If This Goes On…

For some cheery Saturday morning viewing and if you have a strong stomach you might want to take a gander at this presentation from Jon Moynihan, Executive Chairman of PA Consulting Group, a global management and information technology consulting group, on the economic decline of the West. It’s more than 90 slides long so it requires some commitment to view and digest it.

I deliberately selected a delightfully busy slide to exemplify the presentation. You can click on it for a larger version. It illustrates the folly of the central banks’ actions in reaction to the financial crisis of 2008, largely keeping the ball up in the air. The presentation is certainly concerning but, at least from the point of view of an American, there are reasons to doubt the scenario they outline at some length and even reasons for hope.

First, the scenario depends too greatly on the persistence theory. All that would be required for their prediction to fail would be for China’s growth to slow below 7% and the U. S. to sustain growth over 2%. To the best of my knowledge in every developing country that has experienced rapid growth as China has that growth has slowed markedly at the per capita income level that China has now reached. And there are good reasons to believe that’s precisely what is happening now. A considerable portion of China’s rapid economic growth, like Russia’s before it, has been accomplished not by managerial brilliance but simply by moving labor from relatively non-productive agricultural production to industrial production. China has largely completed that process and the challenge it faces today is in maintaining its level of growth now that it’s no longer supine. Meanwhile China faces substantial demographic headwinds.

Second, “the West” is an artificial construct consisting of the United States, the United Kingdom, parts of Europe, Japan, Canada, Australia, and New Zealand mostly intended to separate us from them, them mostly consisting of Russia and China. This is cozy for the United Kingdom and those parts of Europe included in the club but the United States and Canada could just as easily be classified in “the Americas”, another construct, or, with Australia, Japan, South Korea, New Zealand, and, notably, China in the “Pacific Rim”, a third construct. Where you sit depends on where you stand.

The UK and Europe do, indeed, have significant worries. Those worries are not necessarily ours. At this point we do not have Germany and Japan’s demographic problems and we do not have the enormous dependency ratio issues that the UK and much of Europe do. That’s not intended to be an exhaustive catalogue of the differences, merely an illustration.

Canada’s economy is certainly more tied to ours and it may well be more tightly coupled to that of China that it is to that of “the West”. Australia’s ties to China are clearly growing. In short the colonies may not have the problems that the mother country and the adjacent Eurozone countries do.

Third, it’s hard to know how much credit to give to China’s R&D. There is some evidence that incentives to produce more research and patents are producing a bumper crop of bogus research and patents.

The presentation does make a point that I think is very important: the centrality of manufacturing. Production engineering is tied closely to manufacturing and other science and engineering to production engineering. The notion that we can maintain robust science and engineering without a robust manufacturing sector is a will o’ the wisp. Fortunately, manufacturing in the U. S. continues to grow. It’s just growing without producing a lot of new manufacturing jobs in the U. S.

Food for thought.