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Having 1 billion MORE, shouldn’t China be more anxious in being the #1 economy?

Following is Russia Today interviewing Economist Max Fraad Wolff, from The New School in New York, supporting an IMF report saying China’s economy will overtake that of the United States in five years on a purchasing-power parity (PPP) basis. This report has stirred up a new wave of discussions around the globe. I liked Wolff’s overall take on this issue, and I would like to chime in with some thoughts of my own. Please watch the footage below before continuing with this post.

Wolff didn’t elaborate on why the U.S. has been consistently making “bad policy decisions” in favor of short-term politically expedient ones. I watched a panel discussion on CCTV yesterday about this same topic. On the program, the host used the term “cowardice” as are some circles in criticizing the U.S. policy makers.

Regarding deficit, both the American public and government are in trouble. First, let’s look at the consumer side (see chart below of U.S. consumer borrowing in the last few decades):

Graph: Total Consumer Credit Outstanding (TOTALSL) (Source U.S. Fed)

On the government side, this year’s federal budget is $3.82 trillion, and with taxes amounting to $2.17 trillion, a short-fall of $1.65 trillion will be added to the overall national debt, which mounts to $15.1 trillion by year-end.

It is not rocket science for one to see both are problems of over spending. The above chart shows that in the last decade alone, the U.S. consumer borrowing has roughly DOUBLED.

One may argue, there could be a miracle breakthrough to American productivity and in turn economic output dramatically increases. Tax revenue will then be sufficiently large to pay down the debt. Well, miracles may occur from time to time, but they certainly do not occur frequently.

Wolff also said, U.S. by exporting manufacturing to China exports ‘growth’ as well. That is true. But, American corporations also enjoy incredible global competitiveness partly due to them leveraging China’s cheap labor pool. As in the case with the iPad, China is compensated very little in fact in the overall value chain. See “Fighting for Jobs in a Globalized World” by Allen. China could import more from the U.S., and that comes gradually as China’s population crawls out of poverty. China needs an opportunity to grow too.

I would characterize the trade relationship as the U.S. enjoying spectacular standards of living by exporting some ‘growth’ to China. Who is getting a better deal? That was arbitrated by the smartest people on both sides, when China agreed to U.S. terms in order to gain entry into the WTO long time ago. In exchange, China was recognized primarily as a developing country. Fairness therefore must be viewed through that relationship.

And, the truth is, across America, there is broad recognition the country needs to cut back spending. China is not holding a gun requiring the U.S. to spend beyond her means. Nobody else is doing that.

With the Fed constantly printing USD (and by the way, this act is now ‘sophisticatedly’ termed “quantitative easing”), the U.S. is doing just that on her own.

The latest quantitative easing, or QE2, was sold to the American public on this idea that with unemployment high, the government must pump money into the system and relax credit to spur investments and job creation. With unemployment too high, there could be social unrest in America. (I know, “social unrest” sounds strange to describe what might happen in America, but that’s the truth, isn’t it?) To stay on the job, the Obama administration must embark on this short term decision to temporarily prop up the economy.

But also remember that too much quantitative easing causes inflation, so the unrest would come from everyone, not just from the unemployed.

That then means the U.S. government must borrow at the same time. With Dagong dropping U.S. sovereign ratings and S&P threatening to do the same, U.S. borrowing could become more expensive. U.S. interest payments is already a significant portion of the U.S. spending.

The situation in America is like a house of cards on a table. A group of people is lifting this table and moving it. No one person can fall. Each time the U.S. borrows more or prints more USD, more cards are added to the table.

There is also this psychological “problem.” They are determined to move this table to a “number one” position, which by the way, they seem to believe is a God given imperative.

Wolff also makes the good point that China has 1 billion more people, so it is inevitable this many people will have a bigger combined economic output. If anything, I think it is China who should feel behind and dissatisfied on the economics front.

In this day in age where everyone can get access to cell phones, computers, and relatively good education, it is preposterous to hold unto this view that 3 people could out-produced 13 people.

Is it possible for the narrative in America to accept China having a much bigger economy given her size?

Back to the point about making politically expedient policy decisions vs. smarter and longer term ones. There is no productive debate within America between the two parties on how to solve this problem from a long term perspective.

Do we hear any sort of 5, 10, or 20-year plans from both the Republicans and the Democrats on tackling the $15.1 trillion? Nope. All we hear is bickering.

American-style politics like to shift blame to someone else. They want a “morning after” pill. Force the Chinese to suddenly valuate the RMB, so overnight, Chinese manufactured goods become more expensive for the Americans. They’d prefer the Chinese to be blamed for making too expensive stuff in case the American public gets upset for not able to buy enough.

See this New York Times article, “Inflation in China Poses Big Threat to Global Trade.” You see how this works? Yesterday, it was “cheap” Chinese goods wrecking havoc on world trade. Now that there is inflation in China and goods from there are more expensive, the global trade is again threatened. The editors at the New York Times are idiots or they believe Americans are. One must be true.

How the New York Times treat the issues of deficits in America is emblematic of what is wrong with the country. Everyone likes to blame. Nobody seems to truly care about solving problems. In fact, the question of who is the idiot above is irrelevant to the likes of the NYT. As long as they blame and Americans are upset, they generate more revenue.

American politicians and the American media seem to have an incestuous relationship, don’t they? Wolff puts it more nicely – the country cannot make smart and longer term decisions. I would have to agree with the CCTV panel’s more blunt characterization – that’s because American politicians and media are cowards. Will they ever have the courage to offer up a narrative of reducing consumption, lowering expectations on entitlements, and cut back on that out-sized military?

  1. SilentChinese
    May 2nd, 2011 at 13:34 | #1

    Let me put my macro-econ hats on…

    If RMB revalue up XX% vs US Dollar tomorrow, it would also mean China’s Nominal GDP in dollar terms went up XX% vs US.
    you can’t try to keep china down by force her to re-value the currency AT SAME TIME expecting somehow to knock her off the upward trend she has been on. Those would do exactly the opposite.

    Revalue or not for china IMHO does not really matter in long term.
    In long term it is only the (phenomenal) per-capita productivitiy growth (assume her population would not implode overnight) that propelled the country upward. Exchange rate as a long term issue is just smoke and mirrors. inflation and/or productivity growth would deal with the exchange rate issue one way or the other. a violatal exchange rate on other hand would have detrimental affects that could de-rail a country’s long term economic growth.

    pratical side do you really want to inject shock into THE global growth engine that is pulling everyong out of recession right now in this anemic global economy?

    pseudo-econo-politicans should just shut their trap and walk away quietly before they screw things up more than it already is.

  2. SilentChinese
    May 2nd, 2011 at 13:36 | #2

    Yeah the last paragraph summed it up nicely. American Media and Politicans are dumb f*cks.

  3. syuintseng
    May 2nd, 2011 at 19:54 | #3

    China can’t continue to develop in this way.I can say that Chinese workers are exploited by western countries capitalists,not working for China.

  4. May 2nd, 2011 at 21:04 | #4

    I disagree with the premise that one outsources “growth.”

    Growth is not a zero sum game. Suppose U.S. is slated to have 5% growth. Trading with China – sourcing some jobs to China – does not per se cut into the 5% growth.

    When HP moves a factory to China, it does so because it provides a net benefit to HP. When Americans decides to buy from China instead of making it itself, it’s because doing so provides a net benefit to America. If the U.S invests the resources and money saved from trading with China, putting it to productive use, U.S. will have more than 5% growth.

    Trade becomes a win-win.

    America’s problem is not outsourcing, but what it decides to do after the outsourcing. With $ and resources freed to do things, it chose to devote almost everything it had into certain “service” sectors – especially financial sectors – not just the part that made the economy more productive, but the part that created ponzi schemes and bubbles.

    For the longest time, the British, Americans, Spanish, etc. thought they found a new paths to wealth – the financial gimmickry path. It developed good lifestyle, but now it’s clear that it needs to revitalize the path to true wealth – which is to create, to innovate – not just to be rich. The West still has the core to do that, but merely blaming others and trade won’t get it revitalized any time soon.

  5. May 2nd, 2011 at 23:23 | #5

    @Allen, #4

    I am glad you brought this point up, and overall I tend to see it the same way as you do. But in agreeing with this “exporting growth” view, I guess I was thinking in a narrower context:

    When time is good, the thinking was to let others do the low margin and grunt work. Keep the high paying jobs and make tons of money. Let others pollute their environment. Invest in other high margin and high growth areas. Sure, financial gimmickry like derivatives included. This was the U.S. thinking.

    During bad times when unemployment is high, it is a natural tendency to want to even perform menial jobs domestically. Granted, there are tons of fruit picking jobs throughout America that are only being filled by non-citizen migrant workers. There are other ones too. Unemployment benefits still pay better so they opt to remain home.

    1. But I think some Americans want to believe some policies can be altered – whatever they are – and due to extra competitive pressure to find a job, are now willing to work for less pay. In this context, I can see *some* jobs coming back to the U.S..

    2. Furthermore, perhaps the U.S. government would be breaking WTO rules if it does this, but I think they could have biased U.S. corporate investment to some other developing countries. China provided incentives to foreign corporations by giving them good infrastructure, tax breaks, market access, and etc., so it was by no accident China attracted FDI.

    Under these two scenarios, U.S. corporations continue to order from Chinese factories, so I felt it fair to say that the U.S. exported ‘growth.’ China in turn exports high standards of living to the U.S.. The key is this idea that the trade between the two countries benefit each other, not that one is offering charity to the other. Maybe it’s a simplified view.

    I also felt Max Fraad Wolff wasn’t taking the position that the U.S. is somehow entitled to preserving the relative wealth levels of the two countries indefinitely; unlike Obama’s state of the union address saying America needs to be #1.

  6. May 3rd, 2011 at 06:35 | #6

    Some Americans blame the US corporations for “outsourcing”, and I can see their point.

    But the reality facing the US corporations is also very simple. If they don’t integrate cheap labors in China into their company as the competitive advantage, then eventually and sooner, there will be Chinese companies that integrates Western technologies and cheap Chinese labors having the same competitive advantage.

    Indeed, US companies that took advantage of US technologies and Chinese labors as 2 competitive advantages, probably delayed the entry of Chinese companies having the same competitive advantages by many years, because the dominance of these US “multi-national” corporations in the market.

    The thinking is strategic, Chinese companies can learn technologies much faster and easier than a US company trying lower its US domestic labor cost. And if US companies do not take advantage of cheap Chinese labors, then other countries’ companies might, such as European, Japanese, etc.

    Indeed, much of the “outsourcing” of US manufacturing jobs, was done out of simple necessity, because European and Japanese companies did it first and did it faster. (Japanese companies began their economic cooperation with China in the late 1970’s).

  7. May 3rd, 2011 at 08:24 | #7

    The real growth in next 10 years will be the internal market and higher value products. Both will take a while to catch up. I do not believe it will pass US in 10 years and there is no real meaning to pass US while our living standard is still far below US. One’s opinion and no need to debate on the time frame.

    To me, GNP per capita is more important as it will affect the living standard. There are more important tasks for China to face than #1 in GNP such as pollutions, corruption, jobs, food… China should work on regulations for road maintenance, house construction, food quality, nuclear power safety, stock market (insider manipulation…), fire prevention… You will not get any medals, but they more important than new roads, market highs, new dams, new nuclear reactors…

    Again, if the air you breath and the water you drink are polluted, what do you gain to be #1 economy?

  8. May 3rd, 2011 at 10:20 | #8

    The Japanese and Europeans are much more relaxed in their trade with China. China is Japan’s largest trade partner is by no accident.

    Indeed, China has tremendous domestic challenges. Also, not to mention 1 Billion people could likely lift up and migrate to cities in a matter of 5 to 10 decades.

    I was in Beijing recently and a local told me “Beijingers are now minorities.” I thought, what? Beijing’s population was 4 to 5 million, but it has swelled to 19 million in the last few decades. This brings about tremendous stress to society.

  9. xian
    May 7th, 2011 at 21:34 | #9

    “Wolff didn’t elaborate on why the U.S. has been consistently making “bad policy decisions” in favor of short-term politically expedient ones.”

    In short because the US is a democracy with 4 year terms. Each party spends half its time fighting off the other party, half its time winning a popularity contest within its own party, all the while constantly preparing to midterms and reelections. Sure, most Americans realize they should spend less. But they’re not willing to give up their ideological positions. Democrats don’t want to cut back on health care, Republicans don’t want to cut back on military, and so on. With the rhetoric being spewed you’d think it was civil war in there.

  10. May 9th, 2011 at 06:05 | #10

    “Wolff didn’t elaborate on why the U.S. has been consistently making “bad policy decisions” in favor of short-term politically expedient ones.”

    It is not merely wasteful for the parties to fight over each other for control, it also “dumbs down” extremely complicated policy issues into moralistic soundbites. When soundbites control the debate, then there can be no effective long term policies, because long term benefits cannot always be boiled down to soundbites.

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