Via Tyler Cowen am article on infrastructure in China
[The vast overbuilding] relates to the problem of current demand versus long-term demand. Over the past few years, some medium- and long-term plans drafted by national and regional authorities have touched on the long-term. But in terms of implementation in recent years, many projects have been running far in advance of demand.
In fact, most of our medium- and long-term plans are very backward because they do not take into account the regional particularities of passenger traffic concentration. In provinces that are exporting manpower, transportation planning and construction can’t keep up.
When you think about a place and time in which the core premises of Austrian Business Cycle Theory might hold its hard to come up with a better example than China.
Monetary policy and banking policy are deliberately suppressing domestic consumption in an effort to fund vast increases in investment. The pace of building is astronomical, the inflation pressures tremendous, and the proliferation of unprofitable projects enormous.
Yet, its not stopping.
Its been going on for decades and by the looks of it will go on for at least a few decades more. What happens at the end might wind up being very ugly but my case is not about the wisdom of market distortion, its about the dynamics.
Here I see a state that is able to maintain artificially low levels of consumption for may wind-up being half-a-century. Realizations of bad loans and bad ventures do nothing to stop this juggernaut. It just keeps on keeping on, even in the face of a global recession – which I predicted would bring China to its knees.
It did this not by accepting reality but by doubling down and replacing export driven growth with infrastructure driven growth. The economy barely skipped a beat.
I bring this up because I have never been satisfied with the inevitability argument behind Austrian Business Cycle Theory. I understand why a continuous money-fueled boom would actually lower present discounted living standards. I just don’t know why it has to all come crashing down.
Isn’t it conceivable that you suppress consumption, forever?
Aren’t there always more nowheres to which one can build bridges?
Again, this isn’t to say that this is advisable, simply that it is possible.
What we should see in the end is a country where eventually the marginal return to investment turns negative and already low consumption rates begin to fall further. An increasing share of income is spent simply maintaining a massive capital stock that no one uses.
People are worked to the bone, but have little to show for it. Their roadways and office complexes are massive, but rice takes up half of the family paycheck. Everyone has a job, but no one can afford new clothes. Kids drop out of school at 14 because being a day laborer pays nearly as much as being a doctor. Besides, they’ll have to save for a decade before they can afford a new car and then work double shifts to pay for the gasoline.
That’s the world of massive overinvestment. Its not pretty, but it doesn’t look like ours.