Wednesday, August 20, 2008

Samuelson on China

Robert Samuelson has a great op-ed out today on what we should really worry about when it comes to China. He argues that concerns that the Chinese economy will surpass ours are silly - there is no possible way they can't surpass us, and they'll probably do it by the 2020's. That doesn't mean that Chinese per capita income will exceed that of the U.S. - we will probably lead there indefinitely.

More importantly, though, China risks destabilizing the global economy, rather than dominating it. Samuelson parades the usual suspects: trade, oil, and exchange rates. For the most part, I think he's dead on. He's a little timid when it comes to trade - pointing out that the ones China hurts most with its trade policies are other low-cost labor economies that can't compete with the Chinese. I'm not so sure they're the only victims, but OK.

He also highlights the risk posed by Chinese energy consumption - and that's the important thing to consider. The rise in oil prices in the last couple years hasn't really been a symptom of decreased supply (although my understanding is that we're flat-lining) - its that demand has been propelled by developing countries - particularly China. Now I agree with those who are calling for safe offshore drilling - there's no reason we shouldn't benefit from higher oil prices by producing more ourselves. But that alone is not the solution to the problem. If China's demand for energy shows no sign of quitting, we can't just beat them at their own game - we need to get into other energy markets that are not threatened by this increase in demand. I'm personally intrigued by the prospects of wind farming in the U.S., and the so-called Pickens Plan.

Samuelson also brings up China's currency reserves which have developed over years of aggressive exporting. He only really raises the issue of the Chinese buying up U.S. companies and a nationalistic U.S. response... I find it odd that he doesn't highlight the possibility of currency instability in general caused by China's massive reserves and our massive debt. Samuelson raises the prospect of a "resource war" (to which I'm forced to respond "sure - what's new?"), but he doesn't even consider the possibility of a "debt war". Could that ever happen? Let's say McCain is elected and we dig in deeper in Iraq and Afghanistan while cutting taxes and not doing much of anything about Social Security or Medicare - and lets say this current slump lasts a little longer than we expected. Suppose we start to have trouble paying off our debt - and some coalition of lending nations demands our compliance with a strict payment plan... and we refuse. The value of the dollar drops even farther than it has over the last couple months, and the Chinese reserves begin to evaporate. If the U.S. is sufficiently weakened, could there be a debt war, where the Chinese insist on a part in the management of the most valuable asset they own - a sizable chunk of the U.S. government? Probably unlikely. China is more likely to implode than explode on the world scene. But the risks involved in the U.S. national debt can't be stressed enough. And I'm a fan of both Hamilton and Keynes - I think there are very valuable uses for a government debt... but even then, you can go too far.

Finally - I was absolutely shocked by a statistic that Samuelson cited. Apparently, 17 million people a year move from the country to the cities in China. Urbanization is progressing at break-neck pace. 17 million! That's like a new New York City popping up in China every single year. That is absolutely unbelievable!

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