Random Density Facts

Matthew Yglesias: "First if Texas (268,820 square miles) were as densely populated as New Jersey (1,134 per square mile) it would contain about 305 million people—essentially the entire population of the United States. Second, if the entire state of Maine (35,385 square miles) were as densely populated as the city of Somerville, Massachusetts (18,147 per square mile) it could hold over 640 million people.

To reach for a policy point here, the Texas/Jersey thing illustrates that it would be possible for the United States to contain a lot more wilderness without jamming everyone into super-dense cities. New Jersey is the quintessential suburban state.

Have we underestimated Chinese consumption?

China Financial Markets:

How do we know that China has an under-consumption problem? To answer that question it is unnecessary even to look at the consumption statistics. All you need to know is that China has a very high investment rate (perhaps the highest in the world) and a huge trade surplus.

Every country produces goods and either consumes or invests those goods. This is not quite an accounting identity, but it becomes one if you take into account the trade balance. Why? Because if it produces more than it consumes or invests, it must run a trade surplus. If it produces less, it must run a trade deficit. In other words by definition what ever you produce is equal to what you invest plus what you consume plus or minus the trade balance.

China has an extremely high investment rate, perhaps the highest ever recorded for a medium or large economy. Countries with high investment rates should normally run trade deficits, since there is so little left over of their production for them to consume that they must import the balance. This is what happened, for example, to the US during most of the 19th Century.

But China has probably the highest trade surplus ever recorded. This means that an extraordinarily large portion of its production is invested, and another extraordinarily large portion is exported. So what about consumption? The only way a country can run an extraordinarily high investment rate and an extraordinarily high trade surplus is if consumption is extraordinarily low.

So almsot by definition we know that consumption in China is extraordinarily low as a share of its total production. It is unnecessary to check consumption statistics to prove this.

In fact official statistics do prove it. They show that Chinese households consumed a little less than 36% of total GDP last year. This is an unprecedented number, much lower than the 65-70% typical of the US and Europe and even far below the 50-55% typical of other low-consuming Asian countries.

...Credit Suisse estimates that last year Chinese household consumption was just over 31 percent of GDP – although I am not sure even they completely believe this number. Still, it suggests that the real consumption rate may be between 31% (their number) and 36% (the official number).  Either number is completely off the charts.
So isn’t this good news for consumption as far as its implications foe the economic imbalances?  Consumption is so low that it has no choice but to surge, right?  Perhaps, but I am very uncomfortable with this argument.  It seems to me that the only way consumption can be so low is if there are some very severe structural impediments that distort consumption growth, and I think there is no reason simply to assume or hope that these impediments will dissolve and, as they do, consumption will explode.  Rather than proclaim that Professor Wang’s adjusted consumption rate is more evidence that consumption must surge, it seems more reasonable to wonder how any country can have such a massive imbalance.  And how can Beijing unwind this imbalance?

Chinese consumption and the Japanese Model

Michael Pettis is a good source for economics news about China

China Financial Markets: "in order to rebalance the economy China must sharply raise the consumption share of GDP. It has declined from 46% of GDP in 2000, which was already a very low number, although not quite unprecedented, to 41% in 2003, which is, I believe, an unprecedented number, at least for any large economy.

But that wasn’t the end of the story. Consumption declined further as a share of GDP to an astonishing 38% in 2006, finally to end under 36% in 2009. I don’t think we have ever seen anything close to this level before.

... In order to get to 47% of GDP in ten years, consumption needs to do something it has never been able to do – grow faster than GDP by a huge margin – something like three full percentage points – every year for the next ten years.

...If China continues growing at 7-9% for the next decade, which is what many analysts seem to be projecting (very unlikely, I say), consumption must grow much faster than it ever has in post-reform Chinese history, even while China’s GDP grows more slowly than it ever has during that period.

It’s arithmetically possible, of course, but there are two schools of thought about how to do it. One school argues that relatively low consumption growth has to do with factors that can be changed without changing the fundamental growth model – perhaps demographics, or Confucian culture, or tax incentives, or lack of TV advertising, or the sex imbalance, or the lack of a social safety net, etc.

If they are right, then presumably Beijing can administratively address those issues while separately keeping GDP growth rates high. But if that’s what it takes, and since they have been determined since 2005-06 to drive up the consumption share of GDP, and during that time it has plummeted, you sort of wonder why they just don’t get on with it.

The other much smaller school (but growing rapidly, I think) argues that low consumption is a fundamental feature of the growth model because of the hidden taxes that channel household income into subsidizing growth. Growth is high, in other words, because consumption is low. This group has been arguing for the past five years that all the measures Beijing has taken to ensure more rapid consumption growth will fail because they do not address the underlying cause.

I guess we will just have to wait and see who is right, but I am confident enough to say that unless GDP growth plummets to below 5% annually on average, and probably even then, there is no way consumption will represent 47% of GDP in ten years. I say this with one caveat – if Beijing were to engineer a huge shift of state wealth to the household sector, say in a massive privatization program, it could boost household consumption significantly, but I suspect that this will be politically difficult to do.

...So why do they consume such a low share of national GDP – perhaps the lowest share ever recorded? The answer has to do with the level of household income as a share of GDP, also one of the lowest ever recorded.

Chinese households are happy to consume, but they own such a small share of total national income that their consumption is necessarily also a small share of national income. And just as the household share of national income has declined dramatically in the past decade, so has household consumption. This isn’t to say households are getting poorer. On the contrary, they are getting richer, but they are getting richer at a much slower speed than the country overall, which means their share of total income is declining.

... The Chinese development model is mostly a souped-up version of the Asian development model, and shares fundamental features with Brazil during the “miracle” years of the 1960s and 1970. While it can generate tremendous growth early on, it also leads inexorably to deep imbalances.

At the heart of the model are subsidies for manufacturing and investment paid for by households. In some cases, as with Brazil in the 1960s and 1970s, the household costs are explicit – Brazil taxed household income heavily and invested the proceeds in manufacturing and infrastructure. The Asian variety relies on less explicit mechanisms to accomplish the same purpose. It channels wealth away from the household sector and uses it to subsidize growth by restraining wages, undervaluing the currency, and keeping the cost of capital extremely low.

This model, which some also refer to as the Japanese model, and which many countries have followed before China, has been extraordinarily successful in generating eye-popping rates of growth, but it always eventually runs into the same constraints: massive overinvestment and misallocated capital. And in every case I can think of it has been very difficult to change the growth model because too much of the economy depends on hidden subsidies to survive.

...Japan itself provides the most worrying example. It kept boosting investment to generate high growth well into the early 1990s, long after the true economic value of its investment had turned negative.

But for a long time the problem of misallocated investment, which was whispered about in Japan but not taken too seriously, didn’t seem to matter. After all, as nearly everyone knew, Japan’s leaders were extremely smart, with a deep knowledge of the very special circumstances that made Japan different from other countries and not subject to “western” economic laws, with real control over the economy, with a strong grasp of history and penchant for long-term thinking, and most of all with a clear understanding of what was needed to fix Japan’s problems.

China Model for Development

Good debate about whether China has produced a new model for the world to follow for economic development.