China's Economic Rise Mocks a Fraudulent Economics Profession
In her 2007 book, The Elephant and the Dragon, Robyn Meredith noted that in 1978 the city of Shanghai in fully communist China could claim 15 skyscrapers, but by 2006 the skyline of increasingly free Shanghai was marked by 3,780 tall buildings - and counting. Just back from MoneyShow's Forbes Investor cruise, one that included a visit to Shanghai, cranes as far the eye can see reveal growth that will soon enough render the 3,780 number rather quaint.
Back in the ‘70s and ‘80s, a common refrain to those who left food uneaten on their plates was that they must consider the millions of starving people in China. Though it remains a very poor country on a per capita basis, an economically liberalized China has placed its tragic past of starvation squarely in its rearview mirror, and in doing so, has mocked the hubristic pretensions of an economics profession that grows more fraudulent by the day.
Considering the notion of demographics which has oddly captivated a right wing that has historically cheered economic freedom, China's rise shows how foolish worry over birthrates is. Though it's not always been strictly followed, China's leadership has strived to enforce a one-child policy. Yet despite low birthrates that the demographically obsessed say are a barrier to growth, China has been the recipient of massive investment.
Humans certainly are capital, and to quote AEI economist Nicholas Eberstadt, the "true wealth of modern countries resides in its people," but the biggest driver of economic progress by far is economic freedom. The birthrate-focused continue to argue that low-birthrate countries will suffer weak economic growth, but China's staggering growth reveals how overdone is their worry. Economically free countries thrive no matter the birthrate, and just the same, countries defined by government meddling in the economy flail even if their birthrates are high. The only closed economy is the world economy, and because the latter is true, country birthrates aren't someting to spend a lot of time on.
It's also popular inside the economic punditry to promote a link between education and economic growth. In a Wall Street Journal op-ed from last year titled "The Vital Link of Education and Prosperity," scholars Paul E. Peterson and Eric A. Hamushek attempted to prove this widely held belief. As they remarkably put it, "raising student test scores in this country up to the level in Canada would dramatically increase economic growth." Their view was that "long-run growth rates are mainly accounted for by differences in cognitive skills as measured" by "standardized tests of math and science such as PISA and NAEP." Importantly, China's rise yet again mocks this Ivory Tower thinking.
Indeed, China's economy has soared in the last 30 years, and if Peterson and Hamushek are to be believed, a major factor in the country's ascendance would be a top-level education system that prepared the citizenry for a sharp-elbowed capitalist world through schooling that lends itself well to test prep? Not so fast.
As Fox Butterfield wrote about Chinese education in his 1982 book China: Alive In the Bitter Sea, "12 percent of those who finish primary school are unable to go on to junior high, and there is no room in high school for 50 percent of the students who complete junior high." Regarding access to college education that at least in the U.S. is worshipped to this day by politically correct pundits irrespective of ideology, "only 3 percent of the college-age population in China, about a million students, can get into university."
So while most in China by the early ‘80s had no access to college-level instruction, Butterfield found that 35 percent of 18-21 year-old Americans were in college, 23 percent of Soviets were, and even the Philippines, despite a population that was a fraction of China's, could claim more college students "than in all of China." Not a country known for a media that was or could be honest about its presumed weaknesses, Butterfield wrote about how the Guanming Daily "groused that China ranked 113 out of a list of 141 countries in the world in percentage of its young people who get a post-secondary education."
Apparently the Chinese didn't get that memo about education and prosperity. Their economy began to take off in the early ‘80s; all this despite a population that was largely uneducated. Just as birthrates are made irrelevant by economic freedom, so is a lack of access to the irrelevancies taught on college campuses trumped by economic freedom.
Considering job opportunities and a limp "new normal" when it comes to the creation of work, Keynesian economist Robert Samuelson recently wrote about the relatively weak U.S. economy that you might compare it "to someone who's recovering from a serious illness. At first, everyone hopes the patient will return to normal. Then it's gradually realized that the patient suffered permanent damage and will never be the same. So, perhaps, with the economy." Really?
Lest we forget, China's embrace of communism from the 1940s to the 1970s meant that it literally and figuratively committed economic suicide. Its "new normal" was decades of near starvation. Whatever damage the Bush and Obama administrations have done to the U.S. economy, no reasonable person would compare the ineptitude they foisted on Americans to what Chinese leaders did to their own people. If the individuals who comprise China's economy can recover from the brutal horrors of communism, surely we Americans can bounce back from the softer idiocy of our own leadership.
Taking this narrative further, economists like to talk about how long-term unemployment makes those who experience it unemployable for depriving them of modern work skills. It's an interesting idea, but one utterly devoid of reason. The Chinese were deprived of real work experience for over 30 years, but once their economy was freed of government meddling, its "unskilled" workers quickly adapted to the work norms of capitalism. Since the Chinese rapidly evolved, so can Americans put out of work by hubristic politicians quickly adapt to modern work standards once our political class gets out of the way.
In June of 2013, former Bush administration Treasury Secretary Henry Paulson wrote in a Wall Street Journal op-ed that "China saves too much, produces too much, sells too much to Americans and consumes too little." Rarely has such a short sentence been so pregnant with falsehoods.
To produce is to consume, by definition. That's why we produce in the first place, and that's why the proclivity of the Chinese to "produce[s] too much" has occurred alongside the opening of beautiful shopping meccas throughout the country. They don't work hard so that they can continue to live impoverished lives; instead they produce because they want to live like we do. Every luxury global brand can be found in China, and they're not opening stores there in order to sell very little. As the Chinese have produced more, so have they consumed more.
Of course to the extent that the Chinese "save[s] too much," that some do in no way subtracts from demand. Banks don't seek deposits in order to look at the money; rather they take in savings in order to quickly lend those savings to others with near-term consumptive desires.
Even more important, though seemingly lost on Paulson, is that savings are the logical driver of consumption. That's the case because savings are often lent to businesses eager to direct them toward enhanced production techniques that render their workers even more productive per man hour. In short, the more the Chinese save, the more the production that drives all consumption is enhanced.
Most comically, economists seek to "measure" economic growth, which, translated, means they think themselves smart enough to divine the infinite decisions made by millions of individuals every millisecond of every day. Their most famous "measurement" of country economies is "gross domestic product" (GDP), and in this calculation, imports subtract from economic growth.
Who cares that as individuals we're working so that we can "import" from other producers next door and from the other side of the world, who cares that our "trade deficits" with other producers are our reward for our "trade surpluses" with our employers, to economists the "trade deficits" which signal productive economic activity among the individuals who comprise any economy are somehow bad, and subtract from GDP, their measure of economic growth. China yet again mocks the conceit of this unnecessary profession.
Indeed, China's richest city by far is Hong Kong. Notable about this once "barren rock" is that it is almost totally bereft of arable land and natural resources. Hong Kongers aren't just "energy dependent" on the rest of the world, they're dependent on the rest of the world for food, televisions, shoes, cars, and just about any consumable good readers might think of. Hong Kong's citizens run massive "trade deficits," but are they poor, and is the economy sagging as a result? Not at all. Hong Kong's citizens let specialists around the world produce all manner of goods for them, and that they do so gives them time to focus on work that pays a great deal more; finance and other forms of investment most notably.
Not surprisingly, China's economic rise, despite it being one of the happiest stories of modern times, has attracted a lot of skeptics. Some point to feverish building of residential and commercial properties that are "see through" thanks to their empty nature. Some posit that a lot of China's "ghost city" growth is of the "crony" variety whereby government officials are directing the allocation of capital. No doubt there's some truth to the latter, but for pundits and economists to use this to support their contention that Chinese growth is fraudulent is for them to miss three important truths.
For one, governments have no resources. They can only spend, and can only allocate capital toward construction insofar as they extract it from the private sector first. To the extent that Chinese government officials are able to spend with abandon, that they can simply confirms a great deal of taxable private sector productivity in the first place.
Second, beautiful Washington, D.C. is the ultimate "ghost city" for its beauty and wealth almost entirely existing as a function of government spending. Rather than pointing to China's "ghost cities" as evidence of a false economic boom, the more realistic assertion to make about both the U.S. and China is just how much more prosperous both countries would be if Washington, D.C. weren't so prosperous and China's landscape weren't marked in certain locales by government allocation of once private wealth.
Implicit in the "ghost city" argument is the silly belief among economists that government spending constitutes economic growth. Figure the fraudulent number that is GDP is actually increased by government spending. Back in the land of the sane, government spending on its very best day merely facilitates growth through enforcement of property rights, but otherwise spending subtracts from it. By definition. If readers doubt this, then they must explain how it is that John Boehner, Nancy Pelosi, Harry Reid, and Mitch McConnell are better allocators of capital than are Warren Buffett, Ken Fisher, Paul Tudor Jones, and Peter Lynch. The economics profession actually believes politicians are good capital allocators, but that just speaks to why we should tune so many economists out. Third, crony capitalism could have in no way authored China's revival. It's been far too substantial to have been directed by the second-rate minds who populate government.
The economics profession ultimately justifies its tenuous existence by promoting the belief that economies benefit from their vain attempts to measure economic activity. Happily China mocks the latter most of all. Returning to Hong Kong, the man most responsible for its success, Sir John Cowperthwaite, was adamant that the city's government officials not collect most statistics. He felt doing so would be dangerous, that attempts by government to measure economic growth would lead to government meddling in the economy. Despite its citizenry being "blinded" from the alleged insights of the economics profession, the city's economy soared, and to this day it remains one of the most impressive places on earth.
In light of what China's success says about so many of the economics profession's conceits, it's perhaps no surprise that it has detractors from the profession. Indeed, Hong Kong's long-ago rise, and China's more modern ascent, are living examples of why we don't need economists at all.