Matthew Yglesias » A Land Where Charity Is Illegal

Matthew Yglesias » A Land Where Charity Is Illegal: "Gordon Chang’s account of why China’s new rich are so stingy with their charitable donations is a nice illustration of why:

But an overriding reason explains why charity barely exists in contemporary China: The Communist Party makes giving difficult. Why? The Party wants no competitors, especially organized ones. Charities, therefore, have to find government sponsors before they can register with the Ministry of Civil Affairs, and this requirement severely limits the number of them. Even Hollywood action star Jet Li, a favorite of Beijing because he makes “patriotic” films, cannot register his One Foundation, which may have to suspend operations soon.

Don’t be surprised that as of last year there were, in all of China, only 643 foundations not run by the government. There were an estimated 300,000 so-called grassroots organizations that were operating without registering, or had registered as business enterprises.

Outdated Tariff Systems Means the Poor Pay More « The Washington Independent

Outdated Tariff Systems Means the Poor Pay More « The Washington Independent:

low-income Americans end up paying extra for necessities like clothes and shoes — victims of an outdated, inefficient tariff system that inadvertently penalizes the poor. Even proponents of reform, though, acknowledge that the byzantine nature of the tariff code and the low priority it’s generally assigned by lawmakers makes the prospect of changing this entrenched system unlikely.

Luxury goods have very low tariffs, while cheap clothes, underwear, shoes and household products have much higher rates, said Edward Gresser, trade policy director at the Democratic Leadership Council. “The people who are paying for the tariff system don’t know they’re paying for it,” he said.

“It’s the dirty secret of the U.S. tariff code,” said Daniel Griswold, trade policy expert at the Cato Institute. “It’s our most regressive tax that the federal government imposes.” ...

The disparities are staggering. In his research, Gresser found that the tariff rate on a cashmere sweater is 4 percent; the rate for one made of much cheaper acrylic is 32 percent. A silk brassiere has a tariff rate of less than 3 percent, but the rate on a polyester one is slightly less than 17 percent. The tariff rate on a snakeskin handbag is just over 5 percent but climbs to 16 percent for one made of canvas. Similar variations occur when it comes to household goods. Drinking glasses that cost more than $5 each have a tariff of 3 percent, while those that cost less than 30 cents each have a rate of 28.5 percent. A silk pillowcase has a rate of 4.5 percent; this goes up to nearly 15 percent for one made of polyester.

Overall, clothes and shoes contributed nearly $10 billion in tariff revenue in 2009, while higher-cost items including audiovisual equipment, computers and even cars added less than $2 billion. Gresser contends that the $10 billion is disproportionately borne by people who can’t afford to buy luxury goods.

Globalization has had a similar incidence in labor markets. It has adversely impacted the lowest-wage manufacturing workers and benefited the highest wage people in finance who have been able to sell financial products all over the globe. Whereas highly paid doctors have little competition from globalization, low wage jobs get much more competition from foreign workers (such as via immigration).

Economic Scene - The Long View of Changes in China’s Currency - NYTimes.com

Economic Scene - The Long View of Changes in China’s Currency - NYTimes.com:

"a stronger renminbi would not be a quick fix for our economic problems, as appealing a notion as that might be... The renminbi itself rose 21 percent against the dollar from 2005 to 2008, and the trade deficit continued to widen.

But there is also no question that China’s currency remains undervalued, probably by 20 percent or so. The economics are simple enough. The huge demand for Chinese goods should be driving up the price of its currency, but Beijing has been intervening to prevent that. Getting China to stop will be crucial to correcting the global economy’s imbalances. A stronger renminbi will help China’s people — many of whom are hungry for better living standards, to judge by the recent labor strikes — buy more goods and services, and it will also help the rest of world produce more. But change is not going to happen overnight.

...Chinese officials sometimes go so far as to suggest that the value of the renminbi makes little difference. That’s wrong. ...economies, like battleships, tend to turn slowly. Companies rarely move production in a matter of weeks. If they are using a Chinese supplier, it is often cheaper to stick with that supplier for a while, even if costs rise, rather than find a new one in another country.

Also see the graph of the yuan exchange rate. It fell dramatically in the 80s and 90s and then remained fixed with occasional small adjustments. Also see Paul Krugman's takedown of the Chinese notion that their exchange rate doesn't matter.

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.