Roach on globalization and China
Stephen Roach made three arguments last Friday.
I disagree with two of them, but agree with the third. And the third is by far the most important.
But before getting to the point of agreement, the points of disagreement.
The US saves less than it invests. Roach thinks the US would do so no matter what China does. So rather than criticizing China for subsidizing its exports (and US consumption), the US ought to be writing China thank you notes.
This is one of those arguments that I strongly disagree with. It is an example, I think, of what Brad DeLong calls one-equation economics. I personally don’t think the US deficit can be divorced from the willingness of China (and others) to finance it. Like Morris Goldstein, I don't think savings and investment balances are entirely independent of exchange rate policies, even if finding the connection takes a bit of work.
It is pretty easy to explain why the depreciation in the real value of the RMB (in the face of strong Chinese productivity growth) led – with a lag to the rise in China’s current account surplus. It is even easy to link the depreciation in the RMB and growing profits in the export sector to the surge in Chinese business savings. And, as Martin Wolf has shown, China has had to adopt restrictive macroeconomic policies to prevent inflation from eating away at the real depreciation. In order to avoid real appreciation through rising inflation, China basically had to clamp down on bank lending and increase government savings … pushing the current account surplus up.
That is the core of my disagreement with Dr. Jen. He argues large Chinese current account surpluses are a natural byproduct of globalization. I think they are a natural byproduct of an undervalued RMB.
By contrast, if you start from the savings and investment side, is seems — at least to me – pretty hard to explain why the 10% of GDP increase in China’s investment to GDP ratio over the past few years should be associated with a rise (not a fall) in China’s current account surplus. Clearly, Chinese savings has grown even faster than Chinese investment – but unless it is pretty hard to explain what shock triggered a 15% of GDP increase in China's propensity to save.
A surplus in one part of the world has to be offset by a deficit elsewhere. So it isn't surprising that I think that there is a link between China’s savings surplus and the US savings deficit. China's large current account surplus and the associated growth in Chinese reserves, basically subsidizes US external borrowing. Without that subsidy, the US would borrow less from abroad. It would either save more or invest less.
China’s 2007 current account surplus looks set to top $300b, which is roughly enough to finance a third of the US current account deficit. There isn’t a comparable source of substitute financing out there. If China adjusted, the US would be forced to adjust.
Roach also argues that Chinese value added is low. He cites a Lawrence Lau paper from 2003. Lau was working off data from 2002, if not before. In 2002, China exported $300b and ran a $30b (customs) trade surplus. In 2006, China exported almost $1,000b of goods and ran a nearly $180b trade surplus – all while both importing a lot more oil for domestic use and paying a lot more for that oil. Chinese value added has – according to somewhat anecdotal but at least recent sources – gone way up over the past few years. Previously imported components are now made in China. There is no other way China could run such a large trade surplus while paying so much more for its imported commodities.
However, I fully agree with Roach’s key argument.
There can be no mistaking the intensity of the angst bearing down on the American workforce. I suspect something else may be at work here. As I have noted previously, at present, there is an extraordinary disparity between the capital and labor shares of US national income (see my 8 January dispatch, “The Power Shift”). The profits share currently stands at a 50-year high of 12.4%, whereas the labor compensation is just 56.3% — back to levels last seen on a sustained basis in the late 1960s. It turns out that’s a very different juxtaposition of economic power relative to that which prevailed during the Japan bashing of the late 1980s. Back then, the shares of both capital and labor were under pressure: The profits share of about 7% was well below the 10% reading hit a decade earlier whereas the labor compensation share of about 58% was down markedly from the 60% reading hit in the early 1980s.
In my view, this underscores a key element of tension in America’s current backlash against globalization that was not evident in the late 1980s. Today, the pressures are being borne disproportionately by labor, whereas 20 years ago, capital and labor were in the struggle together. In the late 1980s, many of the once proud icons of Corporate America were fighting for competitive survival at the same time that US workers were feeling the heat of global competition. The pain was, in effect, balanced. Today, US companies, as seen through the lens of corporate profitability, are thriving as never before while the American workforce is increasingly isolated in its competitive squeeze. In essence, capital and labor are working very much at cross purposes in the current climate, whereas back in the late 1980s they were both in the same boat.
Despite all the talk about the risk of protectionism, I bet that there has been a lot less actual protectionism in the face of the current 6% of GDP US trade deficit than in the face of far smaller (as a share of GDP) trade deficits back in the 80s. The key reason: the China trade has generated a set of concentrated winners in corporate America and in the financial sector and they have exerted a bit of influence over actual policy.
The US has been no more willing to tax US imports from China (Walmart's supply chain) than US imports of oil …
Back in the 1980s, US auto firms using US workers were competing against German car firms using German workers and Japanese car firms using Japanese workers. As Roach notes, US firms were in the same boat as US workers.
That is less true today, even with respect to Japan. Ford owns a Japanese car company. Toyota makes a lot of cars in the US, even if Toyota’s US production is declining relative to Toyota’s US sales.
And it certainly isn’t true when it comes to China. US and European automakers are up in arms over the yen, but not over the RMB – presumably because GM and VW are making a lot of cars and a bit of money in China. And a huge number of US firms – the “designed in California, made in China” subset as well as the “everyday low prices" subset – depend on a Chinese supply chain. Or perhaps a Taiwanese run supply chain that now produces in China. US firms than can source production in China win from a weak RMB, as do US financial firms that supply China’s huge demand for financial assets.
US consumers win too – at least in principle. It isn’t quite as obvious in practice. Higher prices for the things China buys (oil, commodities) and the things China finances (houses) offset lower prices for the things China makes (most manufactured goods), especially when median nominal wages haven’t risen by that much over the past few years. Median real wage growth hasn’t been impressive during the past few years (even if 2006 was better), and real compensation growth has lagged productivity growth.
With labor compensation slipping as a share of national income and a growing share of those wages going to those at the very top (See the CBPP report on the latest data on after tax income), it isn’t exactly a surprise that a large set of folks are asking what is in it for me.
The raging debate over inequality spurred by Dr. Cowen misses a point. Workers may not be worse off than they used to be. But if they aren’t getting better off, they may not continue to support the policies that make those at the top better off. Stephen Roach gets it. Dan Gross does too. And he has figured out why at least of the more far-sighted winners are starting to worry too.
Excellent piece. On target.
Now, the 64 billion dollar bonus question is: Can the good fortunes of those at the top carry this economy? Can they, in effect, spend enough—and spend it in the right ways?
If you listened to CNN’s coverage of the Bush visit to the NY Stock Market, you would think we never had it so good.
At the level of discourse you and Stephen Roach (and a few others in this blog’s comments section) engage, the differences are primarily about nuance. Should the list of issues start with the US savings/investment gap, or should that item be second to Chinese exchange rate/trade?
The differences are important, but only at this level. When it comes to Congress threatening protectionism and looking a whole lot like they’re about to take a hammer to American consumers . . . well, aren’t we all pretty much on the same page?
* * *
GIGO moment of the day: The 10% rise in China’s investment-to-GDP ratio is based on pre-revision GDP figures (where the first digit to the left of the decimal is unreliable), or post-revision GDP figures (where the first digit to the right of the decimal is unreliable)?
_____________
Never attribute to policy that which can more easily be explained by poor data.
Damelo, your Mandarin is pretty good. I’m not sure about your use of “nan”, though. and why don’t you like Messrs. Setser and Roach?
What? Setser is especially small, even smaller than Roach?
[BSETSER INSERT: on the advice of a sinophone, I took down the Chinese comments]
“If you’re working on Chinese exchange rate issues, it’s very important that you translate the above. The information might be more critical than you think.”
Other than insults, what information does the above convey?
Excellent analysis.
It also bears down on one of the central issues of today: political power has flowed to the top of the income ladder at the same time that wealth has. Any protectionist impulse would have to get through great (elite) political resistance. That is why I think Roach’s fears may be overblown. Voters are disempowered as never before, by voting machines, corruption, disenfranchisement, and the ability of the powerful to neutralize the Democratic party with their money.
On the other hand, as things continue to get worse for workers, the backlash by voters could become furious. Interesting times!
It’s been interesting to see how the mainstream media has focused on Clinton and Obama, two free-trade stalwarts. Edwards has not been getting attention. If voter discontent increases, the globalization-as-usual politics of Clinton & Obama may not suffice.
Duibuqi HVH, wo juede zhege fanzi shi Roubini de!
dissent:
Good point on the political situation.
To date the single best political voice on the impact of globalization on American workers — by which I mean sympathetic without being patronizing or demogogic — has been Bill Clinton. The only memorable line from the 2004 Democratic National Convention was his:
“we can’t enforce our trade laws against our bankers … I mean c’mon!”
There’s our trade relations predicament in a nutshell.
Until more of our political leaders learn to talk about this, we’ll continue to be divided between the dumb, fat and happy ibankers & executive class on the one hand, and the terrorized but ill-informed workers on the other.
You wrote:
“That is the core of my disagreement with Dr. Jen. He argues large Chinese current account surpluses are a natural byproduct of globalization. I think they are a natural byproduct of an undervalued RMB.”
The Yen strengthened from over 200 in the mid 1980s to 85 in 1995 and that didn’t dent the surpluses of Japan.
Since Roach doesn’t just come out and say it here, I’ll say it for him.
American corporations have found it cheaper to produce overseas. And with each passing day they have less use for American workers.
Maybe I’m wrong. With this hope, I have request to make. Can anyone tell me where the money’s coming from and where it’s going for investment in new production that does not necessarily need to be consumed domestically?
For example, the data would answers questions like: Is the U.S. investing a higher or lower percentage of it’s total domestically than before? What are the trends?
Don’t count things like home building. But do count things like R&D for computers or biotech. Don’t count Alcatel buying Lucent. Lucent isn’t new.
I’m trying to get a picture of the flows of this type of investment and, not being an economist, don’t know where to look.
Oh, I forgot to mention the flip side. The destruction of existing production.
I posted this request to a few other econocentric blogs witout success. This data would seem to be very relevent to discussions such as these but no one ever cites any stats like these.
“Paulson tells angry senators that he will push China”:
http://news.yahoo.com/s/nm/20070131/pl_nm/usa_china_paulson_dc;_ylt=Am8XtALzYc28FjzIC2o8IIABxg8F;_ylu=X3oDMTBjMHVqMTQ4BHNlYwN5bnN1YmNhdA–
Just to get the picture clearly, Brad, what could the US do “in fact” to “push” China to revalue that would not hurt us more than China? A little essay on this would be helpful to those of us who are not up on the real policy alternatives.
Paulson tells angry senators that he will push China
Push China to do more business with Goldman Sachs maybe. Anything else, forget about it!
Pushing China is hard — that is the problem. Pushing the US is also hard — some say that is also part of the problem. The way out is for folks on both sides to conclude that our mutual interdependence has evolved in an unhealthy way, and for there to be real commitment on both sides to gradually change …
that sounds vague, but necessarily so — for China it means letting the XR appreciate and shifting away from a policy regime that requires macro limits to avoid overheating — and, basically, starting to subsidize poor rural China rather than rich urban America. that is hard in part b/c domestic subsidies are visible and on the balance sheet, while the PBoC’s subsidy for the US is off balance and sufficiently hard to understand that some (cough, felix) think China is making money off its reserve accumulation, when in reality it has to buy ever more us debt to avoid taking losses on its existing holdings.
And we in the US need to save more — do a bit more real engineering and a bit less financial engineering (hard as it is for me to say, since I am more of a financial engineer) and so on. We also need to rebuild our system of social insurance, fix our disfunctional and costly health care system and so on — and find ways of doing so that don’t involve more bororwing/ bigger deficits/ etc. I would have put more emphasis on fiscal changes a couple of years ago, but the US fiscal position has improved more than the US current account position …
all that said, I tend to agree with the notion that the last thing the US needs to push China to do politically is open up its financial sector to Goldman and others — they aren’t the ones feeling the heat from Chinese competition/ aren’t the ones who need a political boost from the US gov (tho a few NY i-bankers seem to be feeling the heat from London, tho, from what i gather, not enough to reduce the fees they charge for an IPO … )
PC — several posts ago I dug up the US Japanese bilateral trade data in a debate with DC. there was a noticeable improvement in the US -Japanese trade deficit from 86 to 92 … tho not as big a swing as in the US-European trade deficit. The dollar’s broad decline from 86 on clearly had an impact on US export growth, and helped bring the overall deficit down. After Japan’s bubble economy burst, the story is a bit different — but the real myth here is that yen depreciation never had an impact. It clearly did have an impact before the bubble economy burst. And the us/ european trade balance clearly moves in response to the DM/ $ and euro/$. the data here is very clear.
Ponzi — the easy answer is to look at the investment data (US domestic investment) in the GDP data (national income and products data). the level of business investment in the US has bounced back from its lows in 02 or so, but remains below its peak in 00. I think you compare that number with the FDI inflows in the balance of payments data to get a sense of how much of that is financed directly from abroad, but that clearly understates net us dependence on foreign savings. In broad terms, the US invests @20% of gDP, and saves @13-14%, making up the difference by by borrowing from abroad. US direct investment abroad can also be taken from the BOP data, but that leaves out investment done by say Taiwanese and chinese companies financed out of their domestic savings to meet US demand … tis sort of like Coke and its bottlers — the bottlers raise a lot of money to invest in their operations, but it doesn’t appear on coke’s balance sheet. Those are hints tho — I am not at all an expert on the investment data in the national income and products accounts and questions like how to best account for R and D and the like.
‘capital and labor were in the struggle together’
And together they got through it — by dint of scorched-earth headchopping. Roach’s nostalgia for a golden age of scrappy solidarity is touching, but somewhat ingenuous. That was also a right-wing regime, after all. The main difference now is that corporations are pushing the limits of factor substitution. In the current environment of pervasive overcapacity, subverting competition will be a more effective response. That means unchecked consolidation in industrial markets and rigged laws to proscribe choice in consumer markets. It requires regulatory capture of unprecedented scope. Mission accomplished there, at least.
YESTERDAY: The CNY carry trade…
TODAY: The BMW carry trade
A BMW owner who twice pawned his car for 200,000 yuan, with a monthly interest rate of 4.7 percent, in the Jinbao Pawnshop in Beijing boasted that his stocks had yielded a 20-percent gain.
Pawnshops in Beijing offer loans worth 70 percent of the value of an apartment and charge a monthly interest rate of 3.2 percent.
A man surnamed Li pawned his 200-square-meter apartment worth over 1 million yuan (US$129,000) near Beijing Capital Airport for 800,000 yuan so he could invest in the stock market. He then pawned his stocks for 700,000 yuan and bought more stocks.
http://www.chinadaily.com.cn/china/2007-01/26/content_794156.htm
I also noted that State Owned Enterprises were explicitely warned not to gamble in the stock market….
Why shouldn’t Paulson push the Chinese to let Goldman (and other players) into Chinese banking? It’s an area he knows extremely well, it is a major high-value industry that brings major revenue into the US (well, some fraction of it after the various dodges … but those are another issue).
If populists eventually hit upon trying to tax our “economic royalists” (FDR), they’ll be a heck of a lot more successful raising revenue if those fat cats aren’t all nearly broke themselves.
And remember, all that’s left of the British Empire is the City of London (from a certain point of view). Decades after the near-death experience of WWII, London is *still* a major financial center — arguably THE financial center. There is some value to all Americans in keeping NYC in that game.
But of course, I’d ALSO like to see more action on improving labor and environmental standards in China, etc. Stuff that would make trade *fairer* and less of an international race to the bottom. We won’t get any of that if we don’t FIRST: stay competitive where we still can, and SECOND: get our fiscal house in order by trimming back our over-extended military commitments and raising some revenue from Bush’s “have and have mores” base. Otherwise we’re stuck trying to (as Bill Clinton put it) “enforce our trade laws against our bankers” — NOT!
The exchange rate adjustment makes sense if you are talking about two economies with similar price structures — that way domestic price structure can be preserved while trade balance adjusts. It is not necessarily the best course between two such disparate economies. China needs to raise labor’s share of the economic output and domestic consumption more than anything else. It can do this better through enforcing labor laws, developing the service sector and providing better safety nets. Otherwise pushing through the appreciation could create Japanese style deflation that will hardly benefit the majority.
I was saying that Chinese domestic price structure (that of labor to goods) needs to adjust — not to be preserved, in case that was not clearly stated.
Brad,
I appreciate your reviewing the 1986-92 effort to fix the US trade deficit by driving down the dollar against a range of major currencies. What I missed was the impact on highly sophisticated, institutionally modern, politically stable Japan, and what a similar ‘adjustment’ might mean for China (which has none of those critical characteristics).
And, the minor issue that China doesn’t own its own export industries.
If it is allowed, I would like to re-post the comment I made rather late in the Davos Lie debate, since it is relevant here, and I will refer to it below:
I still say “globalisation” is a misleading word, because it implies that it is increasing economic openness that is making life harder for Americans. I do not think that this is the main cause of the change. The key event is simply the fact that China, India etc, have decided to wake up and take their share. From then on, the terms of any trade between America and the rest of world will be worse, because you have more competition (unless you can get third party countries to trade with you preferentially of course). Even if all economies were becoming more closed, the US would still get relatively poorer, and of course, to the extent that trade really is welfare-improving, every country would be absolutely poorer than otherwise.
Brad
There are various reasons why the US saves comparatively little. You emphasise the supply of savings from China. I think there is another China-related cause, related to the competition effect I mention above. Americans are borrowing to resist the incipient impoverishment arising from this competition. For example it is driving up the prices of commodities such as petroleum, copper for plumbing and wiring in houses, soybeans for livestock etc. Rather than consume less, Americans pay up and run down their savings. They are culturally imbued with the idea that their living standard generally improves, so they borrow to get through what they see as temporary hard times, and look to the politicians to fix it. The borrowing channel itself creates some financial jobs that are not obviously related to China. So, for a while, the impact of competition is not fully apparent, but it is only being delayed, not avoided.
Brad
I thought that your debate with DC about the effect of exchange rates on the US trade balance really needed some econometrics before any conclusions could be drawn. As I have argued in previous debates, I believe that Americans’ propensity to borrow is related to their optimism. If so, the fall in the trade (and current account) deficit with Japan in 1986-1992 might have been associated with negative shocks to expectations (eg the 1987 crash) that discouraged the US consumer, and prompted Fed easing which depreciated the dollar. In other words, the association between dollar exchange rates and the US trade deficit may arise from a common cause as well as (undeniably) a direct relationship. To try to unravel these effects, it would be necessary to include both in an econometric model and estimate it.
Good analysis.
“American corporations have found it cheaper to produce overseas. And with each passing day they have less use for American workers.”
Sort of like American workers that find with each passing day they have less use for American made products.
Rebel — Menzie Chinn has done the econometrics. A fall in the dollar (broad dollar) pushes up US export growth and has a negiglibe impact on US import growth. The sample period includes the $ rise in the early 80s and the $ fall in the late 80s. Occular econometrics shows the same thing — plot the $ v. y/y US export growth and y/y US import growth and it shows the same thing. I was never very good at econometrics and am now downright terrible, but at one time I ran a model built by Joe Gagnon (now at the Fed) to forecast the US trade balance, and, low and behold, it (accurately as it turned out) predicted the $’s late 90s rise would increase the US trade balance. This relationship is robust.
DOR — I did present the data on Japan. If memory serves, the US trade deficit with Japan was reduced by about $20b between 86 and 90/91. Obviously, more was going on, but there was a response.
The China/ Japan comparison is difficult, but I would argue for different reasons. Japan responded to a weak yen with monetary easing to keep growth at the very high rates Japan expected; the result was a bubble economy. Right now, China is flooding its economy with liquidity (de facto monetary easing combined with financial repression) and creating, it seems, its own version of a bubble economy.
It seems to me that the relevant comparison for China isn’t Japan in 80s, but China in the late 90s — back when the RMB rose in real terms b/c of the $ link. China didn’t enjoy anything like its current boom, but it didn’t do all that badly …
(incidentally, China might have done better if had not seriously restructured its SOEs just at the moment the $/ RMB was rising v. the rest of ASia post 97 … that did deliver a bit of a deflationary shock … and, given all that was going on, I personally think China might have been better off with a bit more flexibility then and a bit more now … )
STS — I am no longer so sure the US currently has much of an advantage at cross-border financial intermediation — all that biz is going to London, or so it seems … and the uS has always done more international banking biz in NY vis a vis the Latin countries that vis a vis China/ East Asia.
But my bigger problem is that allowing US financial firms to take stakes in chinese financial firms — while lucrative for the ex-Goldman partners and great for the treasury if the treasury gets its cut of their capital gains and they aren’t deferred or hidden or avoided in some structure — doesn’t really generate any jobs in the US. It helps US capital, but not US labor — not even high end labor. Goldman doesn’t have an office in NYC doing credit analysis for ICBC, the BAnk of America doesn’t have an office in N. caroline for the Bank of china (hope I matching US institution to Chinese bank correctly). And so on. Domestic CHinese financial intermediation is done with Chinese labor –
So in my list of priorities, I wouldn’t put helping an industruy that a) already is doing well in a globalized economy b) profits from chinese financial inflows and c) would not use US-based labor to manage/ operate its financial stake in Chinese banks at the top of my to do list … it strikes me as very tangental to the business of getting along with global adjustment (apart from the tax revenues it generates … ).
the case that it helps adjustment hinges on the argument that US financial entry would change chinese banking culture and lead to more use of credit cards and financing of consumption, so less savings … the problem is that right now, China cannot allow the bnaks to stimulate the economy with more lending w/o overheating given the strong boost from exports and internally financed business investment. The internal distortions in China’s financial system and financial repression are directly tied to the mechanics of the peg (Goldman, ironically, had a good report on this … ). So I personally think the constraint on Chinese banking reform isn’t the lack of foreign entry, but rather the peg.
To Brad Setser,
Sure Brad, pass the blame and scapegoat the Chinese for the monetary policy failures of the Greenspan Federal Reserve. By artifically suppressing interest rates well below the inflation rate to a historic low of 1 percent, it was the Greenspan Federal Reserve that inflated numerous credit bubbles in Dot-con stocks and Housing.
Until the Bernanke Federal Reserve discontinued reporting of broad M-3 statistics, the money supply was increasing exponentially at double digit rates. The statistics were too embarrassing for the Federal Reserve to continue reporting. Now ask yourself, if only the US Federal Reserve has the authority to print trillions of fiat dollars, where did those trillions of dollars in Asian foreign reserves originate from.
Frankly it is a ludicrous argument that somehow those devious Chinese Central Bankers are responsible for forcing Americans to overconsume on McMansions and gas-guzzler SUV’s. Has anyone in the US Treasury Department or the Fderal Reserve ever discussed the terminology, “taking personal responsibility for one’s decisions”.
Regards,
Dr. Setser -
I think you undersell your own intellectual breadth here in this passage:
“That is the core of my disagreement with Dr. Jen. He argues large Chinese current account surpluses are a natural byproduct of globalization. I think they are a natural byproduct of an undervalued RMB.”
From what you have written over the past two years, I think you admit globalization’s role has been huge.
Indeed, the reason we are having this discussion is very likely because both globalization AND China’s longterm currency policy in tandem accelerated the growth of China’s surpluses beyond the norms of central banking behaviors and the predictions of serious economists.
Dr. Jen’s predictions on currency movements have more often than not trumped yours—but not because his ideas were better. Quite the contrary–his predictions have been more on target because his ideas are inane. He has guessed that “Individuals do not want losses to be booked during their period in office. So they don’t book them.” This kind of thinking causes you to tear your hair out–the losses are still there, lurking, growing larger as the day of reckoning is put off again and again. But Jen so far has been right–individuals have been passing the buck–literally–allowing traders like PC to make their fortunes on technical inflection points rather than on fundamentals.
Rebel Economist -
I do not think that Fed data on personal savings rates and consumption can support your proposition that improvements in the trade deficit could have come through a shrinkage in consumption due to reduced consumer expectations. During the late 1980s and early 1990s indebtedness rose in the lower income strata as individuals tried to maintain a standard of living during a time when GDP growth was stagnant, prices were climbing and unemployment was rising. Savings rose in the higher income brackets, triggering a deepening of the recession, further suppressing high-end imports.
PC -
Please remember that even in the 1990s, the products Japanese companies were exporting offered significant improvements in technology and manufacturing quality over what was being produced elsewhere. This made growth in Japanese export volumes resistant to exchange rate appreciation. This is a very different situation from what is going on now, where Chinese production is replacing production of goods of EQUAL quality, not just in the U.S., but in Taiwan, South Korea and Japan as well.
the BAnk of America doesn’t have an office in N. caroline for the Bank of china (hope I matching US institution to Chinese bank correctly). And so on. Domestic CHinese financial intermediation is done with Chinese labor — Brad
Actually Bank of America has a huge office tower in Guangzhou China that handles letter of credit and financing trade between the US and China. While Bank of America has sold its retail banking operations in Hong Kong to state-owned China Construction Bank, it retains its international trade operations in Guangzhou. Large US corporate customers are located nearby. Walmart’s Global Procurement headquarters is located an hour away by high speed railway in Shenzhen China. And IBM has recently transferred its global procurement headquarters from New York City to Shenzhen where most of the world’s electronic suppliers are located. In many respects, the Chinese economy today is more open to foreign trade and investment than the US Economy which has restricted investment by China CNOOC and Dubai Ports. For instance, Middle East owned Dubai Ports was just granted a concession to build new multi-billion dollar port facilities in Qingdao and Shanghai.
“But if they aren’t getting better off, they may not continue to support the policies that make those at the top better off.”
I think if you should have said,”if workers do not feel that they are benefiting at the same perceived rate as management then they may not support those policies.
What you’re talking about Brad is called an inequality aversion:
http://neuroeconomics.typepad.com/neuroeconomics/2003/09/inequality_aver.html
FYI it has been demonstrated in other primates.
“Higher prices for the things China buys (oil, commodities) and the things China finances (houses) offset lower prices for the things China makes (most manufactured goods), especially when median nominal wages haven’t risen by that much over the past few years”
I agree on the offsetting inflation. Its not as if you can earn US wages and pay Chinese prices for your healthcare and housing. Now that would definitely be a winning political formula for globlization!
Although most workers are probably outraged by whats happening I think of their anger as the blind anger of a beserker lashing out randomly at illegal immigration and even global trade.
However I see few organized groups mounting truly effective to derail or even publicize GATT/WTO talks.
Of course what you’re talking about at this point is politics and not economics per see and what its anyone’s guess about what goes or doesn’t in the political arena.
Throw in rising social discontent in China and OPEC diversifying out of dollars and we definitely have some very interesting complications.
“inequality today is much less extreme than it was in the 19th or early 20th Centuries, but it IS
greater than in the second half of the 20th century, when income tax rates were above 70% in the US and, at one
point, as high as 98% in Britain. This greater inequality is in many ways desirable and has certainly contributed to
more entrepreneurship and, recently, to faster and more stable economic growth. It is also true that, while inequality is
greater than it was in the 1960s and 1970s, the living standards of even the lowest 10% of society are much higher
than they were then.
We are not arguing that we need to or will return to the conditions of the 1970s. In fact, we believe that inequality will
continue widening. All we are saying is that this widening inequality is challenging one of the main political assumptions
that became so widespread in the late 20 Century – that as societies become richer, inequality will naturally be
reduced. It now looks as if the “natural” trend in a capitalist society may well be the other way. As we see it, there is
nothing wrong with this, especially if opportunities for social mobility continue expanding, as you point out.
From the 1940s until the early 1980s, it was almost universally assumed that in a democracy, the people at the bottom
would vote against inequality and demand highly redistributive taxes, etc. In the past 20 years this assumption seems
to have been refuted. The question is, though, whether this tolerant attitude to inequality will be widely shared by the
people in the bottom half of the income distribution.
History suggests that it will be since, as you say, inequality was much greater throughout most of human history apart
from the aberrational period of social democracy from the 1940s onwards. But we will just have to wait and see if
free-market capitalism remains politically acceptable or if social democracy comes back.”
bsetser:
Actually it should be easy to resolve cause/effect with US deficits. If you graph US deficits versus interest rates for the last X years, you should see a correlation. If there is no positive correlation, then it means that the US deficits are decoupled from interest rates, and that had the PRC not pegged the currency, you’d see the same deficit.
Also it is easy for me to think of a shock that would vastly increase savings rates. In the late 1990’s there was a massive restructuring of industry in which large state owned enterprises were shut down. These SOE’s were losing money because of the GM problem, in that they were responsible for lots of health and welfare benefits.
So you free up SOE’s from having to pay benefits, this means that suddenly the state sector becomes immensely profitable, but there is no mechanism for paying out dividends. At the same time, all of the people who got their benefits cut, now need to save massively for things that the SOE used to provide.
The result is a massive increase in savings around the time the SOE reform finished.
MTC — Dr. Jen only consistently beat me as a currency forecaster in 05 — his 06 call was the year of the yuan. didn’t happen. it was the year of the euro. i didn’t think the euro’s 05 fall would be sustained, he did. and i think we both underestimated yen weakness. right now, we basically have the same near term view of the yuan .. he is just not structurally bearish and i am (for the reasons you mention).
yes it is both globalization and currency policies that are shaking up the world. but remember, from say 92-97 there was very, very strong growth in both us exports and us imports and a lot of globalization (mexico’s integration into the us market, the asian tigers, the beginnings of china as an export force). but that era of globalization was marked by a stable us current accout deficit and the downhill flow of capital — japan basically financed SE asia, and US/ europe helped finance deficits in Latam. it differed markedly from the post 02 bout of globalization …
Sort of like American workers that find with each passing day they have less use for American made products.
Yes, one follows from the other.
I would argue that one shouldn’t judge the fairness of the economic system by the distribution of the financial wealth. Our political power is concentrated in the president/governors/congressmen/judges. That doesn’t inherently make the political system unfair, does it?
I think the right metric is to see how consumption is distributed. If it is distributed unfairly then the part that is deemed unfair should be taxed. For all the hand-wringing about mortgage interest deduction on housing affordability, a more effective way is to simply tax more the second homes, the trophy estates. Tax anti-social consumptions to make the society more fair, not capital accumulations.
Ponzi — the easy answer is to look at the investment data (US domestic investment) in the GDP data (national income and products data). the level of business investment…
Thanks for the info. Is there a link to this?
bsetser: It helps US capital, but not US labor — not even high end labor. Goldman doesn’t have an office in NYC doing credit analysis for ICBC, the BAnk of America doesn’t have an office in N. caroline for the Bank of china (hope I matching US institution to Chinese bank correctly). And so on. Domestic Chinese financial intermediation is done with Chinese labor.
The gates haven’t opened up yet, but then they do (and we are talking about one or two years), there will be a lot of demand for computer programmers and physics Ph.D.’s to handle the flood of capital from China. It’s actually much easier to centralize the programmers and physics Ph.D.’s in New York City, than it is to outsource the jobs to China, because NYC has the specialized technical knowledge that Shanghai doesn’t quite have yet, and won’t for a decade or two.
These jobs are very, very high end, and ironically a lot of them seem to be filled by Chinese that have immigrated to the United States. It’s actually easier to move people to NYC than move the job overseas.
“There can be no mistaking the intensity of the angst bearing down on the American workforce.”
For the past six years, US Government’s trade, currency, and monetary policy has been implemented in support of the trans-national agenda to establish the “platform” corporate structure. Manufacturing and production of low cost products in low wage countries for sale at “high” relative prices in the developed world.
Roach was one of the first to signal the dangers of this unsustainable “imbalance”. I am surprised by his current myopia as the electorate begins to realize what the powers to be have been about. Protectionism is in the eye of the beholder. From my perspective the protectionists are those, like the transformed Mr. Roach, who seek to sustain the status quo of foreign and domestic government manipulation of the credit and currency markets.
It is time for the Asian world (Japan included) to stop competitive currency devaluation, remove impediments to US exports, and stimulate domestic (Asian) consumption demand.
The congressional elections were about unease with the US government complicity in support of the corporate agenda. Unfortuneately, it would appear the eviro extremists from the left have claimed victory and are replacing the fascist right.
It’s actually much easier to centralize the programmers and physics Ph.D.’s in New York City, than it is to outsource the jobs to China, because NYC has the specialized technical knowledge that Shanghai doesn’t quite have yet, and won’t for a decade or two.
I don’t buy this. A city doesn’t have knowledge. The people in a city do. The knowledge moves with the people. Look at the centers of physics pre and post WWII. The people make the center, not vice-versa. Technology and the current neoliberal regime make the transferring much easier than in the past.
What should be asked is (1) Where would it be cheaper to do the work, Shanghai or NYC? and (2) Why would the leaders of China not want to have this type of work done domestically?
This globalization nonsense will create a single global labor pool. And, while realizing that it may not be a zero-sum game, I’d bet that for most work, the wages in this single global labor pool will be less than the wages that are currently enjoyed by Americans.
Ponzi — try http://www.bea.gov — it is the US government’s web site for economic data.
Joseph:
Perceptive as usual — one quibble however about the notion of locating quant finance experts in NYC. The software industry has a long history of importing talent from India and China in just the way you described. It was more cost effective to bring them here than to operate trans-nationally.
This has all completely changed since 9/11 however. Immigration restrictions seem to have been the spark that kicked off a hiring race among multinational software/services players in India particularly. Once the artificial barrier was gone, and CEO’s started to panic that the other players might beat them to the local talent, the perceived value of keeping staff in one place vanished almost overnight.
The same will happen in finance to some degree, although the differences in business model (proprietary algorithms and tools serving trading vs. licensing of software to customers) may affect the final distribution of the workforce. It will probably be more peaked near exchanges for real-time front office/quant collaboration.
I’m skeptical about the “decade or two” timeframe you gave for Shanghai’s full emergence. It could be sooner.
China slows down investment in steel industry. Investment on fixed assets in China’s iron and steel sector reached 260.3 billion yuan (about 33 billion U.S. dollars) last year, which Luo Bingsheng, vice-chairman of the industry’s association, termed excessive.
But he noted growth of the investment has slowed down significantly to 0.81 percent year-on-year last year, 23.69 percentage points lower than the growth of the national total investment on fixed assets. Luo warned iron and steel enterprises that the country’s production capacity has outstripped market demand.
Luo said the emphasis of investment has shifted to high-end projects to produce more value-added products.
China produced 418.78 million tons of crude steel last year, a rise of 18.48 percent year-on-year, and its output of pig iron was 404.17 million tons, up 19.78 percent year-on-year.
China’s apparent consumption of crude steel amounted to 384.05 million tons last year, accounting for 30.98 percent of the global total.
Domestically-made steel products accounted for a record 95.82 percent of China’s steel market last year, 2.61 percentage points higher than the previous year.
China became the world’s largest stainless steel producer last year with an output of 5.3 million tons, up 67.68 percent year-on-year. Source: http://www.researchinchina.com