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Karl defends Andy Stern on China by making a claim about economic growth that on the one hand I think is partly true, but I think he overstates the case. His argument is that it is possible for economies to grow too fast in some sense, because economic growth is not the same thing as welfare. You can take too much from current generations in the name of stimulating economic growth. Karl has made this point in the past more explicitly, pointing to China’s 40% savings rate outside the bounds of plausible optimal savings rate. This much I agree with, or at least I agree that it is possible and worth considering (I don’t know what the bounds of optimal savings are for China, or if they’re actually outside it). The problem is to use this to defend the notion that China can go too fast forever and use their current strategy to one day surpass us in per capita GDP.
The essence of the problem is still is that while China may be growing too fast because of too much savings, they also still owe a lot of their fast to catch up growth. There are still many things that go into determining a growth rate, and many of these things will weigh China down in the long-run no matter how high they keep savings rates.
In fact, one of the things that will work against them is reducing the incentives of their workers by using policies “designed to induce a large degree of suffering on its people today in return for a more prosperous tomorrow”. Any country trying to do this for a long period of time is going to have all sorts of problems. Look around at all the richest countries in the world, do you see any of them that have anywhere near the level of active management of the economy that China does without oil wealth that is massive relative to the rest of the economy?
Given China’s current level of per capita GDP ($4.3k in PPP terms), sustained large growth rates are not surprising or unprecedented. If China were as rich as we were, it would be unprecedented. China would have invented a brand new model of large developed nation that can grow extremely fast forever. There is a reason such a model does not exist: being a rich country requires democracy, freedom, innovation, entrepreneurship, and citizens who are willing to work. The ability to impose extreme levels redistribution to future generations like Karl is talking about cannot exist alongside all of these other things.
China will reach a limit to healthy growth using their current economic model. When they do, if they wish to keep growing they will look around and realize that their only choice is to become more like the rich world. If China wants to be rich they must learn from us, and Andy Stern is wrong to suggest the opposite is true. Reihan put this best:
To really learn from the Chinese, and to enjoy such staggering growth rates, we should go about things differently: let’s have a Maoist insurrection followed by a civil war that lasts for several years. Then let’s destroy most of the wealth in the country, and drive out millions of our most enterprising and educated citizens by launching systematic terror campaigns during which millions of others will die in violence or of starvation. Next, let’s have a modest economic opening in coastal regions: impoverished citizens will be allowed to launch small-scale township and village enterprises and components will be assembled in a handful of cities by our stunted descendants. Then let’s severely curb those township and village enterprises because they represent a potential political threat and invite large foreign multinationals and state-owned enterprises [let's not forget those!] to work our population to the bone at artificially suppressed wage rates, threatening those who complain with serious reprisals up to and including death. Let us also initiate a population control policy designed to improve our dependency ratio for a few decades. As large numbers of workers shift from low-value agricultural work to manufacturing, we will experience … rapid growth! Mind you, getting from here to there will involve destroying an enormous swathe of our present-day GDP.
None of this detracts from Karl’s point about the possibility of growing too fast in a way that does maximize welfare. It’s an important point about today’s China that is worth understanding. But neither does Karl’s point disprove everything economists know about what it takes to be a wealthy nation.
One of Matt Yglesias’s commenters offers this concern
I fear we’ll get a society where perhaps 10% of the people will own all the land and capital, and they will hire 60% of the people to work for low but comfortable wages, while 30% will be totally dependent on a welfare and the odd temporary job every now and then.
If this scenario is a real possibility, then the only solution I can imagine is highly progressive taxation and wealth distribution, so that the great masses can afford to employ each other (with restaurant meals and dance lessons).
After offering me a shout-out, Yglesias says
At any rate, I’m not blogging about land use at the moment because I’m hoping to build enthusiasm for a potential book, so let’s focus on the “capital” side of this arrangement. What’s missing from the doom analysis (and this is fresh in my mind since coincidentally I’ve been reading Ricardo) is the “human capital.” Employee compensation accounts for the majority of GDP because the majority of the actual capital available to the economy is inside people’s heads.
I’ll offer my interpretation of the phenomenon. It is decidedly neo-classical.
Redistribution is desirable because it raises the living standard of the person we are redistributing to. However, welfare-reinforcing-the-culture-of-poverty arguments aside, it shouldn’t change the basic structure of pre-tax national income.
In a completely free market economy the share of national income that goes to the various factors of production are determined by their role in production. To the extent human capital has a more important role, human capital will command more of national income. The same is true for physical capital and raw labor power.
However, the rents, to the factors are determined by their reproducibility. That is, how easy is it to make more.
The majority of the rise is living standards for workers occurred because they – the workers – were relatively irreproducible. It takes, according to modern law, 16 years to produce a new worker. Most producers, that is to say parents, are not induced, through higher wages, to produce more workers.
So the following scenario ensues. The economy grows larger and larger. Labor, even raw labor, has some productive role in the economy and so it has a share in this growth. However, the number of laborers is not growing as fast as the economy. Thus, labor’s share of the economic pie grows faster than the total number of laborers and so the share of the economic pie per laborer grows.
What we seem to be facing at the moment is culmination of several forces. I think most economists from Tyler Cowen to David Card agree that the production of human capital has become more constrained, while its role in production is growing.
The result is that the economy is growing, human capital’s share of the economy is growing, but the quantity of human capital is not growing as fast as it could be. Therefore, the slice of the economic pie going to each “bit” of human capital is growing very rapidly. We see this in a rising return to education, technology, general smarts etc.
At the same time are seeing massive growth in the pool of laborers. More laborers from rural China move to the city everyday and economic liberalism marches across South and South East Asia. This radically increases the pool of labor.
Labor is still relatively hard to come by, by historical standards. However, it is not as hard to come by as it once was. Moreover, increases in the return to labor are indeed increasing the supply of labor as higher wages increase the speed at which farm workers leave for the city.
This means that the global economy is growing, the share going to labor is growing slightly slower – because it is being crowded out by human capital – but the size of the labor pool is growing faster and faster. Thus, labor’s slice of the economic pie is barely keeping pace with the size of the labor pool, itself. The result is a stagnant slice per laborer.
Indeed, I think the slice is probably declining in the Western World, so that a person with no knowledge or skills whatsoever, earns less today that he would have 20 years ago.
I would guess that is similar to the phenomenon the classical economists witnessed. Labor was migrating steadily into the city, drawn by higher wages. To some extent – though less than they envisioned – increased wages also allowed for larger families. This meant that while the economy was growing, and with it labor’s share, the share per worker was not growing or growing very slowly.
At the same time, capital markets were highly underdeveloped. It was not easy to produce new capital. Capital’s share of the economy was increasing steadily right along with labor. However, the number of capitalists was not increasing. Thus the slice of the economic pie per capitalist was exploding.
This trend reversed itself, mainly as the result of several forces: family size stopped growing, the rural labor pool was exhausted and capital markets opened up, allowing a rapid increase in the number of capitalists and the amount of capital available.
The greatest potential source of relief for low skilled Americans will be exhaustion of the global rural labor force. This will mean primarily a fully industrialized Asia. This will exert itself in one of two ways.
If Asian countries retain their very high savings rate then it will occur as enormous foreign direct investment (FDI) in the United States. Chinese and Indian corporations will set up shop in the United States and bid up the demand for raw US labor. One might be tempted to think that this FDI will only support “skilled jobs” but marginalist thinking suggests not.
As the price of skilled workers rises some tasks will be substituted by unskilled workers. Making predictions about what this will look like is hard, especially since it involves the future. However, an one easy vision is to imagine a world where grocery stores turn into a massive “fresh counters” where all the prep work necessary for your meal is done to order from fresh ingredients. You go home with little premeasured containers that you can combine into the recipe you want as easily as Food Network chefs do.
This is a pampered life for high skilled workers, but its also a world in which unskilled workers can regularly find work capable of supporting their families and an ever increasing standard of living.
Another alternative is for savings in Asian to decline, which would shift the balance of trade and cause at least a temporary surge in manufacturing done in the US. The transition period would be different in this scenario, but the end game likely the same. There would be a bidding up of the returns to capital in the US and rather than FDI, domestic investment would bring about the future.
Precisely how these hacking attacks are coordinated is not clear. Many appear to rely on Chinese freelancers and an irregular army of “patriotic hackers” who operate with the support of civilian or military authorities, but not directly under their day-to-day control, the cables and interviews suggest.
U.S. government hackers, I’d venture, operate under a more command and control structure: they work for the NSA, or some similar agency, and operate only under instructions from higher ups. How can China operate in a less command and control style than the U.S. here? This is pure speculation, but here is my guess:
In the U.S. the internet is not controlled and monitoring abilities are relatively low, so freelancers and an army for hire of hackers couldn’t be trusted. They would be too powerful, and uncontrollable. In China I’m sure they can monitor every move their army of hackers makes online, which means they can grant them more freedom and autonomy.
To put it in economic terms, China has a better hand on the principal agent problem because informational problems are less severe. The principal (the government) grants the agent (the hacker) power. But the operating without constraints, the agents profit maximizing behavior would not be optimal for the government. They’d hack domestic companies and government agencies trying to extract profit. The more complete the principal’s information about the agent’s behavior the more power and autonomy they can trust them with. Since they are more invested in monitoring and controlling internet activity, China has more complete information, and so can trust their hackers with more power and autonomy.
Like I said, this is almost pure speculation, so I’d be interested if anyone who knows something about this can tell me whether this description is plausible.
The question of how immigration affects the wages and employment of natives is a frequent topic of research in the U.S. With respect to wages, a simple model of course suggests an increase in supply will decrease prices, thus more immigrants bring down native wages. Some research, notably the work of George Borjas, supports this. Another model is one where immigrant labor is complimentary to native labor, and thus more immigration increases native wages. Other research supports this model, which was described recently by Tyler Cowen in the New York Times. Similar stories are told for employment. Unsurprisingly, a similar question of immigrant and native complementarity exists in other countries. A new paper sheds some light on this issue with respect to China:
Hundreds of millions of rural migrants have moved into Chinese cities since the early 1990s contributing greatly to economic growth, yet, they are often blamed for reducing urban ‘native’ workers’ employment opportunities, suppressing their wages and increasing pressure on infrastructure and other public facilities. This paper examines the causal relationship between rural-urban migration and urban native workers’ labour market outcomes in Chinese cities. After controlling for the endogeneity problem our results show that rural migrants in urban China have modest positive or zero effects on the average employment and insignificant impact on earnings of urban workers. When examine the impact on unskilled labours we once again find it to be positive and insignificant. We conjecture that the reason for the lack of adverse effects is due partially to the labour market segregation between the migrants and urban natives, and partially due to the complementarities between the two groups of workers. Further investigation reveals that the increase in migrant inflow is related to the demand expansion and that if the economic growth continues, elimination of labour market segregation may not necessarily lead to an adverse impact of migration on urban native labour market outcomes.
As I’ve said before, I think people who are sympathetic to more restrictive immigration regime in the U.S. should ask themselves, especially in the face of such contrary evidence, whether they think China should restrict immigration to possibly preserve the wages for the relatively well-off at the definite expense of poorer immigrants from rural China or from immigrants from other countries.
James Fallows at the Atlantic backs up my criticisms of the awfulness of a recent campaign ad against Pennsyulvania U.S. Senate candidate Pat Toomey. Note that Fallows is liberal who supports Sestak and is to the left of my on trade issues, yet recognizes the disgustingness of this ad. He also hones in on the same quote that I do. Here’s Fallows:
The “smoking gun” quote against Toomey, his having once said “It’s great that China is modernizing and growing” — where do I start? Maybe here and here. It would be worse for the U.S. if China were stagnating and stewing. There are problems from a prospering China, sure. But the problems from a billion people unhappily moving backward would be worse.
Reasonable people should agree: this ad is ridiculous.
Millenocket, ME. has the right idea. Matthew Yglesias has apparently been to Millenocket, and finds what they are doing funny. I’ve never been there, but as the article points out, it’s a pretty dead town, with horrible weather…so it seems out of place:
Never mind that Millinocket is an hour’s drive from the nearest mall or movie theater, or that it gets an average 93 inches of snow a year. Kenneth Smith, the schools superintendent, is so certain that Chinese students will eventually arrive by the dozen — paying $27,000 a year in tuition, room and board — that he is scouting vacant properties to convert to dormitories.
There are three ways in which I’d like to analyze this development; from an economic standpoint, a human welfare standpoint, and a social standpoint. I will argue that all three a net benefits to the US and the world, and we should make a long-term policy commitment to this type development around the country (and, indeed, other countries should imitate it).
The economics of importing capital through education are fairly straightforward. The long run growth of an economy, given money neutrality, is a function of an economy’s real capital stock. Ceterus paribus, increasing the efficiency of capital increases the ability of an economy to grow in the long run. If the $27,000 spent on educating a Chinese child is more productive than any other investment, which means the real returns to a US education are higher than any other investment available to them (something that is almost surely the case), then this results in an increase in the marginal efficiency of capital. Whether these Chinese immigrants remain in the US, or return to China, the effect on world growth will for the better. Literally everyone will be better off due to the rising of the world Wicksellian equilibrium interest rate as China and other countries become more productive (and thus, richer).
The US is arguably much more efficient at education than the Chinese, so why not export education?
From a human welfare standpoint, consider this analysis from the World Bank:
This volume asks a key question: Where is the Wealth of Nations? Answering this question yields important insights into the prospects for sustainable development in countries around the world. The estimates of total wealth–including produced, natural, and human and institutional capital–suggest that human capital and the value of institutions (as measured by rule of law) constitute the largest share of wealth in virtually all countries.
Growth is essential if developing countries are to meet the Millennium Development Goals by 2015. Growth, however, will be illusory if it is based on mining soils and depleting fisheries and forests. This report provides the indicators needed to manage the total portfolio of assets upon which development depends. Armed with this information, decision makers can direct the development process toward sustainable outcomes.
This analysis looks at the levels of “intangible wealth” that is embedded within human and institutional capital. The US is found to have $418,009 in intangible wealth per capita (comprising 80% of our real capital stock). That means, simply by stepping within the borders of the United States, human productivity is enhanced by this massive stock of wealth embedded in our people and our societal institutions. By contrast, China has just $4,208 per capita (comprising 55% of the total wealth stock).
Now, despite the obvious material living standards present in the United States, access to intangible capital totaling more than 99 times the amount available in China, comprises a vast gain in human welfare for each and every person who comes to the United States to live and be educated.
Finally, from a societal standpoint, having more immigrant workers increases the real wage rate for most people in the US. Not only that, but it because of the increase in marginal productivity of the Chinese worker (assuming that a non-trivial sum of people will return to China), this will increase the wages of Chinese workers — which, in turn, will increase the demand from China for US-produced goods and services. A greater supply of future labor is very important to the future of the wealth creation (and thus, the welfare state), as is evident by Japan’s aging population.
So, let’s overcome this roadblock…
There is one hitch. Under State Department rules, foreign students can attend public high school in the United States for only a year, a system that Dr. Smith considers unfair, given that they can attend private high schools for four years.
…and make a real Pareto improvement in the lives of people around the world. Most of all, the lives of these prospective Chinese immigrants.
To end, a quote from Terry Given, an English teacher:
“I don’t want to sound flip,” Ms. Given said, “but why not? We won’t know until we get the opportunity to know them and give them the opportunity to know us. There’s something to be said for putting ourselves out there to see if we can be the prize that’s claimed.”
In response to my recent post about a China-bashing campaign ad, several commenters replied that I was ignoring the fact that many American lose out as a result of trade with China, and that the ad is okay because it’s criticizing policies that encourage or fail to prevent that trade. And it’s true, trade does create losers. Furthermore, we can certainly argue about trade policies on the margins, which is what the ad starts off doing. But to move from there to implying that we shouldn’t praise the economic growth and modernization in China that has been called an “economic miracle” shows wild indifference to the welfare of the hundreds of millions who have been lifted out of poverty. Heaping stupid stereotypes like gong sounds and fortune cookies on top of that adds even more offensiveness. Honestly, I’m surprised they didn’t use the Oriental riff.
Ads like this beg the question of why we only get angry when jobs are lost to trade. Yes, there have been many manufacturing jobs lost as companies increasingly produce and assemble manufactured goods in China, Vietnam, and many other areas of Asia. But the destruction of jobs not a byproduct of trade alone, but a byproduct of progress in general. Technology, for instance, is easily as a powerful a job killer as trade. You can see this in the fact that while manufacturing employment has decreased in this country, total manufacturing output and output per worker has gone up. The following graphs, courtesy of Mark Perry, display these facts nicely:
The massive increase in productivity, with output increasing even as jobs decrease, demonstrates that trade is not the only thing that destroys jobs; so too does technology, and the productivity it creates. Yet could you imagine a campaign ad criticizing a politician because he supported technology? Or productivity?
It’s important to recognize that there are very few forms of progress that don’t make some people worse off. Imagine if the growth in China’s economy had come solely from the production of some good that we didn’t make in the U.S., and in fact wasn’t made anywhere else in the world. Still, the huge increases in wealth would drive commodity prices higher, which means we would pay more for things like copper and oil. Sure some people who purchase and enjoy the brand new products that our hypothetical China makes would be better off, so too would those employed in the industries making goods China imports. But some people would only be made worse off by higher commodity prices, both directly and indirectly, as higher input prices make some production unprofitable and thus jobs are lost. Should this diminish the fact that millions of people in China were lifted out of poverty?
The industrial revolution produced winners and losers too. Blacksmiths and buggy whip makers were put out of business by the automobile. Does this diminish the invention of the automobile? Greater agricultural productivity put many farmers out of business. Do people demonize the industrial revolution for making them worse off?
This isn’t just true for big, economy-wide shifts in technology, but individual inventions as well. The success of the iPod has destroyed jobs at Walkmen assembly plants. A quick, easy, and cheap cure for cancer would put many specialized healthcare workers out of a job. This is creative destruction, and it would be wrong to argue that’s it’s not a great thing.
If you think the difference between trade and technology is that our trade policies gives China an edge, consider the many ways in which we subsidize technology, innovation, R&D, and capital in this country. These subsidies, like the trade distortions, mostly just exaggerate an unstoppable trend. Take a look again at the output per manufacturing worker in the graph above, clearly it would be ridiculous to assume that absent those subsidies to technology and capital the state of manufacturing would be as it was in the 1970s. Sometimes progress is inevitable.
Likewise a massive shifting of manufacturing to China and other parts of Asia was inevitable once certain developments took hold. What happened was the China government began easing it’s boot off the throat of it’s people by gradually moving from Moaism to a mixed economy. Once that transformation had begun there’s only so much that trade or exchange rate policies can or could have done to prevent massive amounts of manufacturing from moving to China. By maligning China’s economic success, by attacking someone for saying it is a great thing, you can only be defending the boot upon China’s throat, because there’s nothing short of autarky we could have done to stop much of what has occurred.
Just as manufacturing jobs inevitably shifted from here to China, rising wages in China have begun the inevitable shift of some manufacturing from China to poorer countries like Bangladesh.
I believe in a social safety net. We should help workers whose jobs are destroyed and who are facing hardship. But there is no reason to privilege workers whose jobs were destroyed by China’s growing economy over those whose jobs were destroyed by technology. Likewise we should no more demonize China than we would demonize inventors and the technologies they produce.
UPDATE: Via Matt Yglesias comes an important reminder that the Democrats are not the only ones bashing China with xenophobic ads. The following video is even more egregious and disgusting than the anti-Toomey ad.
The Democratic Senatorial Campaign Committee is running this extremely ugly and xenophobic ad against Pat Toomey, who is the Republican U.S. Senate candidate for Pennsylvania. The ad includes all the classic racist Orientalism touches, from gong sounds to fortune cookies. The goal of the ad to slander Toomey with a quote of his where he says “It’s great that China is modernizing and growing”. Gasp! Oh the horror!
The economic growth and modernization in China over the last 30 years has lifted literally hundreds of millions of people out of poverty, and if you don’t think that’s an unmitigated great thing then fuck you, I hope a Chinese person does “steal your job”.
I know campaign ads shouldn’t affect us. We should vote based on policies and expected welfare impacts of those policies. But at some level these political ads become pollution, a pure negative externality. And I can’t look past it when a party or politician is willing to spew pollution to get elected. If you’ve got to denigrate a whole nation of people and one of the greatest economic miracles of the last 50 years, and stir up a hornets nest of ugly xenophobia in order convince people you’re the man for the job, then you’re demonstrably not the man for the job.
Paul Krugman is at it again with his calls, using a model based on what I believe to be an entirely flawed conception of monetary policy at the zero bound, to argue that China’s currency policy is harming the US:
So again, the Fed is moving in the right direction, both for US interests and for the sake of the world as a whole. China is beggaring its neighbors, which in this case means everyone else.
Krugman is continuing his call that we begin threatening to engage in protectionism through legislation aimed at Chinese products. Of course, this is wholly unnecessary. Matt Yglesias has the money quote:
The Chinese government’s discomfort with monetary stimulus is understandable. Monetary stimulus plus Chinese currency policy will equal an undesirably large amount of inflation in China. That means that in order to avoid an undesirably large amount of inflation, Chinese leaders will need to engage in a more rapid currency readjustment than they want to. That, however, merely underscores that unilateral monetary action is the right way for the US government to handle our concerns about China’s currency policy. We don’t need to threaten them, or bribe them, or cajole them, or go to “currency war” or anything. What we need to do is to adopt monetary policies that are appropriate for our economic situation. The Chinese will learn to deal with it, and in the longer term we’ll all be better off.
Which highlights the idea that beggar-thy-neighbor policies are anything but zero-sum games when it comes to money. All currencies can’t devalue against each other simultaneously, but all currencies can depreciate relative to goods and services…and that has a stimulative effect. Depending on the relative slope of your economy’s SRAS curve that either means higher inflation or higher real output. Monetary easing in the United States would likely mean higher real output in the US…but it would likely mean higher inflation in China.
What exactly does that do? It gives China cover to adjust their exchange rate policy. A policy of easy money in the US actually benefits both the US and China (assuming that China will follow an optimal policy regime).
What is embarrassing is that we live in a rich country, with a fiat currency, and we are still having a conversation about how to get the economy off the ground…and furthermore contemplating highly detrimental policies in order to do so.
The illegal immigrants come seeking higher wages, steady employment and a chance at better lives for their families. They cross the border in remote stretches where there are no fences or they pay traffickers to sneak them past border guards.
Then they work as maids, harvest crops or toil hunched in sweatshops.
Think you’ve heard this story before? No, it’s not illegal Mexican immigrants coming into the United States, but Southeast Asian, North Korean, and African illegal immigrants coming into China. If you think our border problem is daunting, consider that China’s mostly unprotected border stretches 13,670 miles across rain forests, mountains, and deserts.
According to the article, from the L.A. Times, the demand for foreign labor comes from rising Chinese wages and a shortage of low-skilled workers, and those willing to do harder field work at profitable pay. For instance:
Chinese farmer Lu Qixue hires Vietnamese laborers before the autumn sugar cane harvest. For as long as five grueling months, the foreign workers put in 10-hour days thwacking sugar cane stalks with scythes.
“They work slowly and we always have to train them, but we can’t find enough skilled Chinese,” said Lu, a rail-thin 58-year-old village chief with gravelly stubble. “If we don’t hire the Vietnamese we won’t be able to grow as much.”
“I don’t want to carry sugar cane down the mountain,” said his youngest son, Lu Xinghuan, 26, who aspires to own a trucking company. “It’s hard work.”
Labor activists said the increasing use of undocumented foreigners is undermining gains made with China’s 2008 labor law regulating working hours and workplace conditions.
For those who oppose more immigration and want to crack down on illegals, I am curious if they think that welfare would be increased in this scenario by preventing the vietnamese workers from coming into the country, and thus decreasing the output of the cane farmer and his wealth and spending power. I suspect people will be more sympathetic to illegal immigration into China than they are with illegal immigrants into this country.