In his latest column in the Washington Post, Robert Samuelson reviews the bad news from around the world and summarizes:
All this has revealed weaknesses in emerging-market economies that were camouflaged by the commodities boom. Brazil is struggling with high inflation, big budget deficits and a corruption scandal involving Petrobras, the national oil company. China is striving to “rebalance” its economy — shifting “from industry to services, from exports to domestic markets, and from investment to consumption,” as Lagarde put it. These problems are not superficial or easy to solve; they take time.
I think that he drastically understates the problems that Chinese mismanagement of their own economy have caused for the rest of the world. China’s greatest problem isn’t birthing pains—the struggle to “rebalance”, as he puts it in scare quotes, its economy. It’s debt overhang with local governments and businesses borrowing money to plow into airports with no arriving flights, cities with no inhabitants, and factories for whose goods there is no demand and the deadweight loss associated with all of that excess capacity. It’s capacity so excessive that not only does it exceed present demand it exceeds global demand for the foreseeable future.
One of the problems with deadweight loss is reluctance to write it off as sunk. I don’t China will be any more eager to do that than a U. S. company would or than you or I would. Consequently, it’s likely to take decades of sub par growth for China to deal with it.
He then warns:
The United States cannot isolate itself from these realities. The weakening global economy would be less important if the U.S. domestic economy were booming. It isn’t. Americans spend cautiously because they’re still spooked by the shock of the 2008-09 financial crisis and Great Recession. Consumers try to protect themselves against a recurrence by raising their saving and reducing their debt. Businesses do likewise by skimping on investment projects. A recent Wall Street Journal story carried the headline: “Big Firms Hit Brake as Profits Slump.”
I have several issues with that. First, he doesn’t quantify anything. I’d like to see some numbers. IMO economic contraction caused by the decline in Chinese demand for raw materials for its factories and, important for Germany, new factories will have some effect on us. Just how much effect depends on just how exposed we are to both. My intuition is not very. Our economy is over-balanced in the direction of personal consumption which, fortunately for us, tends to insulate us from downturns in foreign economies.
Second, the decline in business investment to which he alludes didn’t begin in 2007 or 2008 or 2009. It started all the way back in 2000 and was the greatest reason for the economic contraction of the early Aughts. American companies have become accustomed to profits without capital investment but it has little to do with the Great Recession and I see no rational reason that American companies would invest in the future less because of international trade they don’t have.
I think that the most significant way in which an economic downturn will affect us is through mass migration. All of those people in floundering emerging economies probably aren’t going to sit around feeling sorry for themselves. Some will pull up stakes and head for better prospects which includes us. That we don’t have much use for more workers will not deter them.
I honestly don’t know what to do about that. My inclination is to think that those talking about a hiatus in immigration to the U. S. by Muslims aren’t thinking big enough. We should slow immigration to the U. S. by everybody. I think it’s pretty likely that we’re entering a very difficult period for the whole world. As I said elsewhere, put your trust in God, my boys, and keep your powder dry.
In a later post I’ll address some of the lessons we should have learned over the last couple of decades but haven’t. Suffice it to say I wish Mr. Samuelson would put some meat on the dry bones he’s left us. I just don’t see China’s economic problems as ours.