Global Economics and Management

China's Woes

In a couple of recent posts, I opined on China's growth slowdown and on the growing economic divide between China and the West. But China's woes are not limited to slowing economic growth and decoupling. As a series of recent press articles have pointed out, China's sense of malaise extends well beyond that:

1) China has a big problem with youth unemployment. The problem stems in part from the growth slowdown, and in part from a mismatch between the supply of skills and the demand for workers. Over the past decades, China invested massively in higher education. Now, there are millions of young people with advanced degrees, but too few jobs relying on this skill level (the WSJ recently ran a brilliant podcast on this problem, with many real-life examples). Now, we learn that the Chinese government will no longer publish statistics on youth unemployment. Indeed, when a statistic brings bad news, what better way to bury the bad news than to stop publishing the statistic?

2) China has a big problem with very low and still falling fertility rates. The rate fell from 1.30 children per woman in 2020 to 1.09 in 2022. Although it is hard to know for sure because... you guessed it, the Chinese government stopped publishing fertility statistics (that was back in 2017)! Marriage registrations, a leading indicator of fertility declines, have been in a freefall since 2012, so there is little prospect of a reversal of China's fertility decline.

3) Via Bloomberg, we learn that China also made questionable calls when it comes to the energy transition. At one point, thanks to generous subsidies, there were up to 500 electric car makers in China (now down to about 100). This led to overproduction, and now brand new EVs sit unused in fields. The photographs in the linked article are striking (can you only get blue or white cars in China? I would have though red would also be on offer!). This episode should be a wake-up call for those who are enthused with industrial policy: the policy of steering economic resources toward favored sectors of economic activity, though subsidies, tax policy, etc. We in the US are of course engaged in a similar set of policies, for EVs, for alternative energies, and for microchip production, just to name a few. Let's hope these policies don't lead to the same outcome as in China. A similar lesson, incidentally, holds when it comes to China's investment in infrastructure. The WSJ has the details in a wide-ranging article by Lingling Wei and Stella Yifan Xie published today.

4) And then of course, problems on the real estate market - due to massive oversupply of housing - are posing systemic risks to China's financial system - and beyond: last week Evergrande, China's second largest property developer, filed for bankruptcy in New York to protect itself from US creditors. The real estate crisis in China could cause the banks, local governments, and lenders to these real estate developers (Chinese or foreign) to themselves come under financial strain.

This is a lot of bad news all at once, and I post them jointly here not to make a specific point about any of them, but to build a broader portrait of what the Chinese economy looks like right now. Such conditions, historically, have not been consistent with social and political stability. Will we see China's economic turmoil spill over into domestic unrest or into an attempt to divert attention by engaging in foreign conflicts? These are the questions we will wrestle with in our upcoming Global Trends class session.

My take on all this is as follows: China made remarkable strides toward modernity since the regime started to open up in 1978. This process of reforms was always a work in progress. It never extended to reforming political institutions to make them more inclusive and less coercive. At some point, in the early 2010s, China had to choose between more modernity at the "cost" of political liberalization, or maintaining the power of the Communist Party at the cost of slowing growth. President Xi made the latter choice. I think this choice was a mistake, and will prove self-defeating. When? That's the trillion dollar question...

The Prospect of a US Fiscal Crisis

At our last Global Trends class, I was asked what major risk factors afflict the US economy. My answer was: the possibility of a fiscal crisis. Indeed, in the aftermath of the Great Recession and more recently during the COVID pandemic, there was an explosion of fiscal spending. More fundamental factors like the ageing of the population are also putting long-term strain on public finances, at both the federal, state and local levels, as entitlement spending is expected to rise steeply. And the recent increase in interest rates (initiated by the Fed to fight inflation) is raising the fiscal cost of public deficits, because interest payments on US public debt are rising on the portion of the debt with low maturity (for longer maturity debt, low rates were locked in, and the cost won't change until these bonds need to be rolled over). These various developments largely explain the recent downgrade of US public debt by Fitch.

Recently the Wall Street Journal ran a short feature on this situation. This includes an interesting graph projecting the amount of interest owed by the Federal government under various interest rate scenarios. What the article does not say is that this problem is almost entirely political. Indeed, a fiscal consolidation would entail either cutting spending growth (including entitlement spending growth) or raising taxes. The political will for either simply does not exist on either side of the political spectrum: within the Republican Party, there is disagreement on what is needed on the fiscal front, which may lead to yet another government shutdown (also at the WSJ, the great economist Alan Blinder tells this story effectively). As for the Democratic Party and the Biden Administration, they do not support reforming entitlement spending, and have set a very high income threshold for tax increases (it will be impossible to meaningfully address the fiscal situation simply by raising taxes on those making more than $400,000 - because there are too few of those).

If I could waive a magic wand, I would implement something along the lines of the 2010 Simpson-Bowles bipartisan report. That is, I would work on the spending side (for instance by indexing the retirement age to life expectancy and by working more aggressively to cut healthcare spending), and on the revenue side (for example by moving to a carbon tax and by implementing a consumption tax that could replace the current income tax). But there is simply zero prospect that this could happen in the polarized political environment that prevails now. When countries with big fiscal imbalances cannot get their act together, what often happens is that a fiscal crisis forces the reform upon them: lenders become reluctant to lend, borrowing costs rise, a recession follows, requiring deep structural reforms. For decades, the US has been protected from such a scenario because it was considered a safe haven and the dollar reigned king: the US government had not trouble selling and rolling over its debt, and was issuing this debt in its own currency. How long this can continue is anyone's guess, and it is true that fiscal doomsayers have been proven wrong time and time again. But that does not mean they will be wrong forever...

Indicators of Decoupling?

In Global Trends and on this blog, I recently discussed a lack of strong evidence of decoupling between the US and China, when looking at trade data. But trade in goods and services is not the only indicator of between-country economic linkages. In class we discussed movements of people, of capital and of ideas, as equally important facets of global economic interactions. And on these fronts, there may be more signs that China is growing apart from the rest of the world. The WSJ recently ran a comprehensive feature on the fact that, in the wake of the pandemic, tourists have not returned to China: "Nationwide, just 52,000 people arrived to mainland China from overseas on trips organized by travel agencies during the first quarter, the latest period for which national data is available, compared with 3.7 million in the first quarter of 2019". This is a dramatic decline. Movements of capital are also down significantly: "The dearth of visitors could also be contributing to less investment in China. Foreign direct investment into the country fell to $20 billion in the first quarter, compared with $100 billion in last year’s first quarter (...)." The causes seem linked to the fact that airlines fly fewer routes to China (but of course this is as much a cause as it is a consequence of reduced flows, because the demand for flights is presumably down), and more fundamentally to deteriorating relations between China and the West (and countries in that orbit). Perceived risk to businesspeople visiting China seems to be an additional factor.

Whatever the cause, this is not a welcome development. Flows of people and capital are an important way in which ideas also flow from one country to another. Without the exchange of ideas - on technologies, on cultural values, on business practices, etc. - progress in China will further slow. Without engagement and interactions, the risk of conflict rises. Those who wanted to revisit the policy of engagement that the US pursued vis-à-vis China since the Nixon Administration often say that this policy failed to yield fruit, in the form of the democratization of the Chinese regime. They argued for a more confrontational relationship, and of course the Chinese regime did not help counter this rhetoric, with various provocations (the latest one a recent naval patrol, jointly with Russia, off the coast of Alaska). However, the policy of decoupling has some obvious costs as well - as we may at some point find out. I hope that the recent efforts to reach some form of détente will win out.

UPDATE: While data from recent years show no pronounced declines in trade with China, as I pointed out above, more recent data suggests things are starting to slow even on this front. The Wall Street Journal today had the details: "Overseas shipments from China slumped 14.5% in July from a year earlier, the steepest year-over-year decline since February 2020, in the earliest days of the Covid-19 pandemic, data released Tuesday by China’s General Administration of Customs showed." The political economy consequences of this export slowdown could be pronounced. In a paper I recently accepted in the JEEA, the economics journal that I edit, a team of economists documented that when exports from China slowed down in 2015, worker unrest increased. Might we also see more civil unrest in China this time around?

Political Obstacles to Technology Adoption

The most obvious obstacle to the adoption of new products is the absence of the requisite technology. Peter Thiel complained that we have been promised flying cars, and all we got were 140 characters. We can’t adopt flying cars as long as the technology to make cars fly hasn’t been invented !

Often, however, the main obstacle to the adoption of advanced technologies is not the fact that they don’t exist, but political and cultural barriers to their adoption. The Wall Street Journal today had a front page story on the case of self-driving cars. By most accounts, the technology to operate self-driving cars is quite mature. Companies like Google’s Waymo or GM’s Cruise have been testing their prototypes for years, and over millions of miles, with much success (you can often spot Waymo test vehicles driving around in Santa Monica, albeit with someone inside). But they have failed to make much headway in getting local and federal regulators to approve a more widespread use and commercialization of their technologies, and they face resistance from local populations. Even in tech-savvy San Francisco, a group called Safe Street Rebel is resisting the diffusion of self-driving cars, arguing that they are hazardous (of course, human drivers are also hazardous !). This is likely to slow down the adoption of this specific technology, but I believe that its potential benefits are so large that this resistance will fade with time - and with improvements in the technology.

I wrote a lot on the cultural and political barriers to technological adoption, earlier in my career. I was worried mostly about international technology diffusion, to poor countries, but the lessons apply just as well domestically, within advanced industrialized countries. Don’t underestimate the political and cultural barriers to technology adoption - just because you come up with a great product or technology does not mean it will be readily adopted!

Update on 8/10/2023: Cruise and Waymo got the approval they sought from the California Public Utilities Commission to operate more extensively in San Francisco. Time will tell whether they are similarly able to overcome regulatory barriers elsewhere.

Harlan County, USA

On Friday I was happy to speak with two Washington Post reporters who plan to cover my new paper, "Does Anger Drive Populism?", coauthored with Omer Ali and Klaus Desmet. This paper uses a unique dataset from Gallup which asked people about their emotional states on the day before the interview - including anger, sadness, worry, stress, and subjective well-being. The dataset comes from a daily survey of hundreds of individuals, so it contains millions of observations over the 2008-2017 period. We find that a county's average anger level is predictive of voting for Donald Trump (and Bernie Sanders) in the 2016 primaries and general election. We also find, however, that this correlation vanishes once we control for other dimensions of "negative affect" (worry, stress, sadness) as well as subjective well-being. Our conclusion is: "Our results indicate that a complex sense of malaise and gloom, rather than anger per se, may drive the rise in populism."

This is a short, straightforward paper, so my coauthors and I were surprised that it seems to be attracting so much interest from commentators. We have already been covered in the New York Times and in Marginal Revolution (a leading econ blog) - and now, of course, we are expecting a feature in the Washington Post. I think the paper hit a nerve, because people understand that there must be something to the idea that malaise and anger can feed political protest voting.

In the course of the conversation with the two WaPo journalists, interesting tidbits emerged. In our sample, one of the angriest counties in the US is Harlan County, Kentucky - in the heart of coal country in Appalachia. This county is famous for being the setting of repeated and violent coal miner strikes going back to the 1930s. The strikes that occurred in the early 1970s were the subject of a brilliant documentary by Barbara Kopple, entitled "Harlan County, USA". This documentary won an Oscar. On the lighter side, the TV series "Justified", starring Timothy Olyphant, takes place in Harlan County. This county represents a remarkable laboratory for social scientists trying to understand numerous trends in the US economy: rising of deaths of despair, the realignment of the working class from the Democratic Party to the Republican Party, and of course the rise of Donald Trump. Here is some striking data on Harlan County, from Wikipedia: 

• "By 2016, more than half of the county's income came from transfers from the Federal government such as Social Security, Medicare and Food Stamps."

• "It voted Republican for the presidential candidate in every election from 1880 to 1932. However, with increasing unionization in the coal industry, it became a Democratic stronghold for six decades (...), it voted blue in every election from 1936 to 2000. (...) In the 2004 Presidential election, Harlan County voted for the Republican Presidential nominee for the first time in 32 years; Republican incumbent George W. Bush received 60.2% of the vote. This rightward trend continued in 2008, when Republican Presidential candidate John McCain received 72.3% of the vote (...), Republican Presidential nominee Mitt Romney won the county over the Democratic incumbent Obama by a 64% margin (81.2% to 17.2%). In the 2016 election, its voters supported Republican nominee Donald Trump over Democrat Hillary Clinton by a 72.12% margin (84.87 to 12.75).

• "Mining employment in Harlan County rose to 13,619 in 1950. The number of employed miners had declined to 764 by June 2016. During the same period, the population of Harlan County declined from 71,000 to less than 28,000."

If you want to understand the rise of populism, you should try to understand what happened in places like Harlan County.

Global Trends Readings

Over the last few days, I came across several interesting articles that are highly relevant for the issues we are discussing in Global Trends this summer:

1) Branko Milanovic's article in Foreign Affairs is making the rounds. Until recently, the conventional wisdom among commentators was that there is a generalized increase in inequality around the world. The specifics are nuanced and the data are not easy to parse, but the view that inequality was on the rise was subject to broad agreement. Professor Milanovic says: not so fast... Of course, we will take a deep dive into data on inequality for our discussion on campus on August 6, which will give us a chance to come back to this important article.

2) Over at Bloomberg, the great historian Niall Ferguson muses about the state of democracy around the world, and the role of the US as a champion of democracy. This, or course, relates to the very interesting discussion we had during our last in-person session of Global Trends.

3) In class last time, I mentioned that education was one of America's leading service exports. I said that, therefore, I was an exporter, because of the educational services that I deliver to students who came to America for the purpose of earning an MBA degree. In a Brookings article that is now a bit dated (2017), yet still highly relevant, Professor Dick Startz of UCSB discusses education as a service export - recommended!

4) Relative to Americans, Europeans are becoming poorer. The Wall Street Journal comments. The data on the divergence of fortunes between the two sides of the Atlantic are striking: "The eurozone economy grew about 6% over the past 15 years, measured in dollars, compared with 82% for the U.S., according to International Monetary Fund data". Arguably, European living standards are now falling even in absolute terms, and they may have been falling for a few years already. Europeans will need to adapt to this reality, and the adjustment won't be easy. Over at Bloomberg, Adrian Wooldridge details the example of the UK. The UK compounds the structural problems of the rest of Europe with the specific self-inflicted wound that Brexit represents. And over at Politico, comes a tale of German deindustrialization and malaise. In my view, it would take very significant policy action to change this course - policy action that European electorates are completely unwilling to contemplate. So the most likely scenario for Europe is one of continued stagnation and decline.

The Politicization of Business and Finance

The US is increasingly politically polarized. This will come as no surprise to those who have been following US politics for a long period. The consequences of this trend, which we explore in Module 8 of Global Trends, extend in very visible ways to the business world. Companies have increasingly become embroiled in political controversies. For instance, Bud Light's recent hiring of Dylan Mulvaney, a transgender social-media star, as a spokesperson seems to have backfired. On the shareholder front, activists have used their positions as partial owners of firms to push for changes in the ways these corporations pursue their objectives - either arguing for the adoption of ESG (Environmental, Social, and Governance) considerations, or on the contrary pushing back against them. Some of these involvements in political hot-button issues have caused some companies to have second thoughts, and to try to withdraw from controversial topics. 

Another notable change in the nature of corporate involvement in politics has to do with the changing political alignment of corporations. In the past, corporations were often aligned with the policy goals of the Republican Party, because of the latter's emphasis on low taxes and deregulation. In more recent times, however, corporations have more often aligned with the priorities of the left. In my view, this reflects their growing alignment with coastal, educated and higher income interests, both as employees and as customers. It also reflects the growing and concurrent rise of populism within the right side of the political spectrum.  A fuller, and much deeper, treatment of this topic can be found in an excellent recent feature by Brody Mullins in the Wall Street Journal, a sort of preview of the book that he is writing on this topic (I am fortunate to have been interviewed for this article, and make a short appearance in it).

A Détente with China?

US Treasury Secretary Janet Yellen just returned from a trip to China which was hailed by both sides as productive and cordial. Bloomberg and the WSJ have useful reports. This of course happened in the context of a relationship that, over the last decade or so, has been gradually deteriorating both on the economic and strategic fronts. We will examine these issues in some detail in this summer's offering of Global Trends. Suffice it to say that the 1990s policy of engagement with China (which actually goes back to President Nixon's 1972 visit to that country) had largely been abandoned, with the Trump administration's trade war with China a significant escalation in this process. The attempt to "decouple" the US and Chinese economies is now the subject of bipartisan consensus.

Or so it seems on the surface. In my view, the "decoupling" was always going the be an uphill battle. Entanglements that come from globalization are rarely easy to walk back from using the mere tools of policy, because the incentives that gave rise to these interactions to start with have a lot of staying power. Tesla, Apple, GM, Walmart - all these companies have deep and long lasting ties with China that result from that country being either a crucial supplier, or a crucial export market (or both). So when one looks at the data, one is often hard pressed to see any evidence of decoupling. A recent post by Chad Bown at the Peterson Institute makes this point eloquently: "US goods and services imports from China last year [2022] were the highest ever recorded."

This discussion illustrates the staying power of globalization even in the context of the very serious headwinds that it faces. Personally, I am not unhappy about this. I am now in the minority, but I have always thought that the policy of engagement with China - which had its heyday during the Clinton Administration and culminated with China's accession to the WTO in 2001 - was the correct policy. True, it has not yet yielded fruit in terms of that country's democratization, causing some to call engagement a failure. But the process of political modernization is a slow one. We just did not give globalization and modernity enough time to assert themselves in China. Secretary Yellen's trip is a welcome development, as is the sort of détente that may perhaps result from it - at least on the economic front.

Fareed Zakaria on Ezra Klein's Podcast

Last week Ezra Kein of the New York Times welcomed the great Fareed Zakaria on his podcast. The conversation was wide-ranging, and included virtually all of the major global issues of the day, with a particular emphasis on China and India. In sum, the podcast was a perfect introduction to Global Trends, which I am now gearing up to teach one more time this Summer. I recommend this podcast heartily!

The Economist on the De-Growth Movement

The Economist recently covered a conference of de-growthers, held at the European Parliament earlier this month. The least one can say is that the coverage is not favorable - and justifiably so. One may even characterize the article as slightly angry, and there is a reason for this, because the de-growth movement hurts the most vulnerable. 

I am not too worried about this movement succeeding, however. If you wonder why, a recent post of mine on this blog provides some reasons.