China: Miracle or Mirage?

Today on the Podcast

China, Miracle or Mirage? with George Friedman
A short Demand Side reading list
New data from BEA means history is moving in the Demand Side direction.
(see the table from the benchmark revisions to NIPA at the end of the transcript)

First, though, we would be remiss if we did not announce the birth of Demand Side, the novel. See it at Analyssa dot net. ANALYSSA. Not "Analyst." A woman's name.

Now, as exciting as that was, it was also good to get a version of the China story that corresponds more to our predispositions, or biases, or understanding of the way the world works.

We have wondered how an economy that specializes in exporting plastic toys to the U.S. can then prosper when the demand for plastic toys collapses. You heard us opine in our reading of Demand Side, the book, last week that once we thought China would not forever be happy giving us goods for pictures of dead presidents on green paper. Sooner or later they would want return in kind. That day has apparently not yet arrived.

The accolades to the People's Republic for its massive fiscal stimulus have also appeared to us to have been too pat. The well-publicized stimulus went out as construction contracts to the well-connected when it should have been more of a social safety net type spending. The result is an immediate boost to the growth number, but precious little in the way of fundamental demand dynamics.

China has been aggressive in producing growth, but has depended on American's borrowing for consumer goods. That is over. Now we will see whether their exploitation of their and the world's environment in the cause of growth has been worth it.

Be that as it may. It is a fairly long-winded introduction to this audio from George Friedman,
George Friedman, chief executive officer of national security consulting firm Stratfor Inc., and a best-selling author, appeared on Bloomberg last week. Friedman is not an economist, but an expert in foreign policy. Here is a digest of his answers on the subject of China.

FRIEDMAN

Upcoming we'll have the dissenting opinion on Japan's lost decade and on the German export powerhouse. But here in China we see a government battling its own illegitimacy with economic expansion running into the end of that expansion. Tens of thousands of public protests happen every year, often due to the absence of concern for environmental degradation. The lines of economic control are corrupted by the personal interests of the managers. To me it seems not unlike corporate America, focused on short-term growth. Screw the environment. Make your targets. Perhaps it will lead to high velocity, but without direction that could mean a long fall off a cliff. It is a recipe not for China leading the world into the future, but for a very messy meltdown.

What ought to be done is to build domestic demand by providing public goods and social insurance. These are not tradable goods, but support for the domestic economy. The export-your-way-out philosophy may have been promoted and indeed enforced by the IMF across the globe, but it cannot go on forever. The virtue of a high savings rate has to be questioned when we look at China's -- over twenty percent by any measure.

...

READING LIST

Now, as promised, a short Demand Side reading list.

Last week we mentioned Robert Lekachman's The Age of Keynes, 1966. Of Keynes' work, we like Essays in Persuasion. The General Theory is really badly written, and benefits from very little of Keynes' sophisticated style. And remember, Keynes' lived before big government. He may have pointed out the internal flaws in the free market capitalism, and may have led the way into the modern international system, but in terms of big government, not so much. The only big government he knew before his death in 1946 was the war-time government. The welfare state arose later.

John Kenneth Galbraith was familiar with big government and with the rise of the corporate control of the economy. I have yet to find something of Galbraith's that is not useful to read. Economics in Perspective, 1987, is good. Economics and the Public Purpose, from 1973.

Hyman Minsky's John Maynard Keyes. From an economist who has experienced a resurgence of respect along with the current collapse and author of "Stabilizing an Unstable Economy." I need to read more of Minsky myself.

The most obscure author on the reading list is Leon Keyserling. Keyserling was the second chair of the Council of Economic Advisers, and probably the most influential of them all. He staffed Truman's successful non-contractionary response to post-war inflation and promoted a strictly New Deal type economics which was essentially a partnership between government, labor and business. So long as it held together it did good things. Unfortunately, his work is not widely known. I have pamphlets from that era, "Full Employment without Inflation" and others, including the intriguing title "Money, Credit and Interst Rates: Their Gross Mismanagement by the Federal Reserve System," circa 1980.

Finally, of course, the great Joseph Stiglitz has to be included. His "Making Globalization Work," is insight into real economics and the absurd mistakes of the IMF in international economics, some of which have led into this current mess.

Others to read are Joan Robinson, John Hicks, perhaps Skidelsky's three-volume Keynes biography. Maybe you have some. Those who wrote at the time of Keynes were somewhat blindsided when the world did not return to Depression following the war. This would include Alvin Harvey Hansen and Seymour Harris.

BEA REVISIONS

NATIONAL INCOME AND PRODUCT ACCOUNTS
GROSS DOMESTIC PRODUCT: SECOND QUARTER 2009 (ADVANCE ESTIMATE)
COMPREHENSIVE REVISION: 1929 THROUGH FIRST QUARTER 2009

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 1.0 percent in the second quarter of 2009, (that is, from the first quarter to the second), according to the "advance" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP decreased 6.4 percent.

The Bureau emphasized that the second-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency (see the box on page 3). The "second" estimate for the second quarter, based on more complete data, will be released on August 27, 2009.

The estimates released today reflect the results of the comprehensive (or benchmark) revision of the national income and product accounts (NIPAs).

The decrease in real GDP in the second quarter primarily reflected negative contributions from nonresidential fixed investment, personal consumption expenditures (PCE), residential fixed investment, private inventory investment, and exports that were partly offset by positive contributions from federal government spending and state and local government spending. Imports, which are a subtraction in the calculation of GDP, decreased.

The much smaller decrease in real GDP in the second quarter than in the first primarily reflected much smaller decreases in nonresidential fixed investment, in exports, and in private inventory investment, upturns in federal government spending and in state and local government spending, and a smaller decrease in residential fixed investment that were partly offset by a much smaller decrease in imports and a downturn in PCE.

* down from 1.1 percent to 0.4 percent for 2008.

Business cycles. From the fourth quarter of 2007 to the first quarter of 2009, real GDP decreased at an average annual rate of 2.8 percent; in the previously published estimates, it had decreased 1.8 percent.

...


Real personal consumption expenditures decreased 1.2 percent in the second quarter, in contrast to an increase of 0.6 percent in the first. Durable goods decreased 7.1 percent, in contrast to an increase of 3.9 percent. Nondurable goods decreased 2.5 percent, in contrast to an increase of 1.9 percent. Services increased 0.1 percent, in contrast to a decrease of 0.3 percent.

Real nonresidential fixed investment decreased 8.9 percent in the second quarter, compared with a decrease of 39.2 percent in the first. Nonresidential structures decreased 8.9 percent, compared with a decrease of 43.6 percent. Equipment and software decreased 9.0 percent, compared with a decrease of 36.4 percent. Real residential fixed investment decreased 29.3 percent, compared with a decrease of 38.2 percent.

Real exports of goods and services decreased 7.0 percent in the second quarter, compared with a decrease of 29.9 percent in the first. Real imports of goods and services decreased 15.1 percent, compared with a decrease of 36.4 percent.

Real federal government consumption expenditures and gross investment increased 10.9 percent in the second quarter, in contrast to a decrease of 4.3 percent in the first. National defense increased 13.3 percent, in contrast to a decrease of 5.1 percent. Nondefense increased 6.0 percent, in contrast to a decrease of 2.5 percent. Real state and local government consumption expenditures and gross investment increased 2.4 percent, in contrast to a decrease of 1.5 percent.

end

Table 1A. Real Gross Domestic Product and Related Measures: Percent Change From Preceding Period--Table Ends

[Quarters seasonally adjusted at annual rates]

	08-Q1	08-Q2	08-Q3	08-Q4	09-Q1	07	08
Gross domestic product (GDP).	(0.7)	1.5	(2.7)	(5.4)	(6.4)	2.1	0.4
Previously published	0.9	2.8	(0.5)	(6.3)	(5.5)	2.0	1.1
Personal consumption expenditures...	(0.6)	0.1	(3.5)	(3.1)	0.6	2.6	(0.2)
Previously published	0.9	1.2	(3.8)	(4.3)	1.4	2.8	0.2
Gross private domestic investment...	(7.4)	(10.4)	(6.9)	(24.2)	(50.5)	(3.8)	(7.3)
Previously published	(5.8)	(11.5)	0.4	(23.0)	(48.9)	(5.4)	(6.7)
Fixed investment..................	(6.3)	(2.7)	(8.3)	(20.2)	(39.0)	(2.1)	(5.1)
Previously published	(5.6)	(1.7)	(5.3)	(22.0)	(37.6)	(3.1)	(5.0)
Nonresidential..................	1.9	1.4	(6.1)	(19.5)	(39.2)	6.2	1.6
Previously published	2.4	2.5	(1.7)	(21.7)	(37.3)	4.9	1.6
Structures....................	6.8	14.5	(0.1)	(7.2)	(43.6)	14.9	10.3
Previously published	8.6	18.5	9.7	(9.4)	(42.9)	12.7	11.2
Equipment and software........	(0.5)	(5.0)	(9.4)	(25.9)	(36.4)	2.6	(2.6)
Previously published	(0.6)	(5.0)	(7.5)	(28.1)	(33.7)	1.7	(3.0)
Residential.....................	(28.2)	(15.8)	(15.9)	(23.2)	(38.2)	(18.5)	(22.9)
Previously published	(25.1)	(13.3)	(16.0)	(22.8)	(38.8)	(17.9)	(20.8)
Change in private inventories.....	.....	.....	.....	.....	.....	……
Net exports of goods and services...	.....	.....	.....	.....	.....
Exports...........................	(0.1)	12.1	(3.6)	(19.5)	(29.9)	8.7	5.4
Previously published	5.1	12.3	3.0	(23.6)	(30.6)	8.4	6.2
Goods...........................	4.2	14.1	(1.8)	(25.5)	(36.9)	7.4	5.9
Previously published	4.5	16.3	3.7	(32.0)	(38.8)	7.5	6.0
Services........................	(9.0)	7.8	(7.7)	(4.3)	(13.6)	11.8	4.2
Previously published	6.4	3.8	1.4	(1.5)	(11.5)	10.5	6.6
Imports...........................	(2.5)	(5.0)	(2.2)	(16.7)	(36.4)	2.0	(3.2)
Previously published	(0.8)	(7.3)	(3.5)	(17.5)	(36.4)	2.2	(3.5)
Goods...........................	(3.5)	(4.6)	(3.7)	(19.6)	(41.0)	1.7	(3.9)
Previously published	(2.0)	(7.1)	(4.7)	(19.6)	(41.4)	1.7	(4.1)
Services........................	3.0	(7.1)	6.1	(0.9)	(11.5)	3.5	0.7
Previously published	5.5	(8.0)	3.3	(6.7)	(10.2)	4.4	0.2
Government consumption expenditures
and gross investment...............	2.6	3.6	4.8	1.2	(2.6)	1.7	3.1
Previously published	1.9	3.9	5.8	1.3	(3.1)	2.1	2.9
Federal...........................	8.1	7.8	13.2	6.5	(4.3)	1.3	7.7
Previously published	5.8	6.6	13.8	7.0	(4.5)	1.6	6.0
National defense................	8.2	7.0	19.8	3.8	(5.1)	2.2	7.8
Previously published	7.3	7.3	18.0	3.4	(6.8)	2.5	7.2
Nondefense......................	8.1	9.6	0.1	12.7	(2.5)	(0.6)	7.3
Previously published	2.9	5.0	5.1	15.3	0.6	(0.2)	3.6
State and local...................	(0.5)	1.2	0.1	(2.0)	(1.5)	2.0	0.5
Previously published	(0.3)	2.5	1.3	(2.0)	(2.2)	2.3	1.1
Addenda:
Final sales of domestic product...	(0.5)	2.7	(2.9)	(4.7)	(4.1)	2.5	0.8
Previously published	0.9	4.4	(1.3)	(6.2)	(3.3)	2.4	1.4
Gross domestic purchases..........	(1.1)	(0.9)	(2.5)	(5.5)	(8.6)	1.4	(0.7)
Previously published	0.1	(0.1)	(1.5)	(5.9)	(7.5)	1.4	(0.3)
Final sales to domestic purchasers.....................	(0.9)	0.3	(2.7)	(4.9)	(6.4)	1.7	(0.4)
Previously published	0.1	1.3	(2.3)	(5.8)	(5.4)	1.8	0.0
Gross national product (GNP)......	(1.1)	0.2	(1.8)	(6.7)	(6.6)	2.4	0.6
Previously published	0.1	2.1	(0.2)	(5.6)	(5.6)	2.2	1.3
Disposable personal income........	(2.4)	9.8	(8.5)	3.4	1.1	2.2	0.5
Previously published	(0.7)	10.7	(8.5)	2.9	6.0	2.8	1.3
Current-dollar measures:
GDP	1.0	3.5	1.4	(5.4)	(4.6)	5.1	2.6
Previously published	3.5	4.1	3.4	(5.8)	(2.9)	4.8	3.3
Final sales of domestic product.	1.5	4.7	1.0	(5.2)	(2.4)	5.4	3.0
Previously published	3.6	5.6	2.6	(6.1)	(0.7)	5.2	3.6
Gross domestic purchases........	2.1	3.2	1.8	(9.2)	(9.8)	4.4	2.4
Previously published	3.5	4.3	2.9	(9.6)	(8.4)	4.2	2.9
Final sales to domestic purchasers.....................	2.6	4.3	1.5	(9.0)	(7.7)	4.7	2.8
Previously published	3.7	5.7	2.2	(9.9)	(6.4)	4.6	3.2
Gross domestic purchases........	0.6	2.3	2.2	(6.7)	(4.8)	5.4	2.7
Previously published	2.6	3.4	3.7	(5.0)	(3.0)	4.9	3.5
Disposable personal income......	1.2	14.1	(4.2)	(1.8)	(0.4)	4.9	3.9
Previously published	2.9	15.4	(3.9)	(2.1)	5.0	5.5	4.6

The press release continues

The change in real private inventories subtracted 0.83 percentage point from the second-quarter change in real GDP after subtracting 2.36 percentage points from the first-quarter change. Private businesses decreased inventories $141.1 billion in the second quarter, following decreases of $113.9 billion in the first quarter and of $37.4 billion in the fourth.

Real final sales of domestic product -- GDP less change in private inventories -- decreased 0.2 percent in the second quarter, compared with a decrease of 4.1 percent in the first.

Gross domestic purchases

Real gross domestic purchases -- purchases by U.S. residents of goods and services wherever produced -- decreased 2.3 percent in the second quarter, compared with a decrease of 8.6 percent in the first.

Disposition of personal income

Current-dollar personal income increased $8.0 billion (0.3 percent) in the second quarter, in contrast to a decrease of $251.7 billion (8.0 percent) in the first.

Personal current taxes decreased $113.1 billion in the second quarter, compared with a decrease of $241.7 billion in the first.

Disposable personal income increased $121.1 billion (4.6 percent) in the second quarter, in contrast to a decrease of $9.9 billion (0.4 percent) in the first. Real disposable personal income increased 3.2 percent, compared with an increase of 1.1 percent.

Personal outlays decreased $18.1 billion (0.7 percent) in the second quarter, compared with a decrease of $27.6 billion (1.1 percent) in the first. Personal saving -- disposable personal income less personal outlays -- was $566.0 billion in the second quarter, compared with $426.9 billion in the first. The personal saving rate -- saving as a percentage of disposable personal income -- was 5.2 percent in the second quarter, compared with 4.0 percent in the first. For a comparison of personal saving in
BEA’s national income and product accounts with personal saving in the Federal Reserve Board’s flow of funds accounts and data on changes in net worth, go to http://www.bea.gov/national/nipaweb/Nipa-Frb.asp.


Current-dollar GDP

Current-dollar GDP -- the market value of the nation's output of goods and services -- decreased 0.8 percent, or $28.2 billion, in the second quarter to a level of $14,149.8 billion. In the first quarter, current-dollar GDP decreased 4.6 percent, or $169.3 billion.