Quotulatiousness

January 23, 2015

“We are all [Milton] Friedman’s children and grandchildren”

Filed under: Economics — Tags: , , , , — Nicholas @ 04:00

At Worthwhile Canadian Initiative, Nick Rowe explains just how important Milton Friedman still is in economics today:

I can’t think of any economist living today who has had as much influence on economics and economic policy as Milton Friedman had, and still has. Neither on the right, nor on the left.

If you had a time machine, went back to (say) 1985, picked up Milton Friedman, brought him forward to 2015, and showed him the current debate over macroeconomic policy, he could immediately join right in. Is there anything important that would be really new to him?

We are all Friedman’s children and grandchildren. The way that New Keynesians approach macroeconomics owes more to Friedman than to Keynes: the permanent income hypothesis; the expectations-augmented Phillips Curve; the idea that the central bank is responsible for inflation and should follow a transparent rule. The first two Friedman invented; the third pre-dates Friedman, but he persuaded us it was right. Using the nominal interest rate as the monetary policy instrument is non-Friedmanite, but the new-fangled “Quantitative Easing” is just a silly new name for Friedmanite base-control.

We easily forget how daft the 1970’s really were, and some ideas were much worse than pet rocks. (Marxism was by far the worst, of course, and had a lot of support amongst university intellectuals, though not much in economics departments.) When inflation was too high, and we wanted to bring inflation down, many (most?) macroeconomists advocated direct controls on prices and wages. And governments in Canada, the US, the UK (there must have been more) actually implemented direct controls on prices and wages to bring inflation down. Milton Friedman actually had to argue against price and wage controls and against the prevailing wisdom that inflation was caused by monopoly power, monopoly unions, a grab-bag of sociological factors, and had nothing to do with monetary policy.

January 22, 2015

China (barely) misses growth target … as if we can trust their numbers anyway

Filed under: China, Economics, Government — Tags: , , , — Nicholas @ 04:00

Ah, well, I haven’t ridden this old hobby horse for a while, so let’s just let Tim Worstall explain why this time, we might be able to get a bit of perspective from the otherwise unreliable official Chinese government economic figures:

Many observers have been slightly sceptical of Chinese GDP numbers for some years now. Regional GDP numbers don’t seem to quite match with other regional numbers (say, oil consumption, other proxies for economic activity) and national numbers don’t necessarily reflect the sum of all of those regional numbers either. There’s absolutely no doubt at all that the place has been getting richer but whether quite so much or quite in the manner being reported is another matter. And then there’s another group of observers (this one including myself) who have some experience of how communists report economic numbers. There’s a plan, the Communist Party is in charge of executing that plan and, amazingly, the plan is always reported to have either worked or been exceeded. Anything less would reflected badly on said Communist Party. As I’ve also been exposed to the old Soviet accounting systems I’m more sceptical than most on this point.

So, there’s that slight worry that a slowing China (or one not growing at the former breakneck pace perhaps) will also lower growth in other countries. We’re pretty sure that’s going to happen. But we’ve also got this other thing to ponder. If the Communist Party is allowing the reporting of numbers that don’t meet the plan then what’s going on with that?

Is this some sea change in the management of the numbers? They’re actually reporting the correct numbers? Or are those suspected massages of the numbers still going on but they underlying reality is so bad that they just couldn’t get up to the planned target? This is, I agree, all wild surmise. But it is a surprise that the numbers came in below target because that’s just not what we’ve come to expect in such a political system. And that could be very bad news indeed.

The seductive appeal of the big project

Filed under: China, Railways, USA — Tags: , , — Nicholas @ 02:00

In a Forbes post from a few years back, Warren Meyer looks at the appeal of the megaproject to those inclined to think that what society really needs is someone in control:

What is it about intellectuals that seem to, generation after generation, fall in love with totalitarian regimes because of their grand and triumphal projects? Whether it was the trains running on time in Italy, or the Moscow subways, or now high-speed rail lines in China, western dupes constantly fall for the lure of the great pyramid without seeing the diversion of resources and loss of liberty that went into building it.

Writers like Thomas Friedman and Joel Epstein in the Huffington Post have eulogized China and its monumental spending projects. These are the same folks who, generations ago, tried disastrously to emulate Mussolini’s “forward-thinking” economic regime in the National Industrial Recovery Act. These are the same folks who wanted to emulate MITI’s management of the Japanese economy (which drove them right into a 20-year recession). These are the same folks who oohed and ahhed over the multi-billion dollar Beijing Olympics venues while ignoring the air that was un-breathable. These are the same folks who actually believed the one Cuban health clinic in Sicko actually represented the standard of care received by average citizens. To outsiders, the costs of these triumphal programs are often not visible, at least not until years or decades later when the rubes have moved on to new man crushes.

These writers worry that the US is somehow being left behind by China because its government builds more stuff than we do. We are “asleep.” Well, here is my retort: Most of the great progress in this country occurred when the government was asleep. The railroads, the steel industry, the auto industry, the computer industry — all were built by individuals when the government was at best uninvolved and at worst fighting their progress at every step.

In particular, both Friedman and Epstein think we need to build more high speed passenger trains. This is exactly the kind of gauzy non-fact-based wishful thinking that makes me extremely pleased that these folks do not have the dictatorial powers they long for. High speed rail is a terrible investment, a black hole for pouring away money, that has little net impact on efficiency or pollution. But rail is a powerful example because it demonstrates exactly how this bias for high-profile triumphal projects causes people to miss the obvious.

Which is this: The US rail system, unlike nearly every other system in the world, was built (mostly) by private individuals with private capital. It is operated privately, and runs without taxpayer subsidies. And, it is by far the greatest rail system in the world. It has by far the cheapest rates in the world (1/2 of China’s, 1/8 of Germany’s). But here is the real key: it is almost all freight.

November 4, 2014

Vizzini and the Man in Black – different kinds of planners

Filed under: Books, Humour, Media — Tags: — Nicholas @ 00:02

Sarah Skwire on the two different types of planners featured in William Goldman’s novel The Princess Bride:

… in the response that has spawned an M.O.U.T. (meme of unusual tenacity), Inigo replies, “You keep using that word! … I don’t think it means what you think it does.”

When my friend Sam Wilson, a frequent blogger at both Euvoluntary Exchange and Sweet Talk, posted a brief Facebook comment on that famous line, a glorious debate erupted. Sam recorded a bit of that over at Sweet Talk, but since that same discussion got me thinking about The Princess Bride in light of questions of political economy, I thought it was worth bringing over here.

Throughout the novel, Vizzini stands as an example of the expert, the intellectual, and the man of system. Thoroughly persuaded that he is capable of controlling the innumerable variables that are involved in every step of his extraordinarily complicated plans, he is constantly failing. While his initial snatch-and-grab of Buttercup goes well enough, everything after that begins to collapse — and always because he has failed to anticipate some kind of human action.

[…]

After a few rounds of intellectual pyrotechnics designed to determine the location of the poison, Vizzini fails. And he dies. And the reason Vizzini fails is that, once more, he has not anticipated a human action. The Man in Black has poisoned both cups. The Man in Black has conditioned himself to be immune to this poison, on the off chance that an occasion like this should arise. Once again, Vizzini’s ideal plan has been beaten by unpredictable humans.

I can hear Sam objecting that our hero, the Man in Black, is also something of a planner. I point out, in response, that his plans — particularly the plan to storm the wedding and rescue Buttercup — are always flexible, updated on the fly, and tagged with a warning label reading, “Hear me now; there may be problems once we’re inside.” He is a planner, yes, but certainly not one who believes his plans are ideal and immune to failure. It seems likely that the Man in Black has read Hayek’s “Use of Knowledge in Society,” which emphasizes the importance and viability of this kind of “knowledge of people, of local conditions, and of special circumstances” that allow an individual to plan his own actions and respond speedily when circumstances change.

By contrast, Vizzini might have done well to read Hayek’s “The Intellectuals and Socialism,” which could have cautioned him about the dangers of viewing the world only through one theoretical lens and ignoring the advice of practical types like Inigo. He certainly would have profited from Adam Smith’s famous warnings about the man of system, who treats other human beings as if they are merely chess pieces, with no motivations of their own. It is those motivations that thwart Vizzini at every turn. His human design is beaten, every time, by the unpredicted and unpredictable human actions of others.

As Hayek and Smith and a host of other thinkers remind us, any other outcome is simply inconceivable.

July 26, 2014

QotD: French “ultra-liberalism”

Filed under: Bureaucracy, Europe, France, Government, Quotations — Tags: , , , , — Nicholas @ 00:01

The French press, media and intellectuals castigate ad nauseam what they call the ‘ultra-liberalism’ of the present-day western world: and their characterization, as intellectually lazy as it is inaccurate, now goes virtually by default. Very few are the commentators who see through its inaccuracy. That a country whose public sector accounts for more than half of economic activity, and which is as highly-administered as France (and, it must be said, often well-administered, for who would not rather go on the Paris Metro than the New York Subway?), cannot plausibly be described as ‘ultra-liberal,’ ought to be perfectly obvious even on the most casual reflection, but alas it is not. If France is ultra-anything it is ultra-corporatist, but even that would be an exaggeration. And so present discontents are laid at the door of ultra-liberalism, though in fact a considerable proportion of the resentments and discontents of the young who approve of M’Bala M’Bala are attributable to the rigidity of the French labor market, which is caused precisely by an illiberal nexus of protections and restrictions.

The problem, then, is not ultra-liberalism but insufficient liberalism. The difference between France and other western countries, incidentally, is one of degree and not of type, though even degree can be important: illiberalism in the French labor market has in a matter of a few years turned London into one of the largest French-speaking cities in the world.

Theodore Dalrymple, “Illusions of Control in the Omnicompetent French State”, Library of Law and Liberty, 2014-01-07

July 11, 2014

QotD: The Utopian urge

Filed under: Politics, Quotations — Tags: , , , — Nicholas @ 00:01

Whereas a conservative writer might warn that humans are just as likely, if not more likely, to bungle things when applying past experience to new plans for society as when trying to fix their own private lives — and an optimistic libertarian writer might note that people are far more rational in planning their own lives than in planning others’ — left-liberals have a tendency to think that humans’ ability to plan collectively is inversely proportional to their ability to plan their lives as individuals.

A more concrete example: the most neurotic of my fellow New Yorkers tend also to be the people most likely to think sense and order can be imposed on our messed-up lives from above. Politics becomes a route to redemption. Or as one comic book industry professional who is a self-proclaimed communist put it when I first met her here seventeen years ago, “Capitalism is a terrible system — it allowed me to get $60,000 in debt.” The left-liberal imagining being saved from herself is analogous to those social conservatives who look at their own bad habits and conclude that the whole world badly needs religion.

Todd Seavey, “Sci-Fi is Socialist, Like Most Art”, The Federalist, 2013-12-26

July 23, 2013

The maple-flavoured Leviathan

Filed under: Cancon, Government — Tags: , , , , — Nicholas @ 08:22

Richard Anderson on the PM’s latest cabinet shuffle and the media’s focus on the personalities rather than their actual performance:

Perhaps if we looked too closely we might start asking questions. Like why a nation of 34 million needs 39 cabinet ministers? Abraham Lincoln was able to free the slaves, save the Union and encourage the settlement of the American West with a mere eight cabinet ministers. And this with a government run without computers, telephones or even typewriters. Just paper, ink and a few thousand miles of telegraph wires. The population of the whole of the United States in 1860, both North and South, was 31.4 million.

But in those days governments were confined to hum-drum matters, such as winning immensely bloody wars and subsidizing the occasional transcontinental railroad. Today the remit of the state is far more ambitious. Beyond maintaining public order and some key bits of infrastructure, the modern state takes it upon itself to educate, scold, monitor and regulate virtually every facet of modern life. Thus, in a sense, we need 39 wise men and women to govern over us. We would likely need 39,000 and there would still be work left undone.

Except such a feat is impossible. You cannot plan an economy, much less something even more complex such as a whole society, from a few office buildings in Ottawa. When those in charge are non-experts rotated in and out based on political expediency, the result is what Mises called planned chaos. Actual experts might even do worse. No one is really in charge of the Leviathan state. No matter how powerful Stephen Harper seems, he cannot fight against the full weight of bureaucratic inertia. He might, if he felt ambitious, give a few hard kicks.

[…]

Ask any halfway educated Canadian, say the typical university graduate, why exactly Canada needs a Minister of State for Sport and you will get no clear answer, not even a half decent guess. Apply the same question to a professor of political science and you will get no better response. Ask a senior bureaucrat you will get not response at all, except a stream platitudes each less discernible than the last. Yet all will swear that Canada needs a Minister of State for Sport. I mean, what have you got against Sport? Or Multiculturalism? Or Western Economic Diversification?

Since no decent consensus fearing Canadian objects to these things in and of themselves, they do not object to them being supervised, managed, regulated or subsidized by the government. Modern Canada’s true and unquestioned stamp of approval on any facet of everyday life is government authorization. No action or thought is truly noble unless a government department has been consecrated in its name.

Blessed is the name of the Minister of State for Western Economic Diversification.

July 4, 2013

“Buenos Aires […] is the headquarters for the central planning bad idea bus”

Filed under: Americas, Economics, Government — Tags: , , , , , — Nicholas @ 08:32

At the Sovereign Man blog, Simon Black discusses Argentina’s sad history of central planning failures:

The more interesting part about Buenos Aires, though, is that this place is the headquarters for the central planning bad idea bus.

Argentina’s President, Cristina Fernandez, continues to tighten her stranglehold over the nation’s economy and society.

This country is so abundant with natural resources, it should be immensely wealthy. And it was. At the turn of the 20th century, Argentina was one of the richest countries in the world.

Yet rather than adopting the market-oriented approaches taken by, say, Colombia and Chile, Argentina is following the model of Venezuela.

Cristina rules by decree here; there is very little legislative power. She may as well start wearing a crown.

Just in the last few years, she’s imposed capital controls. Media controls. Price controls. Export controls.

She’s seized pension funds. She fired a central banker who didn’t bend to her ‘print more money’ directives. She even filed criminal charges against economists who publish credible inflation figures, as opposed to the lies that her government releases.

Inflation here is completely out of control. The government figures say 10%, but the street level is several times that.

[. . .]

Being here in this laboratory of central planning makes a few things abundantly clear:

1) Printing money does not create wealth. If it did, Argentina would be one of the richest places in the world again.

2) All of these policies that are ‘for the benefit of the people’ almost universally and up screwing the people they claim to help.

Printing money creates nasty inflation. If you’re wealthy, it leads to asset bubbles, which can make you even wealthier. If you’re poor, you just get crushed by rising prices. Or worse – shortages (remember the recent Venezuelan toilet paper crisis?)

3) Desperation leads to even more desperation. The worse things get, the tighter government controls become… which makes things even worse. It’s a classic negative feedback loop.

Both the United States and pan-European governments are varying degrees of this model, with only a flimsy layer of international credibility separating them from the regime of Cristina.

So Argentina is really a perfect case study in things to come.

April 16, 2013

The anti-libertarian legacy of Margaret Thatcher

Filed under: Britain, Government, Law, Liberty — Tags: , , , , , , — Nicholas @ 09:31

Sean Gabb explains why Thatcher should not be considered in any way “libertarian”:

She started the transformation of this country into a politically correct police state. Her Government behaved with an almost gloating disregard for constitutional norms. She brought in money laundering laws that have now been extended to a general supervision over our financial dealings. She relaxed the conditions for searches and seizure by the police. She increased the numbers and powers of the police. She weakened trial by jury. She weakened the due process protections of the accused. She gave executive agencies the power to fine and punish without due process. She began the first steps towards total criminalisation of gun possession.

She did not cut government spending. Instead, she allowed the conversion of local government and the lower administration into a system of sinecures for the Enemy Class. She allowed political correctness to take hold in local government. When she did oppose this, it involved giving central government powers of supervision and control useful to a future politically correct government. She extended and tightened the laws constraining free speech about race and immigration.

Her encouragement of enterprise never amounted to more than a liking for big business corporatism. Genuine enterprise was progressively heaped with taxes and regulations that made it hard to do business. Big business, on the other hand, was showered with praise and legal indulgences. Indeed, her privatisation policies were less about introducing competition and choice into public services than in turning public monopolies into corporate monsters pampered by the State with subsidies and favourable regulations — corporate monsters that were expected in return to lavish financial rewards on the political class.

April 10, 2013

In British political circles, the term “Thatcherism” conceals at least as much as it reveals

Filed under: Britain, Economics, Government, History — Tags: , , , — Nicholas @ 00:01

In sp!ked, Tim Black explains why the term “Thatcherism” is not actually a useful descriptor of Margaret Thatcher’s political ideology, but it helps hide the weaknesses of her political and ideological foes:

… for many of those who today preen themselves as left-wing, the idea of Thatcher is arguably even more important. And that’s because she can be blamed for everything that is wrong today. She may have left office nearly a quarter of a century ago, but so potent was the ideology she apparently promulgated — Thatcherism — that we as a nation continue to be in thrall to it. As one prominent left-wing columnist stated yesterday: ‘Thatcherism lives on. Nothing to celebrate.’ Ex-London mayor ‘Red’ Ken Livingstone agreed: ‘In actual fact, every real problem we face today is the legacy of the fact she was fundamentally wrong.’

Elsewhere, Johnathan Freedland at the liberalish-leftish Guardian joined the Thatcherism Lives chorus: ‘The country we live in remains Thatcher’s Britain. We still live in the land Margaret built.’ At the much-reported-upon, little-attended street parties in Brixton and Glasgow, staged in ironic honour of Thatcher’s passing, the belief that her ideas still walk among us was palpable. In the words of one 28-year-old student: ‘It is important to remember that Thatcherism isn’t dead and it is important that people get out on the street and not allow the government to whitewash what she did.’

[. . .]

And here is where reality stops and myth begins. Because that’s not what the left saw. They saw something more ideological than brutally pragmatic. They saw, in the words of Marxism Today editor Martin Jacques in 1985, ‘a novel and exceptional force’. They saw, in short, Thatcherism.

Given the fact that Thatcher herself never had an actual ideological project to which ‘Thatcherism’ might actually refer, it is unsurprising that a recent book on the subject admitted that ‘talk of “Thatcherism” obscures as much as it reveals’. Instead, the idea of Thatcherism always revealed far more about the left than it did about some perpetually elusive right-wing ideology. That is why the concept, first used by academic Stuart Hall in 1979, gained intellectual traction on the left in 1983, the year Labour, under the leadership of Michael Foot, suffered a devastating defeat at the General Election: it shifted the responsibility for failure from the Labour Party, and its complicity with so-called Thatcherite economics, to the working class, a social constituency supposedly seduced away from the Labour Party by Thatcher’s advocacy of social mobility and aspiration. The idea of ‘Thatcherism’ let Labour off the hook.

So the legacy of Thatcherism may indeed live on, as some sunk on the left insist. But not because of anything Thatcher herself did. It will live on because too many are more comfortable attacking a phantasm from the past than reckoning with political reality today.

August 27, 2012

Central planning is always attractive to the ones who see themselves in charge

Filed under: Bureaucracy, Economics, Government — Tags: , — Nicholas @ 00:01

At the Why Nations Fail blog, Daron Acemoglu and James Robinson explain that central planning is not just a Marxist idea:

Essentially central planning is not about the efficient allocation of economic resources, it is about control.

Central planning maximizes the extent of control that the state, and the people running the state, exercise. The desire to control others is a constant in history and is part and parcel of the construction of states. If the state can grab all the land and resources and control who and on what terms people get access to them, then this maximizes control, even if it sacrifices economic efficiency.

This sort of economic and political control — not Marxist ideology — is what central planning is all about. This is not to deny that Marxist ideology supported and legitimized central planning in several 20th-century societies. But it is to emphasize that the emergence and persistence of central planning is often a solution to the central economic and political problem of many elites: to control and extract resources from society.

The people who push for central planning may say they’re trying to solve a problem, but the problem they say they’re trying to solve is just an excuse. They really just want to gain control over you.

April 4, 2012

The authoritarian High-Modernist recipe for failure

Filed under: Bureaucracy, Government, History, Liberty — Tags: , , , — Nicholas @ 08:37

Charles Stross linked to this older post at Ribbonfarm discussing “how to think like a state”:

James C. Scott’s fascinating and seminal book, Seeing Like a State: How Certain Schemes to Improve the Human Condition Have Failed, examines how, across dozens of domains, ranging from agriculture and forestry, to urban planning and census-taking, a very predictable failure pattern keeps recurring.

[. . .]

Scott calls the thinking style behind the failure mode “authoritarian high modernism,” but as we’ll see, the failure mode is not limited to the brief intellectual reign of high modernism (roughly, the first half of the twentieth century).

Here is the recipe:

  • Look at a complex and confusing reality, such as the social dynamics of an old city
  • Fail to understand all the subtleties of how the complex reality works
  • Attribute that failure to the irrationality of what you are looking at, rather than your own limitations
  • Come up with an idealized blank-slate vision of what that reality ought to look like
  • Argue that the relative simplicity and platonic orderliness of the vision represents rationality
  • Use authoritarian power to impose that vision, by demolishing the old reality if necessary
  • Watch your rational Utopia fail horribly

The big mistake in this pattern of failure is projecting your subjective lack of comprehension onto the object you are looking at, as “irrationality.” We make this mistake because we are tempted by a desire for legibility.

[. . .]

Central to Scott’s thesis is the idea of legibility. He explains how he stumbled across the idea while researching efforts by nation states to settle or “sedentarize” nomads, pastoralists, gypsies and other peoples living non-mainstream lives:

    The more I examined these efforts at sedentarization, the more I came to see them as a state’s attempt to make a society legible, to arrange the population in ways that simplified the classic state functions of taxation, conscription, and prevention of rebellion. Having begun to think in these terms, I began to see legibility as a central problem in statecraft. The pre-modern state was, in many crucial respects, particularly blind; it knew precious little about its subjects, their wealth, their landholdings and yields, their location, their very identity. It lacked anything like a detailed “map” of its terrain and its people.

The book is about the 2-3 century long process by which modern states reorganized the societies they governed, to make them more legible to the apparatus of governance. The state is not actually interested in the rich functional structure and complex behavior of the very organic entities that it governs (and indeed, is part of, rather than “above”). It merely views them as resources that must be organized in order to yield optimal returns according to a centralized, narrow, and strictly utilitarian logic.

It’s a long post, but it is well worth reading. In a couple of throwaway examples, it rather cleverly ties the Indian caste system (as made “legible” by the Raj) and the entire Roman empire to Scott’s failure model.

March 16, 2012

One symptom, but lots of different causes

Filed under: Britain, Economics, History, India — Tags: , , , , — Nicholas @ 08:41

Tim Worstall responds to a simplistic definition of poverty:

What we then want to know is why do some individuals have a shortage of money? At which point we enter a forest of different explanations.

By far the largest cause of poverty is that people live in societies ruled by people variously ignorant, stupid or evil. N Korean poverty I would ascribe to that last. The early Soviets, I am sure along with Socialists of the time, really did think that planning would be more efficient, create more wealth. The evil came later, it was ignorance at first.

[. . .]

And, yes, really, there is also that culture of poverty that Ms. Ehrenreich wants to insist does not exist. Choices over drugs, booze, delayed gratification, marriage, children, education, all have their effects on poverty or not poverty.

Sure, poverty is indeed the lack of money. But there are different reasons for different people at different times about why they lack money. Given these different reasons therefore different solutions have to be applied. Our Down’s Syndrome lad does simply need a transfer of resources, of wealth, from others in the society to him.

But that is not to say that the cure for all poverty is such a transfer: poverty in India is going to be better alleviated by the continuing destruction of Nehru’s extentions of the Licence Raj, poverty among some others in the UK is going to be best addressed by a change in the behaviour of those individuals.

April 18, 2011

The real secret weapon of the “China economic miracle”

Filed under: China, Economics, Government — Tags: , , , , — Nicholas @ 10:35

Chriss W. Street thinks the Chinese banks are about to suffer a crisis moment:

It is ironic that China is demanding greater control of the World Bank and International Monetary Fund, just as the nation’s banking system is about to be devastated by the white hot flames of inflation.
From a distance, China’s economy seems to be the poster child of sustainable growth. Recent government reports show the economy expanding by 9.7%, retail sales up a blistering 17.4%, foreign reserves at $3 trillion, and inflation only 5.4%. But these statistics mask a dark side; Chinese communist authorities have been artificially holding down fierce inflationary pressures by subsidizing consumer prices.

[. . .]

The less known and far more important secret-weapon of the “China Economic Miracle” is the absolute control of the banking industry by China’s four largest state-owned banks (“SOB”); Industrial and Commercial Bank, Agricultural Bank, People’s Bank of China and Construction. Since the government does not provide adequate social welfare programs and restricts its citizen’s investment options to bank accounts, about 40% of Chinese household income is deposited in SOBs each month. The SOBs then leverage the deposits by ten times and loan 75% of this massive amount of cash at extremely low interest rates to state-owned-enterprises (“SOE”). The other 25% of lending is allocated to real estate development.

China is no stranger to bankers making risky loans to communist party officials and their crony real estate developers. During the Asian Financial Crisis of the mid-1990s, it is estimated that 40% of all SOB loans were non-performing and most were written off. The Chinese paid for the SOB losses with a 76% devaluation of their currency that crushed the people’s buying-power by 76%. From 1997 to 2004 Chinese frivolous lending was somewhat restrained, but since 2003 the bureaucrats have mandated a massive expansion of lending. In comparison to the U.S. and Europe where bank lending is flat, SOBs have been expanding loans by 25% annually.

H/T to Jon for the link.

Malinvestment the next big problem for China?

Filed under: China, Economics, Government — Tags: , , — Nicholas @ 09:54

Nouriel Roubini thinks that the Chinese central planners are missing the clues about overinvestment in their infrastructure binge:

China’s economy is overheating now, but, over time, its current overinvestment will prove deflationary both domestically and globally. Once increasing fixed investment becomes impossible — most likely after 2013 — China is poised for a sharp slowdown. Instead of focusing on securing a soft landing today, Chinese policymakers should be worrying about the brick wall that economic growth may hit in the second half of the quinquennium.

Despite the rhetoric of the new Five-Year Plan — which, like the previous one, aims to increase the share of consumption in GDP — the path of least resistance is the status quo. The new plan’s details reveal continued reliance on investment, including public housing, to support growth, rather than faster currency appreciation, substantial fiscal transfers to households, taxation and/or privatization of state-owned enterprises (SOEs), liberalization of the household registration (hukou) system, or an easing of financial repression.

China has grown for the last few decades on the back of export-led industrialization and a weak currency, which have resulted in high corporate and household savings rates and reliance on net exports and fixed investment (infrastructure, real estate, and industrial capacity for import-competing and export sectors). When net exports collapsed in 2008-09 from 11 percent of GDP to 5 percent, China’s leader reacted by further increasing the fixed-investment share of GDP from 42 percent to 47 percent.

Thus, China did not suffer a severe recession — as occurred in Japan, Germany, and elsewhere in emerging Asia in 2009 — only because fixed investment exploded. And the fixed-investment share of GDP has increased further in 2010-2011, to almost 50 percent.

The problem, of course, is that no country can be productive enough to reinvest 50 percent of GDP in new capital stock without eventually facing immense overcapacity and a staggering nonperforming loan problem. China is rife with overinvestment in physical capital, infrastructure, and property. To a visitor, this is evident in sleek but empty airports and bullet trains (which will reduce the need for the 45 planned airports), highways to nowhere, thousands of colossal new central and provincial government buildings, ghost towns, and brand-new aluminum smelters kept closed to prevent global prices from plunging.

H/T to Publius for the link.

« Newer Posts — Older Posts »

Powered by WordPress