October 14, 2005
From the desk of Jane Galt:Huh?
Daniel Gross says it's ridiculous to tell the Chinese to start stimulating domestic demand:
Treasury Secretary John Snow, on his trip to China, urged his hosts to stop spending so much money and adapt U.S.-style consuming, spending, and borrowing habits. Yeah, that's exactly what we need: a billion more people in this world leveraging up homes they can't afford, to buy SUVs they can't afford to drive, to drive to the mall to buy merchandise they can't afford.U.S. exports may never be competitive in the Chinese market. But if Snow is successful at encouraging the Chinese to binge on credit, the already-robust U.S. bankrtupcy industry may find itself with a gigantic new market.
Last time I looked the Chinese savings rate was in the range of 50%. They're a loooooooooooooooong way from a credit binge, even if they had a banking sector robust and sophisticated enough to provide that kind of consumer credit expansion, which they most definitely don't.
Saying that China needs to generate domestic demand is not some kind of wacky Republican plot to ruin the world economy; it's the sober and considered opinion of economists at places like the World Bank and the IMF, who have been urging China to do this for quite some time. The reason is that the world, and especially Asia, have become dangerously dependant on the American consumer to soak up growing mountains of exports. When the American consumer retrenches, as now seems inevitable (but don't ask me when), the result is going to be a nasty economic shock in countries where consumer demand is too lacklustre to pick up some of the slack. Like, for example, China.
Posted by Jane Galt at October 14, 2005 1:05 PM | TrackBack | Technorati inbound linksMegan, I think you missed a closing tag on the first link.
A couple points against the Chinese stimulating domestic demand:
If domestic demand increases, I would make the WAG that the demand for oil will increase at a faster rate than it is now. This may have adverse consequences for the American economy.
If domestic demand increases, I assume that the Chinese domestic savings rate will decrease, thereby increasing the cost of capital. This may adverse effects on the US government budget.
Until we start to get our own house in order, should this be the path we encourage?
Slate magazine has a business columnist who hates business and a movie critic who hates movies. (They used to have a TV critic who hates TV but they replaced her with a new TV critic who likes TV, or appears to once you look past all the snark and forced irony in her writing, but can't seem to keep her conventional-wisdom politics out of it. I think I preferred the one who hated TV.)
Don't forget Slate's legal columnist who hates the law.
"Domestic demand" for many Chinese would mean things like owning a motorscooter and a refrigerator, and maybe better healthcare. It would require an extraordinarily mean-souled person who would deny them that on grounds of energy conservation and of cheap capital for us...
You have to ask why Chinese citizens save so much (while not all of that 50% of GDP in net savings is household, Chinese households save a heck of a lot), when we would expect people with lower income to have a higher marginal propensity to consume. One theory that has been advanced is that it is a result of the lack of government provided "safety-net." China's development creates a lot of uncertainty for households; yet China has a very poorly developed "safety-net". In addition, the one-child policy means that parents cannot rely on their progeny as their retirement plan. Faced at once with uncertainty and an absence of social insurance, Chinese households opt to self-insure by building up savings. Since each individual household is risk averse, it saves more than necessary by a strictly risk-neutral, actuarial standard. In sum, China generates excess savings.
Another theory that has been advanced relates to the zooming real-estate market in the fast-growing coastal cities. Apartment price-to-income ratios have reached extreme levels. In the absence of a well-developed mortage market, people have to build up large savings in order to buy a place. As Chinese households started from virtually zero accumulated liquid wealth, this implies a period of very high savings while population shifts from rural areas to the cities and city dwellers move from living in communal housing blocks to owning their own homes. The forecast that these savers use for what housing will cost in the future may be skewed by housing prices in the throes of speculative bubble. Again, the result is "oversaving."
Until we start to get our own house in order, should this be the path we encourage?
As it might provide the impetus to finally put our own house in order, I say, "sure."
Although I think the concept of risk aversion motivated by a shortage of fallback options probably provides a better explanation. In the contemporary West, people have a tendency to take complex infrastructure and government failsafe for granted. As Katrina proved, that attitude may not be wise, but it is widespread.
So, when income arrives, if basic needs are currently met it is generally considered fair game for upgrading housing, transportation, or lifestyle. Hence, a basis for consumerism. Whereas in China right now, a huge block of the population yet lives in grinding poverty and a large portion of the new capitalist generation still has personal or patriarchal memories of what grinding poverty looked like. So a high savings against uncertainty would be expected.
Maybe all those canny Chinese householders are waiting for the US contraction, and the desperate lowering of prices by Asian manufacturers trying to move products that aren't selling in the US anymore.
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