Global Recession and the United States

In his column at Bloomberg Noah Smith warns of the potential impact of an economic slowdown in China on the world economy:

In order to weather the Great Recession, China shifted its focus from export-oriented manufacturing to domestic real estate and infrastructure, and from private companies to state-owned enterprises. That probably caused productivity growth to slow. Meanwhile, China’s working-age population is now shrinking and its supply of surplus rural labor has dried up. Retooling its economy to produce less pollution and cut greenhouse emissions will slow growth as well, even if the long-term environmental effect is worth it.

But it’s not just a Chinese recession that threatens the world economy. The trade war, along with looming geopolitical tensions between the great powers, are threatening to open a rift between China and the rest of the world economy. Tariffs have global manufacturers scrambling to move production from China to countries such as Vietnam and Bangladesh. Companies, both Chinese and otherwise, are being forced to decide whether to consolidate their supply chains inside China or go elsewhere.

This decoupling will probably be protracted, and costly. The past 30 years have seen the construction of a global trading system centered around a China-U.S. axis, and now that structure is breaking down. In addition to the cost of reorganizing supply chains and the economic inefficiency introduced by the separation, companies are facing deep uncertainty about where they will be able to source their inputs and sell their products.

Through some creative cherry-picking and proof by innuendo he points to the adverse effect that a Chinese recession would have on the U. S. economy.

The reality is somewhat different. 70% of the U. S. economy consists of personal consumption expenditures, i.e. retail, health care, education, and houses. That’s a much larger role than in Europe or China. Exports just aren’t that important to us. Exports to China could go to zero and its effect on the U. S. economy would be minor.

My story of the last 40 years would be somewhat different from Mr. Smith’s. Since 1979 China’s economy has grown, like the Soviet Union’s before it, by moving labor assets from relatively non-productive agriculture to more productive manufacturing. In the process hundreds of millions of Chinese people have been lifted from the direst of poverty. Due to distortions in the Chinese economy much of that has been at the expense of workers in the U. S. and Europe.

What would have happened without those distortions? I think the Chinese economy would have grown faster and not at the expense of workers here. Mr. Smith apparently believes otherwise.

China has reached the end of its ability to increase productivity using the strategy that has served it for the last 40 years due to limits on its ability to improve agricultural productivity, its policy of food independence, a declining working age population, and other factors. Additionally, both here and in Europe we’ve gotten fed up with China’s misbehavior.

Europe is much more exposed to a Chinese recession than we are. While it is likely true that when China sneezes, Europe, Germany in particular, gets a cold. It is not nearly as true that a Chinese recession will inevitably spread to the United States.

An end to the present U. S. economic recovery is inevitable. We will go into recession again. I don’t know when it will be and neither does anyone else. But a recession here is less likely to be triggered by a slowdown in China than practically anywhere else in the world.