Streetwise Professor

August 15, 2023

Why China is Shtupped: A Synthesis

Filed under: China,Economics,Politics — cpirrong @ 6:00 pm

Something of a kerfuffle has broken out over the issue of China’s economic angst. On one side is Adam Posen, who in a Foreign Affairs article attributes China’s current predicament to the reluctance of private firms to invest, which he in turn attributes to their fears that an authoritarian regime like Xi’s will not respect their property rights and may expropriate them. On the other side, Adam Tooze (on Substack) and Michael Pettis (on X or Twitter or whatever it identifies as these days) claim no, China’s problems are the consequences of fundamental structural imbalances dating back years, and rooted in pre-Xi economic policies.

All of them are right in parts, and wrong in parts. I assert my post of the other day synthesizes the right parts 😉

It’s perhaps convenient to boil things down thus:

  • What mess does China find itself in?
  • How did it get into this mess?
  • What prospects does it have to get out of this mess?

Pettis and Tooze (and others, including me and not just the other day) attribute China’s current mess as the result of huge imbalances (over-investment, underconsumption) and secular demographic problems compounded by a very weak social safety net.

It got into this mess as the result of a development model and associated policies that heavily favored fixed investment (especially in infrastructure and housing financed by debt) and exports, and punished private consumption. The policies involved are myriad, but they can be summarized as central planning without complete government ownership. That is, the direction of even private enterprise was substantially guided by government policies that caused prices to encourage the types of economic activity that the government favored. The hand of the state was very visible indeed in China–something which fanboyz such as Thomas Friedman and too many western CEOs to count waxed rhapsodic about. (To which I should add the incentives faced by government employees at all levels who were rewarded for meeting certain aggregate growth targets that were most easily achieved by borrowing to make fixed investments–high powered incentives can be dangerous, my friends.).

But that model is played out, and was in fact always unsustainable: what’s amazing to me is how long they sustained it. But as Herb Stein said, if something can’t go on forever, it will stop. And that model couldn’t go on forever. It’s stopping time is about now. Hence China’s current distress.

So how to get out? The hydraulic economists who rely primarily on accounting identities (for all my admiration for Pettis’ diagnosis of structural imbalances, he fits that description to a large degree), the answer is: Correct the imbalances! Shift China from an investment focus to a consumption focus!

Well, how, exactly? And that’s where Posen’s critique of Xi-o-nomics–and mine–comes in. Achieving a new balance would require the CCP and the state to reduce their control over the economy. But the authoritarian Xi is hell-bent on increasing the Party’s–and his–control. For the reasons that Posen sets out, and many more besides, Xi’s kontrolle uber alles mentality is inimical to a fundamental structural shift in China’s economy, and especially a shift driven by private enterprise and private consumers, that is, a shift driven from below not from above. And below is the only place it can possibly come from.

So I would say that Pettis and Tooze prevail on the “how did China get into this mess?” issue, Posen on the “how does China get out of this mess (or not)?” issue, and all are largely in agreement in describing the just what the mess is.

The upshot of this synthesis is that China is shtupped. And the concern for those outside of China should be how a shtupped autocrat responds.

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  1. Another day, another Yiddish word. Which brings up the question—what’s a hydraulic economist? I’ve been reading some Pettis, not always sure whether I agree but his bit on structural imbalances and how they effect the US is interesting.

    Comment by The Pilot — August 15, 2023 @ 6:54 pm

  2. “central planning without complete government ownership”: what, like the Nazis? Did you ever? Socialism comes in varieties, eh?

    According to various economic historians the Nazis turned out not to be terribly good at central planning. I cannot tell whether that conclusion is dispassionate and accurate.

    Be that as it may it must surely be time for someone to produce a Downfall parody of Xi’s dilemma. Hint, hint.

    Comment by dearieme — August 16, 2023 @ 7:15 am

  3. the funny thing is that the US running at an 8 percent budget deficit has been repeating the same error (overstimulating) since Covid too…
    Sooner or later the deficit has to be reigned in (one way or another). Of course the details are different due to different “politcal economies”, but government intervention is government intervention. And the US government interference from inflationary spending is huge, i.e. material..

    The latest paper by Calomiris suggests, it won’t be easy (it never is), hence we are looking at a similar scenario for the US.

    We can take comfort that a “shtupped” US government won’t respond in the same way, because checks and balances or something…

    Comment by viennacapitalist — August 16, 2023 @ 7:25 am

  4. @The Pilot. I grew up across the street from Skokie 😛 A “hydraulic economist” is one that typically thinks in aggregates (“Y=C+I+G+NX”) and that by adjusting the valves you can magically shift economic activity from say I (investment) to C (consumption). These tend to be Keynesian macro types.

    It’s more than a metaphor. The famous economist William Phillips, of eponymous Phillips Curve fame, constructed a literal hydraulic model of the economy.

    Comment by cpirrong — August 16, 2023 @ 11:39 am

  5. By God, Phillips had a remarkable war. Wokeypedia:

    In 1937 Phillips headed to China, but had to escape to Russia when Japan invaded China. He travelled across Russia on the Trans-Siberian Railway and made his way to United Kingdom in 1938, where he studied electrical engineering. At the outbreak of World War II, Phillips joined the Royal Air Force and was sent to Singapore. When Singapore fell, he escaped on the troopship Empire State, which came under attack before safely arriving in Java.

    When Java, too, was overrun Phillips was captured by the Japanese, and spent three and a half years interned in a prisoner of war camp in the then Dutch East Indies (now Indonesia). During this period he learned Chinese from other prisoners, repaired and miniaturised a secret radio, and fashioned a secret water boiler for tea which he hooked into the camp lighting system. In 1946, he was made a Member of the Order of the British Empire (MBE) for his war service.

    Comment by dearieme — August 16, 2023 @ 5:17 pm

  6. Throughout history, a lot of societies have done very well economically in spite of their feudal political structures. The merchants and artisans were allowed to get the hell on with it, provided they paid their taxes. China was on course to eclipse the West. Then something changed. What was that change? The merchants and artisans are no longer allowed to get the hell on with it. Reverse the change, relax the restrictions, and all those structural imbalances won’t mean a thing, just as they meant nothing before.

    Comment by Michael van der Riet — August 17, 2023 @ 3:33 am

  7. @dearieme. Wasn’t aware of that. Fascinating. Thanks for sending along.

    BTW, another Commonwealth Economist, R. A. Radford, was also a POW (held by the Germans) in WWII. He wrote a famous article in the Economic Journal analyzing the economics of POW life.

    Comment by cpirrong — August 17, 2023 @ 10:46 am

  8. @viennacapitalist. I don’t disagree re US fiscal profligacy. The Fiscal Theory of the Price Level that I think is the best way of analyzing inflation is an indication of that.

    That said, I think that issue is hardly China’s biggest problem. Yes, the US has some structural distortions due to government policy/distortions of pricing, but nothing to compare to PRC.

    Comment by cpirrong — August 17, 2023 @ 10:55 am

  9. @dearieme. I agree that although ideologically communist, China is functionally fascist, and closer to the Nazi state on economic policy than it is to either Stalinism or Italian fascism.

    Yes, the Nazis were hopeless at central planning. In some respects central planning is an oxymoron as applied to them. There were myriad fiefdoms viciously competing for influence and resources.

    This was a major factor in Allied victory. My longstanding hope has been that similar dysfunctions in China will undermine the potency of its geopolitical threat.

    Comment by cpirrong — August 17, 2023 @ 10:59 am

  10. There’s another danger for the CCP.
    In a country where quality is defined as “what we can get away with” a shift from export / infrastructure drivers of the economy towards a consumer focus risks a shift from domestic goods to imports.
    That would really put the kibosh on the CCP’s mercantilist model.

    As an aside, the fact that no Chinese nuclear plant has blown up yet seems to indicate that the tech is actually pretty safe.

    Comment by philip — August 17, 2023 @ 2:42 pm

  11. @cpirrong

    Thanks, the hydraulic economists sound like an earlier version of behavioral economists—enough tweaking by smart people wil make everything hum perfectly. Move the right “fluids” in the right order—perfection. Give people the right “nudges” and everyone will be happy wealthy. Pilot humanity gets in way.

    The old joke about Lockheed was, “they tried to build an hydraulic radio, it leaked”.

    Comment by The Pilot — August 17, 2023 @ 3:40 pm

  12. The journalist known to his fans as The Blessed Ambrose has opined on China’s economic woes. I particularly enjoyed “the painful unwinding of the great Communist debt bubble, an episode uncannily similar to the debt woes of the late Qing dynasty.” Attaboy, Ambrose!

    Comment by dearieme — August 18, 2023 @ 5:31 am

  13. @Prof, I’ve just clicked on your links for Posen and Tooze. Each takes me to a Californian legal firm giving advice on how to react to Social Workers visiting your family with the intent (can I have got this right?) of kidnapping your children.

    Comment by dearieme — August 18, 2023 @ 8:12 am

  14. @dearieme. Thanks for the heads up. I’ll fix. I wasn’t having social worker problems . . . helping a friend who is.

    Comment by cpirrong — August 18, 2023 @ 3:29 pm

  15. @dearieme–Fixed. Thanks again.

    Comment by cpirrong — August 18, 2023 @ 3:35 pm

  16. @dearieme–BTW, my children are well beyond my clutches and therefore of the tender ministrations of the social workers:P

    Comment by cpirrong — August 19, 2023 @ 3:21 pm

  17. Are you sure, prof? The government has been busy infantilising us all for a while already.

    Comment by philip — August 20, 2023 @ 1:24 pm

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