Don’t Be Afraid of the Chinese Economic Tiger

The news that China has surpassed Japan as the world’s second-largest economy has generated a lot of attention. It shouldn’t. There are roughly 10 times as many people in China as there are in Japan, so the fact that total gross domestic product in China is now bigger than total gross domestic product in Japan is hardly a sign of Chinese economic supremacy. Yes, China has been growing in recent decades, but it’s almost impossible not to grow when you start at the bottom – which is where China was in the late 1970s thanks to decades of communist oppression and mismanagement. And the growth they have experienced certainly has not been enough to overtake other nations based on measures that compare living standards. According to the World Bank, per capita GDP (adjusted for purchasing power parity) was $6,710 for China in 2009, compared to $33,280 for Japan (and $46,730 for the U.S.). If I got to choose where to be a middle-class person, China certainly wouldn’t be my first pick.

This is not to sneer at the positive changes in China. Hundreds of millions of people have experienced big increases in living standards. Better to have $6,710 of per capita GDP than $3,710. But China still has a long way to go if the goal is a vibrant and rich free-market economy. The country’s nominal communist leadership has allowed economic liberalization, but China is still an economically repressed nation. Economic Freedom of the World ranks China 82 out of 141, just one spot above Russia, and the Index of Economic Freedom has an even lower score, 140 out of 179 nations.

Hopefully, China will continue to move in the right direction. As Jonah Goldberg notes in his Townhall column, it is good for America to have China become a more prosperous nation.

Yes, technically, China’s gross domestic product is now slightly ahead of Japan’s. But GDP is a gross statistic. It doesn’t tell you nearly as much as you might think. In a very real way, China is still poorer than Japan. It’s also poorer than Tunisia, Ecuador, Gabon, Kazakhstan and Namibia. …China still has enormous problems, many of which aren’t reflected in its GDP growth rates, and without democracy, a free press and the rule of law, we can’t know what all of the problems are until they explode (and neither can the Chinese). But all of this misses the most important point. Economic “competitiveness” is a con. It assumes that when other countries prosper, America loses. That’s nonsense. If the average Chinese worker were as rich as the average Japanese worker, it would be an economic windfall for the United States. Conversely, if China’s economy imploded tomorrow, we would “gain” competitively but suffer economically. The cult of competitiveness is just a ruse used to justify the ambitions of economic planners and the pundits who worship them.

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Responding to Paul Krugman and Ezra Klein

I seem to have touched a raw nerve with my post earlier today comparing Reagan and Obama on how well the economy performed coming out of recession. Both Ezra Klein and Paul Krugman have denounced my analysis (actually, they denounced me approving of Richard Rahn’s analysis, but that’s a trivial detail). Krugman responded by asserting that Reaganomics was irrelevant (I’m not kidding) to what happened in the 1980s. Klein’s response was more substantive, so let’s focus on his argument. He begins by stating that the recent recession and the downturn of the early 1980s were different creatures. My argument was about how strongly the economy rebounded, however, not the length, severity, causes, and characteristics of each recession. But Klein then cites Rogoff and Reinhardt to argue that recoveries from financial crises tend to be less impressive than recoveries from normal recessions.

That’s certainly a fair argument. I haven’t read the Rogoff-Reinhardt book, but their hypothesis seems reasonable, so let’s accept it for purposes of this discussion. Should we therefore grade Obama on a curve? Perhaps, but it’s also true that deep recessions usually are followed by more robust recoveries. And since the recent downturn was more severe than the the one in the early 1980s, shouldn’t we be experiencing some additional growth to offset the tepidness associated with the aftermath of a financial crisis?

I doubt we’ll ever know how to appropriately measure all of these factors, but I don’t think that matters. I suspect Krugman and Klein are not particularly upset about Richard Rahn’s comparisons of recessions and recoveries. The real argument is whether Reagan did the right thing by reducing the burden of government and whether Obama is doing the wrong thing by heading in the opposite direction and making America more like France or Greece. In other words, the fundamental issue is whether we should have big government or small government. I think the Obama Administration, by making government bigger, is repeating many of the mistakes of the Bush Administration. Krugman and Klein almost certainly disagree.

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France Wants to Move the Goal Posts to Hide Dismal Economic Performance

A column in the Wall Street Journal mocks President Sarkozy for suggesting that gross domestic product, which is how economic growth is measured, be changed to include subjective variables such as happiness. This is a transparent attempt to paper over France’s sluggish economic performance. Happiness is important, of course, but it comes about by allowing people to make voluntary choices in a free society, not by creating involuntary leisure with stifling tax rates and welfare dependency:

French President Nicolas Sarkozy recently said he wanted the nations of the world to stop using GDP, or gross domestic product, as the main measure of their economic performance. He wants them instead to work up another metric that takes into account not only economic production but such things as environmental quality and even time not spent in traffic—a sort of gross national satisfaction index. France has excellent reason to suppress GDP statistics. Since 1982, among developed nations, France has been a clear laggard in GDP growth. In the quarter century following 1982, France’s GDP growth rate was a mere 2.1% per year in comparison to the U.S.’s 3.3%. Thus the U.S. grew at more than a 50% premium to France per year during that span. When the quarter century elapsed, Americans were one-third richer than the French. …countries of “old Europe” such as France and Italy that were content to stand pat with an overregulated private sector and tax rates well above 50% were left in the dust. In 2003, as the Iraq war got going, France complained that the U.S. was the world’s “hyperpower.” Yet France itself was partly responsible for this fate. …If Mr. Sarkozy’s statisticians ever come up with their new economic index, they should be sure it includes leisure time—because that is one thing the French economy excels at producing. In 2004, the year he won the Nobel Prize, economist Edward Prescott asked, in the title of a journal article, “Why Do Americans Work So Much More Than Europeans?” The answer, he found, was tax rates. Tax rates had fallen so much in the U.S. by that year that the American workforce couldn’t wait to get on the job—or start a business—because you got to keep so much of what you earned. In contrast, high and progressive French taxes left over from the 1970s lured people away from work, especially as they started doing well. So people came to take seven-hour days and six-week vacations, as well as not show any particular interest in striking out on their own in a work-intensive small business. The oldest and most pathetic trick in the book when you lose a contest is to try to move the goal posts. GDP statistics of the past quarter century have shamed France but flattered the U.S., Britain and East Asia. Mr. Sarkozy’s gambit to paper over this real difference will be lucky to find any takers.

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