There’s a Difference

I found George Will’s most recent column in the Washington Post on the Chinese economy interesting enough. Here’s a snippet that bears mentioning:

China consumes almost half the world’s cement, coal, iron ore and steel, and 40 percent of the aluminum and copper. Beijing has six ring roads, and the seventh, under construction, will be almost 600 miles long, encompassing an area as large as Indiana. (Washington’s Capital Beltway is 64 miles long.) Demand for roads so exceeds supply that a 2010 traffic jam extended 62 miles and lasted 12 days. China has six of the world’s 15 tallest buildings (the United States has three) and eight of the 10 tallest under construction. In four years, beginning in 2011, the government built enough housing to shelter the population of the 12th most populous nation, the Philippines. Two months after the September 2014 $25 billion initial public offering for the Chinese Internet company Alibaba, the world’s biggest IPO, the company had a $280 billion market capitalization, bigger than Amazon and eBay combined.

China’s prosperity has been fueled by the traditional modernization trek of people from the countryside to cities — 300 million so far, with another 300 million by 2030. But China has also relied perilously on exports and excessive, grossly inefficient infrastructure spending to employ the former peasants and make burgeoning metropolises habitable. Just between 2010 and June 2013, local government debt alone surged 70 percent to $2.9 trillion.

I think the Chinese Communist Party is a sorrow for China and, increasingly, an impediment to its growth but I don’t fret over it the way Mr. Will seems to. There’s a big difference between the CCP and Soviet communism. After about 1930 Soviet communism was nothing more than a stalking horse for Russian imperialism. The authoritarian thugs of the CCP have always been about enriching themselves and their families and holding on to power within China. I don’t see the Chinese as expansionist.

What does worry me is its unfathomably enormous size, illustrated in the first paragraph quoted above. That’s not a threat to us in any meaningful sense but it is a threat to other countries trying to grow beyond subsistence agriculture. As I said in a previous post China’s gargantuan overcapacity means that they’ve climbed the economic ladder and pulled it up behind them.

Back in the earlier days of this blog I would fairly frequently point out the substantial overcapacity in the auto industry. Basically, eight years ago there was enough productive capacity in automobiles to satisfy any foreseeable world demand for autos and countries like China, India, and Brazil were still building auto plants. I found and continue to find the deadweight loss frightening.

China now has that sort of deadweight loss in any number of industries. I honestly don’t see how we’re going to dig ourselves out of the hole they’ve dug for us.

9 comments… add one
  • mike shupp Link

    In 1950, there were 230 million people in Africa. Today there are 1.2 billion. End of the century, projections say there will be 5 billion In the rest of the world, there are now 6 billion people, which might rise to 7 billion by the year 2100.

    There’s the demand. There’s the customers China’s (and Indias’s) new factories and steel mills and rice growers will be serving. And meanwhile the USA and Europe will be trading, North and South America will be trading, Japan and Korea and Indonesia and Australia wil be trading … We’ll all be happy, almost.

    I don’t know what keeps those 5 billion people in Africa going without industrialization. That strikes me as the real problem.

  • Customers are defined by the willingness to pay. That’s a term of art; “willingness” encompasses both desire and the wherewithal.

    Unless the countries of Africa develop economically, it doesn’t matter how many people live there. There will be few customers because there aren’t enough people who are willing to pay. That’s always been China’s problem. You can only prey off your customers for so long before they stop being customers.

    As to exporting rice China is unlikely to be able to feed itself. Air-borne particulates are cutting the growing season short; soil pollution, over-fertilizing, and improper fertilizing are slowing yields; water pollution is cutting yields too. Something’s got to give—I don’t see how China maintains food self-sufficiency.

  • Guarneri Link

    My friends from S Africa, who still maintain a home there, would tell you the chances of that god forsaken continent getting it’s act together are slim and none. Corruption and poverty for the duration of our lifetimes.

  • Andy Link


    I spent fourth months in east Africa in 2014. I saw kids make their own sandals out of twine and a flattened 1/2 liter water bottles. They don’t have the money to buy a pair $1 flip flops.

    There is real poverty there – people actually starve to death, there’s no health care, poor infrastructure, endemic corruption, little education outside the elites, and a host of other problems layered on top of a complex sectarian/religious/clan system that isn’t compatible with the kinds of institutions required to grow the national political & economic systems required for an economy to actually develop.

    And I was was in the nicer areas.

  • TastyBits Link

    With almost every country creating an unimaginable amount money as fast as they possibly could, it should be no surprise that there is an unimaginable amount of overcapacity worldwide.

    Large pools of money will be used in some way whether wisely or foolishly. There is no businessman or woman who is so savvy that they cannot find the most idiotic use for a large pool of somebody else’s money.

    Overcapacity is created not because it is needed or because the need is anticipated. It is created because it can be. The person who would build the capacity suddenly has access to money he/she would not otherwise have, and whamo-blamo, they suddenly realize there will be a need. If it is not housing, it is steel mills, iPhone factories, or pet rock breeding farms.

    How long it will take to absorb this overcapacity and who will and will not passively accept their situation is the more interesting question.

  • I don’t think the overcapacity will be “absorbed” as you put it. I think it’s misallocation of resources and deadweight loss. Someone, somewhere will absorb the loss.

  • ... Link

    There is real poverty [in Africa] – people actually starve to death, there’s no health care, poor infrastructure, endemic corruption, little education outside the elites, and a host of other problems layered on top of a complex sectarian/religious/clan system that isn’t compatible with the kinds of institutions required to grow the national political & economic systems required for an economy to actually develop.

    And I was was in the nicer areas.

    Andy, Andy, Andy, your thinking is backwards. All those poor Africans are going to move to Europe, where, since all people are exactly the same except for immigrants, who are awesome, they will all be the next Sergey Brinn and will make billions coming up with new ways to put advertising in front of out faces.

    And I know all people are exactly the same because that’s what the economists tell me, and surely no one knows more about human beings than economists. Except for politicians, of course, who tell us that immigrants are actually holy gifts from Heaven, and are better than non-immigrants and thus do even better than the natives when they move to places such as Germany or the US.

    Anyway, failing that all those African immigrants will get really awesome welfare benefits once they move to Europe, so they’ll finally be able to afford a $1 pair of flipflops.

    What could possibly go wrong?

  • ... Link

    Not at all incidentally, I’ve seen that the participants in Davos are absolutely shitting themselves that mild populists such as Trump might get elected. That is, they’re afraid the people may get a little of what they want from a politician for a change, and the billionaire class might finally be forced to stop stealing, at least a little bit, from everyone else.

    I also saw a story that some scientists are at Davos telling the participants that they need to be very careful about making kill-bots coupled to AIs lest those kill-bot AIs decide they don’t need people any more.

    Personally I think the scientists are just going to give the billionaire rulers of the world an idea. If the poor people are going to revolt, then maybe they should just get rid of the poor people. That can start heading for world’s like those in Asimov’s robot series, where a few people live on world’s while robots do all the work. Asimov just lacked the creativity, or more likely found the idea repellent, that those running the Earth might prefer to make THIS WORLD look like those imaginary worlds by any expediency.

    I can even see how they would do it while claiming deniability. Let’s seay Europe decides that it does in fact need to patrol its borders. But they can’t have an actual army for any of a number of reasons. So they make themselves an army, navy & air force of drones, with the very latest in Google’s self-driving car software. Turn them loose on the borders. When they work, send them to the Third World to keep the peace. Then let hidden code turn the bots loose to go on a killing spree. Third World over-population problem solved bitchez! They can blame so racist engineers for the problem later. The “problem” would be analogous to what Volkeswagon did with their emission testing software “glitch”.

    Later massacres for First World populations could be dreamed up when the time was right.

    And why not? Not only are the rich worried about the rest of us revolting, they find the rest of us revolting.

  • TastyBits Link

    Artificial money and artificial needs go together as they must. Expanding the economy through artificial money requires artificial needs, and artificial needs requires artificial capacity. Interestingly, expanding government largess through artificial needs requires artificial money, and artificial money requires artificial capacity.

    (To my friends on the right, are you beginning to get it, or do you need another few decades?)

    If necessary, artificial money will create imaginary needs in order to supply the artificial capacity it requires. Money will be used one way or another.

    The overcapacity is not what causes the problem. The artificial money and artificial needs cause the problem. When the artificial money is removed, the artificial need will disappear, and the artificial capacity will no longer be needed. The only exception would be where the collateral value of the artificial capacity exceeded the artificial money used to create it, or it was able to obtain raw materials exceeding that value.

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