Tuesday, April 26, 2011

The China that can say 'no', and why it doesn't matter

There's a lot of buzz about how China is fixin' to pass the USA by.  The buzz isn't just from the Usual Suspects, but from some smart folks, too (although ASM826 doesn't comment other than to say RTFA).

The Borepatch take is: it ain't going to happen.

The reason is somewhat subtle, and all about how Gross Domestic Product (GDP) is calculated.  GDP is one of those things that everyone has run across so many times that they don't much think about it.  However, there's a technical definition for the term, which is exceedingly important to the topic at hand.  GDP is:
Gross domestic product (GDP) refers to the market value of all final goods and services produced within a country in a given period. It is often considered an indicator of a country's standard of living.
The interesting word there is "final".  It really means "sold", because that's really the only way we have of keeping score.  And this is where the whole ZOMG China is pwning us!!!1! goes into the ditch.  Consider:

Suppose someone [*cough*ASM826*cough*] were to set up a sweet reloading rig that he bought from a buddy for cash.  Doesn't show up in GDP (there's no reporting, see?).  Further, suppose someone [*cough*ASM826*cough*] had a buddy who gave him a mess of lead ingots.  Suppose said hypothetical person [*cough*ASM826*cough*] cast his own bullets and reloaded his own .45 ACP.

Why, GDP would show an increase of around a nickel a round.  Primers and propellant, that's about it.

Now imagine another guy [*cough*Borepatch*cough*].  He's a lazy slob.  He also has no reloading skillz.  He gets a deal at his range on 100 rounds of .45 ACP for $37, or around seven times ASM826's cost.  GDP is nicely enhanced, by a factor of seven.

In both cases, we have precisely the same result - 100 rounds down range.  So point #1 is that GDP doesn't measure everything in the economy.  In some economies - Greece, for example - so much of the economy is "off book" that the government's finances are a shambles.

Point 1: "Off book" activity (almost always caused by government interference - makes GDP values unreliable.

The next point is a corollary of point #1, but in mirror image: government waste almost always shows up in GDP numbers.  Consider John Maynard Keynes' argument that the "stimulative" power of government extends to the government paying people to bury pots of cash in the ground.  It actually works like this.

Desired: one "shovel-ready" stimulus project to reduce unemployment.  Take 100 unemployed people.  Pay then $12.50/hr to dig a series of holes down the side of the road.  Take an additional 100 people, and pay them $12.50/hr to follow group 1 and fill in all the holes.

At the end of the day, the GDP will be higher by $20,000.  The "final" product was labor, and although anyone with two neurons to rub together can see that the result was precisely bupkis, GDP reflects the wages paid.

Point 2: Government waste typically gets scored 100% towards GDP.

So what, I hear you say.  The Chinese economy is growing so fast that it doesn't matter.

Well, that's what Paul Krugman says.  Of course, he doesn't talk about the new Chinese ghost towns:

China is building ten (!) brand new cities each year.  However, it's built with borrowed (leveraged) money, and so rents are high - so high that the cities are deserted.  The Great Mall Of China has 1 - that's one - store open.  There are 64 Million empty Chinese apartments.

It's not just city construction: China's much touted (by Thomas Friedman, and even Barack Obama) High Speed Rail network is supposedly an example of a "moon shot" project.  We have to "keep up with the Chinese".  Except the trains are ghost trains:
Here’s the latest from the South China Morning Post on the dismissal of the nation’s Railways Minister and the engineer in charge of the system’s R&D. Seems there were “severe violations of discipline,” which is usually code for corruption. The larger issue with the vast (16,000 kilometers planned by 2020) endeavor is that it isn’t, in fact, so appropriate to China’s needs. Rather, it may be another symptom of a bubble economy in which vast sums are misspent on underutilized assets.
The high speed trains are wildly expensive, because the (Chinese government owned) rail network had to issue $300 Billion in bonds to build the network.  And so fares are very high, and people take the slower (but much less expensive) old trains.

But that $300 Billion gets added to China's GDP score.

So here's the question of the day: just how big is China's economy, once you strip away the government vanity project and asset bubble waste?

That's what's going to pass us in 5 years?  Srlsy?

Like I said, ain't happening.

And here's the final argument against this low caliber drivel: we've heard all this before.  Remember the Japanese buying Rockefeller Center?  The Japan That Can Say No?

That was nicely sandwiched between lousy predictions.  First there was the CIA's the Soviet Union is the World's Second Largest Economy:

In an essay in The Washington Post on Oct. 27, 1980, Mr. Birman dissected the CIA’s estimates on the Soviet economy, including the agency’s belief that the Soviet standard of living was equal to about half of that in America.

The reality, Mr. Birman argued, was starkly different, with a standard of living closer to one-fourth or one-fifth of that in the United States.
Doubled the size of the economy?  Whatever.  Finest Minds in the Free World.

Then there was the EU, which was going to put those "Cowboy Capitalists" in their place once and for all with their ever-so-wise technocratic management of the European Continent's economy:

The Lisbon Strategy, also known as the Lisbon Agenda or Lisbon Process, was an action and development plan for the economy of the European Union between 2000 and 2010.

Its aim was to make the EU "the most competitive and dynamic knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion", by 2010.[1] It was set out by the European Council in Lisbon in March 2000, and by 2010 most of its goals were alleged by some as not achieved.
"Alleged by some as not achieved".  Whatever.  And note to whiny euro-lefties: that linked article was before the collapse of Greece, Ireland, Portugal (any day now) and the rest of the euro zone dreamland.

This time it's China that will really, srlsy, this time for sure pass the USA.  Oooooh kaaaay.

Must need a different hat.

It's like the old joke that fascism is always descending on America, but somehow always lands in Europe.

Bottom line, I don't trust the (Chinese Government's) GDP figures (hello, off book accounting!) any more than I trust the Global Warming databases.  There's every reason for governments to play fast and loose to get a more agreeable number, and so I'm particularly skeptical of intellectuals who use it as a yardstick when they're trying to measure two very different economies.  Strangely, these intellectually always seem to come to the conclusion that America is doomed, doomed do you hear me!!!11!!one!

Sadly, this won't stop Paul Krugman - and other so-called "elite" types who want to use your and my money to play nobless oblige games - from spouting this sort of drivel again. 

As always your mileage may vary, void where prohibited, do not remove tag under penalty of law.  But I do see all of this as a particularly low caliber intellectual drivel.  I'd like a higher caliber of intellectual drivel, please.

Again, ASM826 is a smart guy - he's just not trained in Economics. I expect that if he has wasted his youth in Econ school (like me) rather than serving his Grateful Republic in the Marine Corps, he would have done this post.  And note to self: I need to buy my .45 ACP reloads from him - off book GDP, of course.  I'd pay him a quarter a round ...


Alan said...

You also have to look at per capita GDP.

$19 Trillion GDP in the US is $62,000 per person

$19 trillion GDP in China is $14,000 per person

Not even close.

Borepatch said...

I was going to talk about that, but the post was already too long, Alan. ;-)

But since you brought it up, at that ratio (4.5:1), the $300B the Chinese wasted on the high speed rail is the equivalent of us wasting $1.5T.

I guess it was their "Obama Stimulus" moment, but this is only one example among many over there. Their central planning is screwing things up, big time.

Retardo said...

Thank you. I've been making the same argument about China for months now, but I'm too lazy to do the research. I've just been relying on anecdotal stuff like "gee, remember how back in the 1930s all the Really Smart People thought Mussolini, Hitler, and Stalin were going to bury the liberal democracies? And whatever happened to Japan, Inc.?" I completely forgot about the Lisbon Agenda.

It's true that the US will eventually be #2, but it does not therefore follow that it'll happen immediately, nor does it follow that our successor as #1 will necessarily get there by growing faster. When that time comes, it may just be that they're collapsing more slowly. And if they're growing, why assume that they won't grow by the same means we did? We did grow pretty big, y'know. #1, in fact.

Overcentralized economies can look pretty good for a while: Hitler in the 30s, Japan in the 70s and 80s. But they never keep it up for more than a few decades at best. Rigid, top-down systems do not cope well with change, and change always happens.

History is littered with this stuff, in government and in business. What kind of idiots do people have to be to look at history and conclude that One Point of Failure to Rule Them All is a uniquely robust design? Easy: They're not looking at history. They're plotting a curve based on one single point.

Krugman is a perfect example: When he was young, he was a real economist. In his old age, he is committed to protecting incumbent people, institutions, and ideas at any cost, right or wrong, reality be damned -- and many of his old ideas be damned, as well, if they don't serve his current interests. Imagine if there were no space for young thinkers, engaged with the present rather than the past, to bubble up alongside of him. That's Krugman's paradise. It's the paradise of old men with tenure.

If academics ran the world, you'd have to wait to buy an iPod until Bill Gates died. Hell, in that world, Obama would now be promising to "invest" in more acreage of PDP-25s, and Krugman would solemnly tell us how lucky we were that Big Government (PBUI) had given us such magnificent technology.

Anonymous said...

Another constraint on their future is China's demographics.

The Czar of Muscovy said...

Dead on the money. China is a long way from surpassing us, and the predictions otherwise are all based on the Very Wrong Assumption that the Chinese are being upfront and honest about their economy.

Reality: things are BAD in China, but official government stats sweep this away. The value of the RMB is artificially inflated inside the market; if the Chinese became the World's Favoritest Economy, a massive amount of dirty, horrible secrets would come tumbling out of that currency.

Too many folks, admiring on the left, terrified on the right, see China as she wants us to see her. Look deeper, and you realize it's a source of concern, all right, but for darker reasons.

Old NFO said...

Good post and ALL good points! Thanks!

Stranger said...

Actually, the China/US population ratio is 4.3:1, so GDP per capita will still only be 23% of US when China's GDP officially equals the US. And officially in this case is likely to be no more accurate than the PRC's official homicide rates.

Minimum wage is pegged at the equivalent of 36 cents an hour in some provinces, as low as 21 cents in others, making it difficult to compete with Chinese manufacture. It can be done, it is difficult.

The major problems are the US governments active program to deindustrialize the US - and the PRC's aggressive programs to lure foreign technology to the area.

The US has lost more than thirty million manufacturing jobs since Willie Clinton took office - and the big push seems to be to make that "all of them." It is really hard to have an economy when people are not allowed to make or grow anything.


Atom Smasher said...

China's never concerned me. India now, they strike me as the Next Big Thing.

Anonymous said...

As an aside, what is our planetary GDP? All this effort for what? A few simple probes scattered about going beep?