Ape Man

What would happen if I throw the polite hillbilly side of me to the dogs and let my ignorant redneck side run this show?

Judging by what happens every time I write a rant; the number of interesting comments on this web site would triple.

My latest rant to attract attention was called “How George Bush got a cost free trillion dollars for the US economy“. So far, comments on that post are evenly matched between those who are taking issue with the fact that I called George Bush stupid and those who are taking issue with the fact that I called the Chinese leadership stupid.

So for the record, let me say that I don’t hate George Bush and I don’t hate the Chinese leadership. Moreover, both George Bush and the Chinese are far more educated than I will ever be. I fully expect that if you gave the Chinese leadership an I.Q test they would outscore me. I bet the same thing would happen if you compared me to many of the members of Bush’s cabinet (Rice and Paulson at the very least). In short, I should not have used the word stupid because the word implies that those people were personally deficient in the intellectual sense.

But I have a deep conviction that even asses are entitled to their opinion (it’s Biblical, don’t you know) and I happen to think that the financial decisions undertaken by the American/Chinese leadership have been…..umm… “unwise”.

Now I am not going to go into why I think the Bush administration’s financial decisions have been “unwise.” I have already given a partial explanation in the comment section of the original post. Besides, three quarters of the blogosphere hates Bush so much that they would sacrifice their first born child just for privilege of spitting in Bush’s face. That is not a crowd I really want to associate with even if I have been less than impressed by the President’s financial acumen.

But in contrast to Bush, most people seem to think the Chinese leadership is pretty smart. In fact, the more anti-Chinese someone is, the more likely they are to think that the Chinese leadership is smart. Everywhere I go I hear about how those devious Chinese are undermining America and stealing all of America’s jobs.

Given the fact that the majority opinion actually thinks that the Chinese leadership has been making some shrewd economic decisions, I think that I ought to defend my assertion that what Chinese are doing is unwise a little more thoroughly.

Before I start, you ought to take a look at my comment section and read Scott Peterson’s explanation of why he does not think that the Chinese leadership is “stupid.” You can also read the comment over at Mr. Peterson’s own blog.

Let me start with a misunderstanding Mr. Peterson seems to have of one of the points I made. He says…

You point out that Japan has had a similar policy and essentially say “Look where Japan is now”…

Now I will admit that the fact that Japan’s export strategy has not been quite as successful as some feared/hoped was incorporated into my rant. But my main point was this….

Now I happen to believe that any country that is willing to help its export sector at the expense of domestic consumption is heading down the wrong path. But the stupidity of relying on exports to make you rich is proportional to how big your country is. A small country can become get rich by selling things to a large country. But a large country cannot get rich by selling to a small country.

In other words, focusing on exports was less stupid for Japan (which has less than half of the US population) than it is for China (which has more than 4 times the US population). Heck, China way outnumbers the US and the EU put together. There is just no way that China can possibly become a wealthy nation on par with the US and the EU through exports.

Let me expand on this idea a little bit. No one says that it would be smart for Singapore to try to fund a nuclear deterrent based around ballistic missiles. It is obvious to all that Singapore is too small to be able to afford the expenses associated with strategic weapons.

Why then was it not equally obvious to the Chinese leadership that an economic policy that was suited for little old Singapore might not work so well for a country with over a billion people in it?

If you add up the population of the EU, America, and Japan you roughly equal China’s population. In other words, China’s population basically equals that of the entire developed world. How could China possible provide a decent living for its people through exports?

I was trying to keep my rant simple. I was hoping that people who had a very simplistic view of economics would be able to comprehend why China’s current policy is “unwise”. Even people who think that you can export your way to real wealth ought to be able to understand that China can’t do that because of its size.

But I should be fair to Mr. Peterson. Judging by his website he has a very good understanding of economics. And he did not argue that China could export its way to wealth. Rather, he said….

I think that up until now, the Chinese policy of subsidizing exports has been rational in that at the time that Deng decided to implement this policy China had no coherent domestic economic systems at all, and therefore no domestic market to build the country’s economy on. So China took what it had, which was cheap labor, and used that to build up a manufacturing and export sector. Still, a rational policy.

Now my first snarky little thought upon reading this was that Mr. Peterson was conceding my point. As Mr. Peterson admits later on, China’s policy no longer makes sense, yet he argues that I should not call them stupid because the policy made sense at one time and now they are afraid to stop. This is not the most devastating rebuttal I have ever experienced.

To my unsophisticated little brain, one of the keys to being smart is knowing when to stop. When you come to a stoplight and the light turns green it makes sense to accelerate. But at some point it makes sense to stop accelerating. If you don’t know how to do anything but put the pedal to the metal I think that it is reasonable to question your sanity.

The core of my rant was the observation that China has kept the accelerator floored in terms of reserves growth over the last 6 years. Now they see the flashing lights in their rearview mirror and they’re afraid that if they stop they will get a big ticket. But it is my contention that they would have never had to worry about the ticket if they had not held the accelerator to the floor.

But my snark is a little unfair. There is an honest difference of opinion between me and Mr. Peterson. As he rightly picks up on, I don’t really think it was ever wise for China’s leadership to subsidize exports to rich countries. And I think that this point is worth defending in greater detail.
Mr. Peterson says…

I think that up until now, the Chinese policy of subsidizing exports has been rational in that at the time that Deng decided to implement this policy China had no coherent domestic economic systems at all, and therefore no domestic market to build the country’s economy on.

I disagree with the idea that Deng had no choice but to subsidize exports. Why is it harder to build a domestic economy from scratch as opposed to an export base?

To me the obvious answer to that question is that building a functional domestic economy would have required disturbing existing power structures. China’s leadership looked to exports to provide them with economic power while enabling them to keep their existing power base intact. Thus the decision to go for exports was made on political grounds, not on what was best for the economy.

It was never in China’s interests as whole to subsidize exports. Not even in Deng’s time.

To understand why this is so, let us remember the first rule of economics. There is no such thing as a free lunch. Since Mr. Peterson himself admits that China subsidizes its exports we must ask what is the cost for this support and who pays it?

I think that it is clear that this support for exports comes at the expense of the domestic economy.

How can I be so sure?

For starters, there is the fact that the Chinese leadership has elected to loan America a trillion dollars so that America could keep buying its exports. That is a trillion dollars that could have been spent in China boosting local demand and building local infrastructure.

Why would you subsidize your export sector by lending money to the US? Why not invest that trillion dollars in the infrastructure necessary to give you a durable competitive advantage? Why is it smart for a country that can never get rich through exports (because of its size) to penalize domestic consumption? Why is smart for poor countries to invest large amounts of money in rich countries?

Sure, exports would have dropped had China not loaned that trillion dollars to America, but I think that domestic demand would have made up for the difference.

Now Mr. Peterson might argue that it is unfair for me to be throwing around the trillion dollar figure when he only said that China’s policy made sense in the beginning. After all, he himself admits that China is in a tricky position now.

But to my mind the problem that China finds itself in now is the direct result of artificially trying to hold the yuan down. Contrary to Mr. Peterson’s view, I don’t think that this policy of fighting the currency markets ever made sense.

What Mr. Peterson seems to be forgetting is that a rise in the yuan would have been beneficial for China as a whole. A rise in the yuan would make it cheaper for people in China to buy energy, raw materials, and food on the international market. In other words, a stronger yuan might hurt exports, but it would make it easier to build a better China. Even in the case of exports, it would not be all bad. Lower inputs costs would help compensate for the rise of yuan.

What I am driving at is that subsidies for the exports are really subsidies for the rest of the world at the expense of your own people. And that never makes sense no matter how rich or poor you are.

China’s policy of holding the yuan down has made America rich. It has made Australia rich. It has made oil producing countries rich. But it has not done much for the people of China except for creating a wealthy super class.

Let us remember that for all the talk of China’s economic success; only 200 million Chinese people have seen any benefits from that economic success. Now that is equal to the entire population of the US, but it still leaves a billion Chinese people who have yet to experience the benefits of China’s economic “success.” Moreover, those 300 million that have benefited have not reached first world levels of wealth. They have not even caught up with Thailand on average.

I do not deny that the economic wealth of China has improved greatly over the recent years. But why should that surprise anyone? Any country escaping the madness of Mao would have nowhere to go but up. That does not mean that subsidizing the export sector should be given credit for the rise, though.

To me the real result of China’s subsidizing of exports is the tremendous class divide. That is the natural result of subsidizing one part of the economy at the expense of the rest.

Why do I care?

Because in the long run I think that what is good for China is good for the US. And China has to get its act together now. Its population is rapidly ageing and this is made worse by the growing gender imbalance. China only has a small window to get wealthy enough to handle those problems without collapsing.

Yet even though China is faced with these serious problems it is investing tremendous amounts of money in the US. The kicker is that that they are not investing this money for the normal reason of generating a return. They have never made any kind of return on US assets. Their only reason for investing money in the US is to benefit a narrow class of people in China.

How is this smart?

As it stands now, I think China is heading towards a collapse. It is not the trillion dollars they have loaned to the US that is going to cause that collapse. But that trillion dollars represents a huge failure to address the real problems in Chinese society.

And the failure to address those problems is unwise.

This entry was posted on Friday, June 1st, 2007 at 8:12 pm and is filed under Economics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.