"What Does a "Good" Adjustment Look Like?"
Michael Pettis, China's Financial Markets (1 September 2014).
This essay is long but excellent. It is also the best thing I have read about the Chinese economy in months. Two quotes to give readers the flavor of the piece:
But with nominal GDP is growing at 20%, this extremely incapable investor still makes a substantial profit by borrowing at 7% and earning 10%, even though his investment creates no value for the economy. His “profit”, in this case, is simply transferred from the pockets of saving households.
Under these conditions it should be no surprise that borrowers with access to bank credit overuse capital, and use it very inefficiently. They would be irrational if they didn’t, especially if their objective was not profit but rather to maximize employment, revenues, market share, or opportunities for rent capture (as economists politely call it).
The second point to remember is that in a severely financially repressed system the benefits of growth are distributed in ways that are not only unfair but must create imbalances. Because low-risk investments return roughly 20% on average in a country with 20% nominal GDP growth, financial repression means that the benefits of growth are unfairly distributed between savers (who get just the deposit rate, say 3%), banks, who get the spread between the lending and the deposit rate (say 3.5%) and the borrower, who gets everything else (13.5% in this case, assuming he takes little risk – even more if he takes risk).
This “unfair” distribution of returns is the main reason why the household share of income has collapsed from the 1990s until recently. I calculate that for most of this century as much as 5-8% of GDP was transferred from households to borrowers. The IMF calculated a transfer amount equal to 4% of GDP, but said it might be double that number, so we are in the same ballpark. This is a very large number, and explains most of why the growth in household income so sharply lagged the growth in GDP.
Clearly there are many risks to Xi’s political campaign, and unfortunately I have no special insight into how these are likely to play out, but if Xi is able to consolidate power enough to impose the reforms proposed during the Third Plenum, Chinese growth rates will continue to decline sharply but in an orderly way. Average growth during the decade of his administration will drop to below 3-4%, but an orderly adjustment means that not only will the hidden transfers from the household sector be eliminated, they will also be reversed.
If China can reform land ownership, reform the hukou system, enforce a fairer and more predictable legal system on businesses, reduce rent-capturing by oligopolistic elites, reform the financial system (both liberalizing interest rates and improving the allocation of capital), and even privatize assets, 3-4% GDP growth can be accompanied by growth in household income of 5-7%. Remember that by definition rebalancing means that household income must grow faster than GDP (as happened in Japan during the 1990-2010 period).
This has important implications. First, the idea that slower GDP growth will cause social disturbance or even chaos because of angry, unemployed mobs is not true. If Chinese households can continue to see their income growth maintained at 5% or higher, they will be pretty indifferent to the seeming collapse in GDP growth (as indeed Japanese households were during the 1990-2010 period). Second, because consumption creates a more labor-intensive demand than investment, much lower GDP growth does not necessarily equate to much higher unemployment.
Read the whole thing. While Pettis does not explicitly make this case, essays such as this have convinced me that the decisions made in Beijing are first and foremost an attempt to shape China's political economy. Those paying attention to developments in Chinese foreign policy or domestic affairs will not have trouble connecting the economic realities Pettis discusses with Beijing's behavior in both arenas.
The Samurai Archive Podcast
This is an outstanding group-discussion style podcast on Japanese history. I have been so impressed that I have added the Samurai Archives to the Stage's blog roll. This episode on Oda Nobunaga was the one that got me hooked.
"Being a Young Adult in this Generation Sort of Feel Like Stumbling Upon the Desolate Remains"
Comment by BecomesAngry, reddit/r/Showerthoughts (10 September 2014)
This may be the most depressing thing you will read this week. Everything I have written about how the rising generation has no future and the threat this poses to America's stability and prosperity is in here.
"The Creepy State Attracts Creeps"
Mark Safranski, Zenpundit (4 September 2014).
This deserves to be national, "Call your Congressmen!" news. It isn't.
"How the GOP Got this Way"
Michael Barone, Washington Times (8 September 2014).
A convincing comparison of the relationship between the Tea Party and the GOP today with the Peace Movement and the Democratic Party in the 1960s-70s.
"Places With Guns Don't Have Higher Crime Rates,"
Robert VerBruggen Real Clear Policy Blog (5 September 2014)
"What the NeoReaction Doesn't Understand About Democracy"
Eli Dourado, The Umlaut (20 August 2014).
In a 2004 paper in the Journal of Economic Perspectives, economists Casey Mulligan, Ricard Gil, and Xavier Sala-i-Martin empirically examine whether the world’s democracies and nondemocracies have different policies, with intriguing results. They find, controlling for economic and demographic variables, that democracies have similar government consumption, education spending, social spending, corporate tax rates, and payroll tax policies as nondemocracies. The only economic or social policy that the authors tested that significantly differed under democracy was income tax progressivity—democracies, it turns out, have flatter tax codes than do nondemocracies.....
THE MIDDLE KINGDOM
"Transformation or Bust, Part II"
Worth Wray, Forbes (11 August 2014)
"Zombies once Destroyed Japan's Economy--Now They Are Infecting China's"
Gwynn Guilford, Quartz (29 August 2014).
See my comments above about how China's political economy drives Zhongnanhai's decision making process for why the data included in these two essays is important.
"Hong Kong's Share of China's GDP"
This one chart will tell you more about Beijing's recent moves in Hong Kong than an essay of two thousand words could.
"Review: Hard Road Home: Selected Essays by Ye Fu"
John Butler, Asian Review of Books (2014)
I reviewed this book with great praise back in March. It is nice to see another thoughtful review.
"ISIS Tentacles Reach Towards China"
Peter Lee, China Matters (14 August 2014)
I am incredibly impressed with this essay; most China hands now the Beijing scene well, and the best of them keep track of top players in Tokyo, Hanoi, Seoul, Manila, and other parts of maritime East Asia. Very few do all of that and know enough about Pakistani internal politics and Jihadist networks to write an essay like this.
"The US and China: sliding from engagement to coercive diplomacy"
David Lampton, PacNet, no. 53 (4 Aug 2014).
Some in the China studies field have argued against the proposition that China’s regional policy has become more assertive. I am not among them. There has been a qualitative change in Chinese regional policy and broader strategic alignment....
All this gives rise to several questions:1) Why (or to what extent) has Beijing changed a successful policy that for more than three decades facilitated a dramatic increase in Chinese comprehensive national power without engendering a proportionate rise in the anxieties of others?2) To what extent is China responding to the behavior of others and to what extent is it seizing on small provocations to make advances?3) Why is Beijing jeopardizing the primacy of its internal, economic reform goals by alienating substantial chunks of its periphery and running the risk of an ever-stronger international coalition pushing back?4) Why is Beijing allowing itself to be driven into a corner of alignment with Russia, an economic underperformer that violates the PRC’s own 60 year-old-principle of respecting national sovereignty?5) What are the lessons that we learned from the Cold War about strategy, deterrence, and coercive diplomacy that have applicability in current circumstances in a far different globalized world?6) Has US policy in any way given added push to negative developments?7) What are the appropriate (and effective) policy responses available to Washington? What are clearly disastrous paths that Washington and others should eschew?....
"China's Education Gap"
Helen Gao, The New York Times (4 September 2014)
THE HUMAN SCIENCES
"The First Smile"
Mike Graziano, Aeon Magazine (13 August 2014)
Long before written symbols, even before spoken language, our ancestors communicated by gesture. Even now, a lot of what we communicate to each other is non-verbal, partly hidden beneath the surface of awareness. We smile, laugh, cry, cringe, stand tall, shrug. These behaviours are natural, but they are also symbolic. Some of them, indeed, are pretty bizarre when you think about them. Why do we expose our teeth to express friendliness? Why do we leak lubricant from our eyes to communicate a need for help? Why do we laugh?
"Genes Influence Young Children’s Human Figure Drawings and Their Association With Intelligence a Decade Later"
Rosalind Arden1, Maciej Trzaskowski1, Victoria Garfield2 and Robert Plomin1, Psychological Science, (Publ. online before print, 20 August 2014).
"Der Todd des Der Euro" and "The 'Anthropology' of the Financial Crises"
"Pseudeoerasmus," Pseudoerasmus (1 August 2014).
Psuedo's dissection of the Eurozone is both novel and deeply informed . The posts' argument ranges from demographics, to anthropology, economics, and sociology--all in all strongly recommended!
"Anthropometry, Physical Anthropology, and the Reconstruction of Ancient Health, Nutrition, and Living Standards"
Geoffrey Kron, Historia: Zeitschrift für Alte Geschichte, vol 58, iss 1 (2005), pp. 68-83.
This survey of skeleton heights from classical Greece and Rome is useful. It turns out that Roman and classical Greek men were taller than Italians or Greeks born before and during the Industrial Revolution! In contrast, the mean height for U.S. Army recruits barely budged between 1776 and 1943.
See also: "Ancient Skulls Show Civilization Rose as Testosterone Fell," Matt Picht, KTVU (2 September 2014).
"Plant Breeding, Not Working Slaves Harder, Drove Cotton Efficiency gains in the South" and "Baptism by Blood Cotton"
"Pseudeoerasmus," Pseudoerasmus (5 & 9 September 2014)
"Where We Came From and Where We Went, State by State"
Gregor Aisch, Robert Gebeloff, and Kevin Quealy, New York Times (19 August 2014)
"AfPak in a Nutshell"
Adam Elkus, Rethinking Security, (31 July 2014).
If you missed this piece when it was originally published two months ago you should go and read it now. I'll be passing this post along for another four or five months to everyone I can.
Adam Elkus has a new blog by the way. See his "Rationality is Overrated" and "The Ballad of BoxeR" to get a sense for the topics he writes about there.
"The Future of Warfare: Small, Many, and Smart vs. Few and Exquisite"
TX Hammes, War on the Rocks (16 July 2014).
Power and Order in Asia: A Survey of Regional Expectations
Michael Green and Nicolas Szechenyi, CSIS Asia Program (Landham, MD: Rowand and Littlefield, July 2014).
"Kim Jung-Un: Starving for Power"
Patrick Cronin, War on the Rocks (25 August 2014).
"Does pre-industrial warming double the anthropogenic total?"
William Ruddiman,Steve Vavrus,John Kutzbach,Feng He, The Anthropocene Review, vol. 1 no.2 (August 2014), 147-153.
"The Future of College?"
Braeme Wood, The Atlantic (13 August 2014).
See also: Burt Likko, "Abolish Advanced Placement" Ordinary Times (14 August 2014).
"Speaking of Southeast Asia"
Nicolas Farelly, New Mandela (5 September 2014)
So the challenge for New Mandala contributors is to suggest a Southeast Asian word that you think should be (but currently isn’t) used in other languages. It can be a word that is already on its way towards such usage, an obvious choice might be farang (from the Thai), or perhaps a concept from completely outside the usual frame, such as my old favourite, Sutdu (a Jinghpaw term for “tycoon”)....
See also parts two and three of Adam Tooze's outstanding set of lectures.