Chinese growth prospects

A politically correct Harvard paper “Asiaphoria Meet Regression to the Mean” by the politically correct authors Lant Pritchett and Larry Summers tells us, or seemingly tells us, that China’s rapid growth is unlikely to last. They examine fifty or so periods of rapid growth, and, almost always, sad to say, there is regression to the mean. In the long run, the periods of rapid growth make little difference.

These are, unlike your usual Harvard intellectual, genuinely smart people, and, for smart Harvard people, surprisingly truthful. And, if you take a powerful microscope, read between the lines, read what is unwritten, you will read the truth. If you listen to what they are not saying, you will hear the truth.

There are a near infinite variety of ways to have bad or negative economic growth. There is one way to have good economic growth, and if your country is Cathedral Compliant, it is not allowed to do things that one way.

Instead of just noticing that periods of rapid economic growth tend to come to a sad end, Lant and Larry took a look at these sad ends.

nearly every country that experienced a large democratic transition after a period of above-average growth (more than the cross-country average of 2 per cent) experienced a sharp deceleration in growth in the 10 years following the democratizing transition.

In other words, the reason that periods of rapid economic growth come to a sad end is that the Cathedral comes after you. It is not regression to the mean, but Cathedral reconquest.

Lant and Larry notice that China is anomalous, different from all their other examples, in that unlike all their other examples, with the partial exception of Singapore, large and long economic growth has not resulted in “Democracy” – their prediction that China will not continue to grow is not a prediction that some mystery factor like “exhaustion of the low hanging fruit” will end China’s growth. It is in fact a highly pious prediction that the Cathedral will soon enjoy its inevitable victory, due, no doubt, to the forces of history.

When making highly pious predictions, Lant and Larry are less reliable than usual.

13 Responses to “Chinese growth prospects”

  1. Orthodox says:

    China is going to have a crisis because it has too much debt. Don’t tell me about the buildings and infrastructure; the U.S. was a far more bullish specimen in 1929 but it went down the tubes. (There’s that Cathedral again……)

    Look at the reforms they are implementing in China though: they are all aimed at two things: getting the government out of the economy and tightening the government’s political control. So this is not a 1929 scenario. More like Reagan/Thatcher, but on a way bigger scale. Like if Reagan had Ted Kennedy executed for treason in 1982.

    • jim says:

      US debt to GDP levels are far higher than Chinese levels, and the same level of debt can be handled much more easily if you are growing than if you are shrinking.

      Chinese debt is largely state banks lending to state firms to keep them from going bankrupt. It is owed by the socialist sector of the economy which, if push comes to shove, can be allowed to fail without any very bad consequences.

    • Dan says:

      The US did not go down the tubes in 1929. It had a monster recession, but afterwards it returned to the pre-depression trendline. That is to say, there was enough catchup growth to entirely erase the effects of the depression.

    • Dan says:

      The recession in the 1930s was due to the fact that the US was the workshop of the world and there was a global slowdown. If the world catches a cold, the big exporters get pneumonia. That is brutal but it is cyclical.

      When global demand returned, the world’s workshop (the US at the time) had a massive resurgence.

      In fact, given the global recession, China ought to have had a huge downturn in recent years, being so export-centric. Other export-centric economies (Germany, Japan) were hit hard. The fact that China grew strongly amid these headwinds suggests a very strong position indeed.

  2. vxxc2014 says:

    The need to capture large internal markets like the US has drove Hitler to the East, the need to defeat the Western Powers before they had equal Air Forces drove him to War in the West. Germany was and remains an export driven economy. Even after the war began only Hitler’s personal directives got Steel to Wehrmacht production instead of exports.

    Now these forces remain today and aren’t going anywhere good. Unless they do go somewhere else.

    Unless entire nations can find new export markets or massive internal markets, or both. Traditionally finding new internal markets means conquest. At this point conquest on earth would be extremely dangerous [nukes] and costly in any case. But there is a solution and it’s the Infinite lying fallow. I mean Space and what is above our heads. Room enough for everyone above us, enough growth built in just getting any settlement in orbit or on the moon to fill 25-50 years of manufacturing orders.

    If Hitler and the Japanese had rocket technology of only 15-20 years later WW2 would not have happened. Hitler needed the East for internal markets, Japan needed Manchuria for raw materials.

    The answer is right above our heads. Further with a Boer leading the private sector US effort and the current state of modern governments the early United Provinces is an excellent model to examine. For the United Provinces conquered all of an entirely new world it needed to [the ports] while fighting an 80 year endless war against Spain, the world’s land Superpower. As some of us might have to as well.

  3. Dave says:

    Imagine flying over America in 1900. Across this vast landscape, every house, village, town, city, and railroad is where it is for a *reason*. People work real jobs producing real goods, and have carefully arranged their homes, workshops, and factories to best take advantage of fertile soil, mineral deposits, and navigable water. Whenever changing market realities make the current arrangement less than optimal, people move; government does not pay the unemployed to sit on their asses waiting for their old jobs to come back.

    That’s not America today. Those same towns are now welfare slums. The mines and factories are closed, the farms are abandoned, and the people escape boredom by gorging on cheap mass-produced food and getting high on drugs.

    That’s not China today either. Millennia-old villages are being bulldozed to build modern high-rise cities. Not because there’s an oil field, factory, or seaport nearby that requires a large workforce to service it, but because government planners saw a blank spot on the map and used it to hit their GDP growth targets.

    • jim says:

      The ghost cities problem is exaggerated. The cities are supposed to be sold to private speculators, and, for the most part, they are.

      The classic failure of the command economy is to command stuff to be built that nobody wants, turning valuable raw materials into garbage. And the only cure for the problem is to reduce the element of command, replacing it with customer demand. Which the Chinese authorities are doing.

    • Dave says:

      That because private speculators have a lot of cash to invest, thanks to the government’s reckless money-printing. Welcome to the new communism — central banks buying up every distressed asset in sight to prevent a badly-needed market correction and keep the boom going at all cost.

      Central banking is leading the First World into a command economy that produces only what the central bank is willing to buy — and you think it will have the opposite effect in China?

      • jim says:

        Private speculators will seldom buy worthless junk.

        If you command GDP growth by the central plan, you tend to produce worthless crap, and this has been a problem from time to time in China, but it seems to me that the current regime is aware of the problem and is trying to stimulate rather than command – though stimulus tends to become command, and command tends to produce worthless crap. But even though the Chinese government screws up with great regularity, they never screw up as badly as Obama with his infamous “shovel ready projects”.

      • Dave says:

        “Private speculators will seldom buy worthless junk.”

        They’ll buy junk with both hands if they can flip it to the central bank for a profit. Zero Hedge calls this strategy “front-running the Fed”.

        I agree that electing Barack Obama in 2008 was the most expensive catastrophe in the history of the world. The final toll in human lives is anyone’s guess.

  4. I think its quite clear that there is a Keynesian multiplier of about -2.
    It costs the Economy about $3 for the Gov’t to raise $1 to spend, (according to various papers like Romer and Romer, there’s pretty much data on the $3 cost) and they count the $1 into the GDP figures so that winds up about -$2.

    I think this pretty well explains how Harding managed to end the depression of 1920, if you run the numbers, and I used it at the beginning of Obama’s term to predict the unemployment figures going out, based on the stimulus, and it was spot on for years. (Romer and Bernstein published a model with a graph projecting employment with and without stimulus, based on +1.5 Keynsian multiplier, so I could basically get my graph by just mirroring their “with stimulus line across their “without stimulus” line. It was spot on for years, till other factors intervened.)

    Anyway I recall driving Spring 2009 listening to Larry speak and answer questions as Obama’s Economy Czar (more or less) and he was honest enough to say:
    “You have to get GDP growth up to at least 2.5% to possibly increase jobs fast enough to keep up with population growth” and I was thinking,
    yeah, with this huge stimulus drag that will be a long time acoming.

    • jim says:

      That is very interesting.

      Obvious that negative multiplier model is going to yield the most accurate results when there are large planned changes in the amount of stimulus, and drift once the stimulus is fairly constant.

      Could you provide graphical data showing goodness of fit following large changes in stimulus?

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