At least five interesting things to start your week (#10)
Where China went wrong, Millennials' economic success, AI and growth, Asian coalitions, and AOC's sunscreen crusade
I’m really enjoying doing these roundups. They help me get rid of the nagging sensation that I’m missing a lot of good topics.
Anyway, first, podcast. Here’s Brad DeLong and me on Hexapodia, discussing the fun question of why so many people perceive a good economy as bad:
Anyway, on to this week’s Five Interesting Things:
1. Did state control wreck China’s economic model?
It took a while, but the popular narrative on China is finally starting to shift. Whereas just a year ago the press was still largely filled with paeans to China’s awe-inspiring economic growth, now we see a lot of stories about how everything is going wrong:
China's…consumer prices dropped annually in July…JPMorgan strategists cautioned that China risks a 1990s-style "Japanification" if policymakers don't address the housing market, financial imbalances, and aging demographics…Manufacturing activity has contracted for four straight months…July exports declined at the sharpest rate in three years, at 14.5% annually…
Embedding Communist Party members in corporations and prioritizing state-run firms, [author Dexter Roberts] said, has dragged on domestic productivity, spooked the private sector, and made the country less attractive for foreign investment.
"A lot of companies now feel China isn't the market of the future," Roberts said…To that point, China's foreign investment gauge plummeted to a 25-year low in the second quarter…
From an unstable, debt-ridden property market to anti-business policies and demographic issues, Beijing has plenty to tackle if it hopes to match the same growth as decades past.
So…what went wrong? Just a couple years ago plenty of people thought that China had figured out a new, better economic model. Why did it run off the rails?
In a larger, “macro” sense, it ran off the rails for a simple reason. In the words of Herbert Stein, “If something cannot go on forever, it will stop.” Ultimately, diminishing returns to physical capital, combined with an increased burden of upkeep, make further mega-investment projects wasteful and useless. Ultimately, it’s no longer possible to bring people from the countryside to the cities. Ultimately, a developing country runs out of technologies that it can copy or steal from advanced countries, forcing it to start the much more cumbersome process of inventing new stuff on its own. China’s hypergrowth could not continue forever, so it did not.
The real question is why China’s growth decelerated when it was still only at 29% of U.S. per capita GDP. Some people will shrug and say well, China is a big country, and it’s harder for big countries to get rich. But the U.S. is a fairly big country as well, and it’s richer than almost all other countries. So I’m skeptical of this common, glib explanation.
Another explanation we see popping up a lot is state control. Posen writes:
After defying temptation for decades, China’s political economy under Xi has finally succumbed to a familiar pattern among autocratic regimes. They tend to start out on a “no politics, no problem” compact that promises business as usual for those who keep their heads down. But by their second or, more commonly, third term in office, rulers increasingly disregard commercial concerns and pursue interventionist policies whenever it suits their short-term goals. … Over varying periods, Hugo Chávez and Nicolás Maduro in Venezuela, Recep Tayyip Erdogan in Turkey, Viktor Orban in Hungary, and Vladimir Putin in Russia have all turned down this well-worn road.
I think there is something to this. Xi has made a ton of mistakes, including Zero Covid, Belt and Road, and so on. I doubt that putting party apparatchiks in every company or making businesspeople spend hours every day studying Xi Jinping Thought is going to do much to help the economy either. But the fact is that Xi’s transformation of the Chinese economy into a giant reflection of his own cherubic face has not really had time to proceed yet; the mistakes Posen describes are very recent, and most of their effect likely hasn’t been felt yet.
I agree with Adam Tooze’s argument that China’s economic deceleration is all about the country’s real estate crash. Xi precipitated that crash, but it’s not really his fault; it was very long in coming, and stemmed from the fact that real-estate-related industries reached almost 30% of China’s GDP, far more than in other countries even at the peak of their own housing bubbles. And that in turn has its roots in China’s strategy of using real estate loans by state-controlled banks as a form of fiscal stimulus. This also lowered China’s productivity growth by diverting capital and labor away from other industries with better prospects for efficiency improvements. In other words, both China’s short-term and long-term economic problems stem from its over-reliance on real estate as an economic driver, a financial asset, a government revenue source, and a method of fiscal stimulus.
But that over-reliance on real estate does stem, in an important sense, from Chinese state control. It was state-owned and state-dominated banks, acting at the behest of the central government and local governments, that redirected so much of the country’s resources toward real estate. That control began long before Xi, but it does represent a failure of central planning nonetheless.
2. Yes, the typical Millennial is thriving
It’s good to see more people being skeptical of the narrative that the Millennials are a uniquely screwed generation, doomed to be poorer than their parents by high housing prices and high student debt levels and the scars of the Great Recession. You still see some folks advancing this narrative, such as a recent story by Julian Mark in the Washington Post. But more and more folks are pushing back, especially from the progressive side. Here’s Dean Baker:
The Washington Post told readers that the current generation of young people is finding it much harder to become homeowners than young people did in the past. The data disagree with this claim…There is no doubt that the recent run-up in mortgage interest rates has made it much more difficult for first-time homebuyers, and if they stay anywhere near current levels we will likely see a drop in homeownership rates among the young. (The average for the first two quarters is already down slightly from the 2022 level.) However, the idea that the current generation of young people is finding it uniquely difficult to become homeowners simply is not true.
And here is Kevin Drum:
Millennials are doing fine. There's a small and vocal subset who are unhappy that they can't afford to live by themselves in a spacious apartment in Manhattan, but the vast majority are faring as well as previous generations and better than Millennials in any other country in the world. Someday a reporter from the Washington Post will read this and pass the news along to the rest of the country.
Here are a couple of great charts from Drum on homeownership rates and student debt levels:
For all the headwinds and disasters everyone talks about, Millennials are, economically speaking, a very average normal generation. I expect it to take at least a couple more years of economic success for this narrative to thoroughly replace the old one, though.
(Update: As some folks on the app formerly known as Twitter pointed out, this measure of the homeownership rate only counts people who are heads of their own household. More young people live with their parents than in the past — about 20%, compared to 12% in 1990. Taking this into account, and counting cohabiting couples the same as married couples, the homeownership rate for young people is maybe 3 percentage points lower than it was in the 1990s. If cohabitors aren’t counted as married, it’s 5 percentage points lower. Still, the difference isn’t huge, and the trend line since the mid-2010s is strongly positive.)
As a coda, one thing that irks me is that the way America’s housing system works makes it very easy to complain no matter what’s happening to housing prices and mortgage rates. If house prices are rising, you can complain about how hard it is for young people to afford a home. But if house prices are falling, you can complain about how middle-class wealth is being demolished (since most middle-class Americans have most of their wealth in their house). No matter what happens, you can tell a negative story about it. This is a product of the fact that America chose long ago to make real estate our main middle-class wealth vehicle, instead of stocks and bonds like they do in Japan. But in any case, I wish the people who complain about these things would imagine what their ideal situation for housing prices would look like.
3. A wonderful debate on AI and economic growth
Keep reading with a 7-day free trial
Subscribe to Noahpinion to keep reading this post and get 7 days of free access to the full post archives.