solution. But currently, the Chinese policy framework is pointing in a very different direction. That leads Paul Krugman to advocate a punitive carbon tariff on Chinese goods to bring them to heel.
I think it’s fine to have something along these lines in the mix of discussions to try to bring them along, but I think this is a pretty unsound conclusion. In reaching this, I think one advantage I have over Krugman is that I’ve never been to China and have never discussed this matter with any Chinese policymakers or business figures. Krugman has and has reached the conclusion based on those discussions that China will never come around voluntarily. James Fallows has also talked to Chinese people and says they tell him something different. I’ve talked to various people who’ve talked to Chinese officials, and the things they say vary. Being personally ignorant, it’s easy for me to adopt the meta-rational stance and conclude that the state of Chinese thinking about this issue is unclear and probably somewhat conflicted.
The bottom line about the international aspects of climate change is that the very idea of an effective response assumes the existence of a generally cooperative international environment. It doesn’t assume the non-existence of the odd “rogue” state here or there, but it assumes the absence of any kind of serious great power rivalries. Not just China, but also India and probably Russia, Brazil, and Indonesia as well are going to need to cooperate in a serious way with the OECD nations on this. And I just don’t see how you’re going to get where you need to get through coercion. If anything, I think attempted economic coercion of China is more likely to wind up breaking down solidarity between the US, EU, and Japan than anything else. First, we impose our carbon tariff. Then suddenly Airbus and European car companies are getting all kinds of sales because the EU hasn’t followed suit. Now not only are the Chinese mad at us, we’re mad at the Europeans. Optimistically, at this point everyone decides coercion is unworkable and we start to back away.
Tyler Cowen says we should remember “this problem is really bad and that means a lot of what we are tempted to do could make it even worse.”
China Slowing, But Still Growing
The Chinese economy grew at a 6.1 percent rate in the first quarter. That would be great by American standards, but it’s slightly less than the 6.8 percent they managed in Q4 of 2008 and it’s quite poor by recent Chinese standards. Apparently China needs to maintain growth of at least 8 percent in order to prevent unemployment from rising, so their ability to maintain growth hardly indicates immunity from the recession.
Signs of Recovery, Or Just an Inventory Correction?
I certainly hope these “Faint Signs of Uptick in China Trade” amount to something. But I’m afraid it may just be an inventory correction. When demand falls, that winds up leading to excess inventory as wholesalers and retailers find themselves having ordered more goods than they can sell. That leads to a collapse in new factory orders. Then as long as retail demand hasn’t gone to zero, eventually the inventory winds down and factory orders tick up again. But you don’t really get to recovery until demand gets back up to where it was before the crash. And by then, the population’s grown, so unemployment continues to be higher than its pre-crash level.
Lack of Eurostimulus: Political or Structural?
It’s hard to visit Spain and not become alarmed about the economic situation in Europe. Certainly I became alarmed when I visited, and now Paul Krugman’s alarmed too. Of course what’s scary is all right out there in facts and figures, but walking around the streets and seeing massive discounts in every single store window as the country faces “a grinding process of wage cuts” that “will be almost inconceivably painful if, as seems all too likely, the European economy as a whole is depressed and tending toward deflation for years to come.” It’s doubly alarming because whatever you think of the Obama administration’s response to the situation, they certainly seem alarmed by it. The key European leaders, by contrast, are much more focused on the medium-term issue of regulatory reform than on short-term rescue measures.
At first glance, I agreed with Krugman that the problem here was fundamentally structural and institutional in nature. The EU has created a very integrated economic unit whose political institutions are far too puny to respond rapidly and effectively in a crisis. It’s as if we were running the modern-day United States under the Articles of Confederation. As Rick Hertzberg says, it’s conservative precepts of “states’ rights” and “small government” run amok.
More recently, I’ve started to have some doubts that this is the whole story. Krugman says that “to hear anything in America comparable to the know-nothing diatribes of Germany’s finance minister you have to listen to, well, Republicans.” Precisely because of that factor, and because Chancellor Angela Merkel is from Germany’s conservative party, I’ve heard several people mistakenly say that he’s a rightwing politician. In fact, he’s a Social Democrat—part of the national unity government in Germany is that the two most important ministries are in SPD hands, even as Merkel runs the show. The fact that Steinbruck has opinions on fiscal stimulus that would count as far right in the United States even though German political culture is generally less market-oriented than American points to a substantial difference of opinion on the merits about this sort of thing. And, indeed, though Steinbruck’s remarks about “vulgar Keynesianism” are well-known, it’s worth observing that Germany has hardly been the most stingy country on the continent in terms of fiscal stimulus. The French, who don’t shy away from state intervention in the economy, prefer to put their faith in more targeted ventures than in broad fiscal stimulus.
Meanwhile, the small European economies appear to me to be less interested in participating in a German-led coordinated stimulus than the Germans are in leading such a stimulus. Long story short, though it’s true that European institutions would make it challenging to put a Krugman-sized stimulus together, I’m not at all sure that this is the actual reason it’s not happening. In the United States, I think it’s pretty clear that were the institutional hurdles to stimulus smaller (i.e., majority rule in the Senate) the administration would have preferred somewhat more stimulus. In Europe, I think national government leaders are, except for Gordon Brown, more-or-less getting what they want.
I don’t have any real knowledge of the deep roots of this difference in political culture except to offer the customary tip ‘o the cap in the direction of German fear of hyperinflation. I would say, though, that Europe’s stronger welfare states mean that people don’t necessarily have the terror of economic downturn that exists in the United States. Recessionary conditions tend, in the U.S., to reduce inequality (the rich, having more money, stand to lose more) but cause the most intense suffering at the bottom because people slip through the cracks of our tattered safety net. In Europe, perhaps the downside risk to the working class is much less, reducing the pressure for stimulus, especially if the European business class shares the American business class’ evident (see, again, the Republican Party’s) distaste for Keynesian measures.
That said, Americans stopped paying attention to European politics on September 12, 2001 and are now waking up to find that we live in a world in which Jean-Claude Trichet rather than Ben Bernanke is arguably the world’s most important central banker. It’s also a world in which a revival in global demand probably needs to come from China rather than from a cuddly democratic ally.
Obama: Our Debt Is Safe
Strange days as the President of the United States needs to reassure China that we’re not defaulting on our debt:
“There’s a reason why even in the midst of this economic crisis, you’ve seen actual increases in investment flows here into the United States,” Mr. Obama told reporters. “I think it’s a recognition that the stability not only of our economic system but our political system is extraordinary.”
He added, “Not just the Chinese government, but every investor can have absolute confidence in the soundness of investments in the United States.”
I don’t know if this was the intention, but the highlighted portion serves as a reminder, I think, that the Chinese leadership almost certainly has a bigger problem on their hands than the performance of their investment portfolio. It’s an authoritarian system that even before the crisis was suffering from a fair amount of protests and political unrest. Conventional wisdom twelve months ago was that the regime’s stability was based on its success in delivering economic growth. And now it seems they may not be able to deliver much in the way of economic growth. And that’s not just an economic problem, it’s a political one.
Today in Chas Freeman Blogging
Another good post from James Fallows on the Chas Freeman issue. A taste:
The two people whose views I quote below have absolutely unquestionable standing to speak on this subject. One is Sidney Rittenberg, who first went to China with the US Army in 1945 and end up spending 35 years there, 16 of them in solitary confinement for alleged espionage and disloyalty to the Mao regime. The other is Jerome A. Cohen, of NYU Law School and Paul Weiss, who has been tireless in his efforts for legal reform in China and was instrumental in freeing John Downey, who had been held in Chinese prison for two decades after the Korean War.
Both of them strongly support the expansion of individual liberties and civil society in China. Both of them strongly support Chas Freeman and his candidacy for his now-disupted job.
You’ll have to click the link to read the actual letters. Then see Josh Marshall on this. Josh has personal beef with Freeman over an unrelated issue that led Freeman to tag him as a purveyor of “slime journalism.” But also says that “the whole effort strikes me as little more than a thuggish effort to keep the already too-constricted terms of debate over the Middle East and Israel/Palestine locked down and largely one-sided.” You can see Andrew Sullivan’s timeline for more on this.
Meanwhile, Ezra Klein observes that whether or not Freeman gets the job in the end, the message has been sent:
But for Freeman’s detractors, a loss might still be a win. As Sullivan and others have documented, the controversy over Freeman is fundamentally a question of his views on Israel. Barring a bad report from the inspector general, Chas Freeman will survive and serve. But only because his appointment doesn’t require Senate confirmation. Few, however, will want to follow where he led. Freeman’s career will likely top out at Director of the NIC. That’s not a bad summit by any means. But for ambitious foreign policy thinkers who might one day aspire to serve in a confirmed capacity, the lesson is clear: Israel is off-limits. And so, paradoxically, the freethinking Freeman’s appointment might do quite a bit to silence foreign policy dissenters who want to succeed in Washington.
Still, I would say that would-be government officials have already internalized the lesson that drawing outside the lines on the Arab-Israeli conflict is not the way to get jobs. But the Obama administration has already put in place quite a few officials—James Jones, Samantha Power, George Mitchell—who didn’t exactly come with the kosher stamp of approval.
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.
Republicans vs Chicoms
Chris Bowers got the idea of comparing the results Gallup got when it asked “Do you approve or disapprove of the way the Republicans in Congress are handling their job” and the results it got when it asked “‘d like your overall opinion of some foreign countries. Is your overall opinion of [see below] very favorable, mostly favorable, mostly unfavorable, or very unfavorable?”
I made the chart:
This is a bit unfair since the question wording isn’t really equivalent. But still.
The Need for Eurostimulus
Lest you think my concerns about Jean Claude Tricet’s too-tight monetary policy are just more left-wing lack of thrift, check out Megan McArdle agreeing with me. Meanwhile, as Felix Salmon observes the Europeans aren’t just being laggard on the monetary policy front. Laggards on monetary policy are naturally going to be laggards on fiscal policy, too. The issue, as best one can tell, is primarily Germany where they’re paranoid about inflation. German sluggishness about this is triply damaging. First, Germany is one of the world’s largest economies. Second, Germany has a huge current account surplus, so they’re much better-positioned to do stimulus than is (say) the United States. And third, Germany’s central position in Europe makes it difficult for Europe’s small countries (who collectively add up to a pretty major economy) to engage in any meaningful stimulus absent Germany leadership.
Kevin Drum remarks:
I don’t have any brilliant suggestions for getting Europe to become a little more proactive on the let’s-avoid-another-great-depression front. Just one more job for the Obama economic team to work on, I suppose. Maybe someday Treasury will actually hire someone besides Tim Geithner and we can start pushing on this a little harder than we are now.
I think it’s important to move beyond dry wit and really ring the alarm bells on this. The economy is very global, and it’s extremely difficult to see it pulling short of a depression if the European Union and Japan are twiddling their thumbs. Beyond that, if there isn’t meaningful global coordination of stimulus efforts then protectionist pressures are going to become harder-and-harder to resist in China and the United States to prevent free riding. That, in turn, would buy some short-term assistance at the cost of really hobbling the prospects for recovery down the road. Under the circumstances, it really would be nice if we had an Undersecretary of Treasury for International Affairs. In the past, the job has been held by such figures as Lawrence Summers and Timothy Geithner, so they must know some people who work in this field. And it would also be nice to see the President and the White House team more focused on this. They seem primarily interested in doing domestic political battle with the GOP over their budget proposal, which is understandable but they need to recognize that their political prospects are closely tied to the fate of the global economy and for better or for worse Trichet, Angela Merkel, Taro Aso, Nicholas Sarkozy, and Hu Jintao are more relevant to this than is Rush Limbaugh.
On a related note, a hobbyhorse of mine over the past couple of years has been the relative neglect of Europe in foreign policy conversations. There’s not that much thrilling bloodshed in Europe, but the immense wealth and productive capacity of the E.U. nations means that, in practice, the everyday lives of Americans are more impacted by political events in Europe than by events in Baghdad or Teheran.
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