Wednesday, December 5, 2018

Taylor on China and Trade and Ideas

Tim Taylor, also reviewing Summers on China, makes a few excellent points.

Growth comes from within. Trade is not conquest.
The formula for economic growth is to invest in human capital, physical capital, and technology, in an economic environment that provides incentives for hard work, efficiency, and innovation. China has made dramatic changes in all of these areas, and they are the main drivers behind China's extraordinary economic growth in the last four decades, and its expectation of above-global-average growth heading into the future.
No matter your views of China's trade surplus, there's no sensible economic theory which suggests that China's trade surplus, which as a share of GDP is relatively small, is a major driver of China's growth....
Conversely, the US economy has not done a great job of investing in the fundamentals of economic growth.
 The US once led the world in share of workers with higher education, but now it's middle-of-the-pack. The US is a low-saving economy, with low rates of investment in both private and public capital. US spending on research and development has been stagnant for years, while other countries have been expanding. Rates of business start-ups have been declining.  Mobility of US workers is down. Economic mobility between generations in the US is not high. Further, the US has made little progress--and little effort--to address ongoing issues like the projections of large and growing budget deficits, or rising health care costs, or a much higher level of income inequality than a few decades ago.
(Just how redistribution to address inequality is gong to help growth, I will let Tim try to explain. Europe's experiments in paying people not to work are not inspiring.) Fallacies in trade thinking are many and subtle -- good for Tim for noticing this one.

Best of all, Tim thinks about the question, how does the world look when countries like China, and (hopefully) India and Brazil continue to catch up, achieving at least middle income GDP per capita, but multiplied by millions of capitas, add up to more GDP overall than the US.
I lack the geopolitical imagination to see how this shift will play out. But at a small scale, you can see it at the movies, when you see a rising number of roles for Chinese actors and settings in China. It tells you that the international market for movies is becoming ever-more important. At a larger scale, The rest of the world used to complain that it was always having to hear about US products like Coca Cola, Levi's. big American cars, and the like. But US domestic car production is now about 7% of the global total. US companies are producing around the world: for example, General Motors makes more cars in China than in the US, and US producers make and sell twice as much inside China as they export to China. 
Just how terrible is this, you may ask? On an economic basis, it's hard to see the problem here. That's not "geopolitical" anyway. You can read Tim more darkly, 21st century, when it comes a wide array of decisions--international trade talks, decisions of the the International Monetary Fund and the World Bank, who leads the way during global financial crises, who dominates the flows of international investment capital and foreign aid, who has the power to impose trade or financial sanctions, and what kind of military threats are most credible--the shifts in the global economy suggest that the high-income countries of the world will not dominate as they did during most of the 20th century. Instead, countries with the world's largest economies, but much lower standard of living for their populations, will play a central role in setting the rules. 
That is the distinct possibility. But trying to keep them desperately poorer than us while we grow slowly so we can lord it over them at the IMF is clearly not the answer. A billion Chinese exiting desperate poverty is about the best thing that has happened to overall human welfare in a long time. Go to India and ask yourself "should we really keep these people from living decent lives so we can be the global big shots?" What is the answer -- beyond aggressively returning to a pro-growth economic agenda?

Ideas are non-rival. This is the central idea (itself nonrival) of new economic growth theory, and Paul Romer's Nobel prize. If you use my car, I can't use it. If you use my idea, that doesn't stop me from using it. Political ideas are non-rival as well. This will happen, and it is bloody important that these people think like us and share our freedom-minded political and social visions when they earn their seat at the table. 

Again, the EU comes to mind. Devastated at the end of WWII, and the source of what we now call geopolitical tensions for centuries, as well as immense exporter of bad political ideas. It also had an "economic miracle" of catch-up growth, before leveling out somewhat below US prosperity, as a result of its higher taxes and regulations, and growing in tandem since. Overall EU GDP is larger than ours. This process, adroitly managed by wise people on both sides, such as the recently departed President Bush I, over often fearsome obstacles, should be the model of what to do with China, India and Brazil.

However, the two are linked. The US right now does not look to much of the world like a great model for growth-inducing political ideas.

Meanwhile, speaking of trade fallacies, one of President Trump's recent tweets echoed another common fallacy:
When people or countries come in to raid the great wealth of our Nation, I want them to pay for the privilege of doing so. 
Uh, taking wealth and putting it on boats and taking it away is called exports. And fortunately the sellers of such goods are already pretty good at making people pay for that privilege.

Much less reported, in checking this quote I found later on the President's twitter stream
Ultimately, I believe, we will be making a deal - either now or into the future....
Let us hope so. Alas bad ideas are non-rival too, and let us hope that the bad ideas cast about to make us look like the scary crazy negotiator don't stick too long in the process.

(Deep apologies to both Scott Sumner and Tim Taylor for an unbelievable brain fade in the first version of this post. Scott has also been writing interesting posts about China that I haven't had time to review. Apologies also to commenters whose thoughtful comments disappeared along with the erroneous post. There is no way to fix the title of a post alas.)


  1. "Growth comes from within. Trade is not conquest."

    The point of free trade is to force domestic reforms. No one has a comparative advantage making consumer goods, except via internal reforms.

  2. Nice post.

    Tyler Cowen asks today why US free-traders and libertarians, normally acutely concerned about property rights, tend to go mute on how the Communist Party of China (CPC) treats property rights, including stolen IP (or how the CPC treats civil, human, free speech or legal rights for that matter). Evidently, it is just bad form to accurately describe the Communist Party of China, or the dirigiste economy they operate.

    I have a separate issue, one I think will intrigue John Cochrane.

    Free-traders say it is axiomatic that large current-account trade deficits result in equal capital inflows. This is often presented as a boon.

    But both the Federal Reserve and the IMF have produced studies or reports that such large capital inflow lead to unstable asset bubbles in the US. In 2007-8, you had about $1.5 trillion of foreign capital seeking stocks, bonds or property in the US (and when buying property, foreign capital inflows can be leveraged between 5-to-1 to 20-to-1.). GDP back then about $14-$15 trillion per year.

    Okay, for sake of argument, let us concede large, axiomatic capital inflows bloat US asset values. Remember, the capital inflows are axiomatic from current-account trade deficits, not volitional.

    Then...we have john Conhrane's keen observation that the US financial system is a house of cards, borrowing short to lend long, especially on property (and the US financial system has been rebuilt to spec).

    Okay, so from 2004 to 2007, the Fed is worried about inflation. Maybe assets look bloaty, maybe commodities are pricey and then if there is just a whiff of wage inflation, the Fed tightens the monetary noose.

    So, you know rest of the story. The Fed yanks the rug out from under real estate in 2007-8, so property craters (real estate is credit-dependent for value), and that drags down the flimsy US financial system. You get the Great Recession, Global Financial Crisis.

    So, for US macroeconomists the question becomes how to handle gigantic inflows of foreign capital seeking a home, and which loves real estate? Do such capital inflows into housing jack up living costs? Do such capital inflows lead to unstable and bloated asset values that threaten (again) to pull down the US financial system?

    I think so.

  3. " -- beyond aggressively returning to a pro-growth economic agenda?"
    How about "aggressively pursuing a pro-well-being agenda"? Growth does not necessarily result in increasing well-being of ordinary folks. If a more healthy existence for ordinary folks comes with reduced, or even negative, growth of GDP is that not a good thing?
    Friends of mine grow vegetables in their back yard and in a community garden. They get to eat some really tasty fresh food. They get some exercise. They feel good about things. The grocery store, and the agriculture industry, get less sales. They don't pay to exercise at the gym. They did not work overtime to pay for it. GDP is depressed. But well-being is increased.

    1. For what it is worth it is not clear that GDP is depressed. Nowhere in this example is it implied that these people save more. They may simply spend their money on other things so this behavior could be pro growth. They may also take they money they didn't spend and invest in companies that have great ideas.

      Also, the time they save not traveling to and from the grocery store has value. If their health increases from a better diet that has value as well. A sense of community and belonging could add value as well.

  4. ECONOMIC WAR: China has unleashed economic war with USA. It is only question of time we will suffer. Atlast there is one Politician , President Trump has the guts to take china openly. Despite his personal faults, no country can win when other country ( China ) imposes 40% tariffs on american goods. The greed of American CEO should have some limits.Trade should be open on both sides.

  5. “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”
    As long as we keep pursuing profits, we will be better off in our own economy because it will be a great motivator. What is best for us may not necessarily reflect or mirror what a different country's economy shows, but it may work out for us in the end. As long as the choices are progressive and helps the general public.

  6. "Political ideas are non-rival as well. This will happen, and it is bloody important that these people think like us and share our freedom-minded political and social visions when they earn their seat at the table."

    Apart from possibly Hong Kong, which isn't actually external to China, what indications are there that China seeks to diminish how the West values individual freedom? Surely the technocratic leadership of China recognizes that it is not entirely state directed investment but also the economic autonomy of the individual that has created the conditions for their growth.

  7. Ideas are non rival. Thanks for reminder. Tweet to Trump?


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