Assume…

by Dave Schuler on December 14, 2012

There was a mad scientist (a mad SOCIAL scientist) who kidnapped three colleagues, an engineer, a physicist, and a mathematician, and locked each of them in separate cells with plenty of canned food and water but no can opener. A month later, returning, the mad scientist went to the engineer’s cell and found it long empty. The engineer had constructed a can opener from pocket trash, used aluminum shavings and dried sugar to make an explosive, and escaped. The physicist had worked out the angle necessary to knock the lids off the tin cans by throwing them against the wall. She was developing a good pitching arm and a new quantum theory. The mathematician had stacked the unopened cans into a surprising solution to the kissing problem; his dessicated corpse was propped calmly against a wall, and this was inscribed on the floor in blood: THEOREM: If I can’t open these cans, I’ll die. PROOF: Assume the opposite…

Consider this graph (pictured above) of manufacturing output for five manufacturing countries that in aggregate comprise a hefty proportion of total world manufacturing. Assume (as seems to be the case these days) that consumer spending for China, Japan, Germany, and Italy are constrained, growth in those economies is export-driven, and all new spending is by the U. S. consumer. Now assume the opposite, i.e. no new spending by the U. S. consumer.

Extra credit question: is it a coincidence that China’s manufacturing output crossed U. S. manufacturing output in 2007?

Update

Not only do I ask the questions, I answer them.

Here are a variety of answers, some contradictory, to the extra credit question:

  1. You can’t tell anything from that graph. The Chinese component is mostly hooey. It certainly isn’t supported by more empirical measures like container traffic, for example.
  2. It’s mostly a coincidence. Note that manufacturing output is being measured in current dollars. The graph actually depicts two things: the yen, the euro and, particularly, the dollar are inflating rapidly while Chinese manufacturing output is increasing.
  3. It’s not a coincidence. The U. S., Japanese, and Eurozone economies are all stalling because of Chinese manufacturing growth without corresponding Chinese consumer spending.
  4. How ’bout dem Bears?

I think that you either believe the graph is mostly hooey or we’re on the cusp of some very significant social changes all over the world but particularly in China. The flywheel is about to come off.

{ 13 comments… read them below or add one }

Steve Verdon December 14, 2012 at 11:10 am

Consider this graph of world manufacturing output. Assume (as seems to be the case these days) that consumer spending for China, Japan, Germany, and Italy are constrained, growth in those economies is export-driven, and all new spending is by the U. S. consumer. Now assume the opposite, i.e. no new spending by the U. S. consumer.

Well, it does not bode well for the export driven economies.

Extra credit question: is it a coincidence that China’s manufacturing output crossed U. S. manufacturing output in 2007?

Is it 2007? The two lines are so close together around 2007-2010 not sure when China’s manufacturing equals the U.S.

Dave Schuler December 14, 2012 at 11:28 am

I can point out some other interesting things in that graph. To my eye there are two important inflection points in the Chinese manufacturing output curve: one around 1992 when the Chinese started pegging the yuan to the dollar and the other in the early Aughts. I don’t know what that latter one is about.

There may be another one right about the time of the Japanese crisis. I’d need to look at the actual data to be sure.

Steve Verdon December 14, 2012 at 11:32 am

You know that graph looks like every country has taken a log of their manufacturing except China.

Dave Schuler December 14, 2012 at 11:37 am

Yeah, that was my first reaction. My second reaction was that the amount by which Chinese production exceeds U. S. production is about equal to the combined production of Germany and Italy and it’s increasing rapidly.

Considering how much total world consumption those five countries constitute, I don’t see how Chinese output continues to increase without Chinese personal consumption increasing, too, a point I’ve been making for some time.

PD Shaw December 14, 2012 at 1:01 pm

My first reaction is the Chinese line is showing exponential growth, and my second is that such growth is not sustainable.

Roy Lofquist December 15, 2012 at 1:18 am

An export economy is eventually constrained by the economic growth of its customers. China’s growth is unsustainable. So, what’s happening?

Graft and corruption are funneling the money into throw away projects. See “China’s Ghost Cities”.

http://www.wnd.com/2012/07/bizarre-chinas-eerie-ghost-cities-arise/

http://www.dailymail.co.uk/news/article-1339536/Ghost-towns-China-Satellite-images-cities-lying-completely-deserted.html

Some guys are getting really, really rich.

Andy December 15, 2012 at 8:26 am

I have to wonder, where has China’s manufacturing output gone since 2008? The global recession/financial crisis had no effect on their output? What did they make and where is it? Was it fed to all those domestic infrastructure projects – the empty malls and cities?

Even if the graph for China is accurate, I don’t see how their growth is sustainable.

Zachriel December 15, 2012 at 8:30 am

PD Shaw: My first reaction is the Chinese line is showing exponential growth, and my second is that such growth is not sustainable.

China’s rapid growth is primarily due to industrialization, that is, low productivity agricultural workers moving into higher productivity manufacturing jobs. Once this process is more-or-less completed, a point China is approaching, then growth will return to more normal levels. Further gains will be due to improved productivity, greater consumer spending and competition for market share. Also, China has grown so fast, there are undoubtedly many contradictions within the economy (e.g. environmental degradation, misallocation of resources) that will have to be corrected.

Dave Schuler December 15, 2012 at 8:54 am

I agree with most of what you’ve written in that comment, Zachriel, but I think there are a few more factors than you’ve mentioned.

The Soviet Union’s economy was the wonder of the world largely by virtu of moving low productivity agricultural workers into higher productivity manufacturing jobs. Different from the Soviet Union, China has done that while increasing agricultural productivity.

China’s agricultural productivity is now essentially at the same level as Japan’s or South Korea’s. Further improvements are unlikely. That makes it harder for China to move more workers out of agriculture, particularly in the light of its official policy of food self-sufficiency.

Additionally, China’s working age population peaked in 2010, several years sooner than the officially projected date of 2015. That will bring new challenges, among them higher wages which will reduce China’s competitive advantage over, say, Vietnam.

Dave Schuler December 15, 2012 at 8:56 am

Andy:

The global recession/financial crisis had no effect on their output?

Remember that the graph depicts production measured in dollars. Changing value of the dollar can make flat production or slow production look like rapid growth.

Zachriel December 15, 2012 at 9:11 am

Dave Schuler,

Yes, we agree. China is nearing the limit of what it can accomplish with industrialization, and may need to retract somewhat as they deal with a multitude of problems. They still lack the political flexibility they need for that, though.

Traditional institutions and relationships are always stressed by industrialization. The transition can be difficult—even under the best of circumstances.

Dave Schuler December 15, 2012 at 9:18 am

They still lack the political flexibility they need for that, though.

China is lacking in the social and civil infrastructure necessary to facilitate a modern economy. There is no robust system of civil law. That’s why I always chuckle when I read assurances from the Chinese authorities about protection of foreign intellectual property. It’s strictly lip service. They don’t have the ability to control the abuses even if they had the will.

Similarly with environmental regulations. China has tougher environmental laws than we do. What they don’t have is a system of enforcement.

Could they change these things? Yes. But probably not while preserving the present elite.

sam December 16, 2012 at 12:21 pm

“Similarly with environmental regulations. China has tougher environmental laws than we do. ”

Right. And they then build the Three Gorges Dam. Damn.

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