Sunday, 12 December 2004

China's ascendancy

China seems to be all the rage these days. I’ve seen the issue of China’s ascendancy in at least one textbook and one test in recent months. The question is generally asked as a comparative advantage question, such as “If China has an absolute advantage in producing all products (meaning it can produce each of them with fewer inputs per unit of output) against the U.S., will China still choose to trade with us?”. The answer is a modern spin on Ricardo’s “wine and wool” scenario between Britain and Portugal.

I would be interested to hear a contrary answer, provided it doesn’t contain overheated rhetoric about “predation” and so forth.

The answer, of course, is “yes”, China would continue to trade with us because it’s too expensive for them not to. Even if they have an absolute advantage in everything, they will still be internally better at producing some good and there’s an opportunity cost associated with their production choices. So it behooves us to not respond to their ascendancy with quotas or tariffs, but rather to continue trading with them. Monetary theory adds some additional difficulty but the answer should be the same (I would be interested to hear a contrary answer, provided it doesn’t contain overheated rhetoric about “predation” and so forth). Business Week has a good article on the economic history of the U.S. and Europe that provides a present-day lesson:

The close links between the U.S. and Europe fostered growth in both regions then, but how is trade affecting the U.S. today? Just as Europe prospered in the 1800s despite the rise of America, the U.S. is faring relatively well now, in a world where manufacturing jobs are moving in droves to China and white-collar jobs are outsourced to India. GDP per person in the U.S., adjusted for inflation, is up 6% since 2000 despite a recession, the terrorist attacks of September 11, 2001, and a massive trade deficit that is subtracted from GDP.

Surprisingly, real wages are up as well, as inexpensive goods from China hold down inflation and help paychecks go further. According to the latest figures from the Bureau of Labor Statistics, real wages of private-sector workers are up 3.3% since 2000. At the high end, real wages rose 5.1% for managers and 3.1% for professionals despite the recession and pressure from information-technology jobs transferring out of the country. At the less-skilled end, over the past four years there has been a 4.1% real wage increase for clerical and administrative support workers, a 3.2% gain for less-skilled blue-collar workers, and a 6.7% jump for traditionally low-paid health-care workers. These are solid improvements, even compared with the boom years of 1996 to 2000, when private-sector wages showed a 5.4% increase.

As for innovation, the U.S. still has a comparative advantage in key areas such as biotechnology and finance. Biotech, which many believe could fuel the next global boom, is still concentrated in the U.S. And the American financial system, far deeper and more robust than its fragile Chinese counterpart, is much better suited to be the global financial hub.

But as history shows, in periods of political, economic, or military turmoil, the free flow of goods, capital, and ideas can get choked off. And some countries feel the pain more than others. Europe found that out during World War I and the Great Depression. While America was developing mass production and a domestic automobile industry, “Europe was distracted by wars and interwar economic chaos,” writes economist Robert J. Gordon of Northwestern University. The result: The U.S. grew while Europe stagnated. From 1913 to 1950, U.S. GDP per person rose 1.6% per year—as fast as in the previous 100 years—while Europe struggled with a meager 0.8% annual gain.

This evening I had dinner with a buddy and he and I discussed how the U.S. is pretty unique among the nations of the world. For most of them history is a story of war, poverty and short lives. Thomas Sowell put it very well in his Fourth of July column this year:
When you have learned of the bitter oppressions that so many people have suffered under, in despotic countries around the world, have you ever wondered why Americans have been spared?

Have scenes of government-sponsored carnage and lethal mob violence in countries like Rwanda or in the Balkans ever made you wonder why such horrifying scenes are not found on the streets of America?

Nothing is easier than to take for granted what we are used to, and to imagine that it is more or less natural, so that it requires no explanation. Instead, many Americans demand explanations of why things are not even better and express indignation that they are not.

Some people think the issue is whether the glass is half empty or half full. More fundamentally, the question is whether the glass started out empty or started out full.

Those who are constantly looking for the “root causes” of poverty, of crime, and of other national and international problems act as if prosperity and law-abiding behavior were so natural that it is their absence that has to be explained. But a casual glance around the world today, or back through history, would dispel any notion that good things just happen naturally, much less inevitably.

If we have enough sense to listen to our own history, we’ll know that China, assuming they don’t have a banking crisis due to the currency peg, will not grow at our expense, but to our advantage. They’ll produce some things better than us and we’ll benefit from trade with them. Really, given their population, it’s surprising that it’s taken them so long to outgrow us in aggregate—except for the fact that they were economic communists until the 1970s.

There will be challenges due to China’s growth—and those that see economics as an extension of their penises will probably feel threatened by it—and we’ll have to address them through education, job retraining and income assistance. Even so, we’ll end up better off and, assuming they pose no military threat to us, we shouldn’t feel threatened by another country throwing off poverty and developing a middle class.

Via the still-valuable-even-though-the-election’s-over Real Clear Politics.

Tuesday, 14 December 2004

Social democracy an inevitability?

John Quiggin has a post on an article by Milton Friedman that discusses the demise of socialism in recent decades, and a similar increase in "welfare" spending (the article is for subscribers, so I have to take his word for it).

Quiggin is a social democrat so, naturally, he sees the recent gains in capitalism (neoliberalism in his lingo) as just making the sectors where capitalism succeeds smaller and making the increase of government interference an inevitability due to capitalism’s own successes. For instance, he lists agriculture and manufacturing as areas that are appropriate to capitalism, but healthcare and education, not so much.

Europe will get increasingly economically weak for the next several decades and almost all of it can be accounted for in their demographics, not their philosophy. If their philosophy stays exactly the same, they will see much more government. That's not a philosophy that's ascendant; rather, one that is stuck in its own demographic constraints.

Like Quiggin, I’m influenced by my own views and disagree with his. He sees increased government interference, and he’s probably right about most of the rest of the world, but the U.S. is still an open question as I see it. Europe will be experiencing dramatically increasing median age, which will propel its welfare states even higher than they are now as a percentage of GDP (typically around 50%, as opposed to 32% for the U.S.). The only real hope they have for immigration is from the Middle East, from a culture largely untouched by the Enlightenment. In my opinion, it’s far more likely that we’ll be seeing a Europe in the future that’s far more illiberal (in the classical sense) if they accept new immigrants, and economically so even if they don’t.

The Economist has an excellent population survey from a couple of years ago that sheds a bit of light on the situation:

For 50 years, America and the nations of Western Europe have been lumped together as rich countries, sharing the same basic demographic features: stable populations, low and declining fertility, increasing numbers of old people. For much of that period, this was true. But in the 1980s, the two sides began to diverge. The effect was muted at first, because demographic change is slow. But it is also remorseless, and is now beginning to show up.

America’s census in 2000 contained a shock. The population turned out to be rising faster than anyone had expected when the 1990 census was taken. There are disputes about exactly why this was (more on that shortly). What is not in doubt is that a gap is beginning to open with Europe. America’s fertility rate is rising. Europe’s is falling. America’s immigration outstrips Europe’s and its immigrant population is reproducing faster than native-born Americans. America’s population will soon be getting younger. Europe’s is ageing.

Unless things change substantially, these trends will accelerate over coming decades, driving the two sides of the Atlantic farther apart. By 2040, and possibly earlier, America will overtake Europe in population and will come to look remarkably (and, in many ways, worryingly) different from the Old World.

In 1950, Western Europe was exactly twice as populous as the United States: 304m against 152m. (This article uses the US Census Bureau’s definition of “Europe”, which includes all countries that were not communist during the cold war. The 15 countries that make up the European Union are a slightly smaller sample: they had a population of 296m in 1950.) Both sides of the Atlantic saw their populations surge during the baby boom, then grow more slowly until the mid-1980s. Even now, Europe’s population remains more than 100m larger than America’s.

In the 1980s, however, something curious began to happen. American fertility rates—the average number of children a woman can expect to bear in her lifetime—suddenly began to reverse their decline. Between 1960 and 1985, the American fertility rate had fallen faster than Europe’s, to 1.8, slightly below European levels and far below the “replacement level” of 2.1 (the rate required to keep the population steady). By the 1990s American fertility had rebounded, rising back to just below the 2.1 mark.

They go on to list the details of the change in median age, which are simply astounding:
According to Bill Frey, a demographer at the University of Michigan, the median age in America in 2050 will be 36.2. In Europe it will be 52.7. That is a stunning difference, accounted for almost entirely by the dramatic ageing of the European population. At the moment, the median age is 35.5 in America and 37.7 in Europe. In other words, the difference in the median age is likely to rise from two to 17 years by 2050.
Read the last sentence again: “the difference in the median age is likely to rise from two to 17 years by 2050”. Europe will get increasingly economically weak for the next several decades and almost all of it can be accounted for in their demographics, not their philosophy. If their philosophy stays exactly the same, they will see much more government. That's not a philosophy that's ascendant; rather, one that is stuck in its own demographic constraints.

The U.S. is not settled by a long shot. First, we had a chance to follow Europe towards social democracy in the 1970s. Instead, we elected Reagan and enacted tax cuts—very steep ones which were partially repealed in the coming years. We’ve done something similar with President Bush who has been characteristically headstrong in his refusal to raise taxes as the boomers start to retire. He’s pushing for reform of social security and has already implemented MSAs on a limited basis. He’s right to do it, as well. I would far rather experience some short-term pain—even excruciating pain—rather than suffer slow decline, which will surely happen with the expansion of government that Quiggin envisions.

He’s an Australian and I’ll wish him well in his country’s little adventure. I just don’t want us to follow them.

Monday, 20 December 2004

European Union Again

Professor Bainbridge has a lengthy post where he dissects the EU triumphalists. I went into this at some length the other day and won’t do so again.

What I will do is note that I agree with Professor Bainbridge—we referenced the same Economist article for Europe’s median age problem—though I don’t find the EU quite as bothersome as he seems to. The EU is a declining power for the time being and will continue that way just due to demographics. Even if they were economically ascendant, I wouldn’t find it all that troublesome since economics isn’t zero-sum (they would have to undo their labor market rigidities and limit their fiscal burdensand would still have a hard time growing as fast as the U.S. in the coming decades). On foreign policy, they won’t spend what’s necessary to build a military so there’s no threat there. The only problem I’m aware of is their recent decision to start selling weapons to China. More than a little troubling ($).

You know that the EU ascendancy meme has jumped the shark—along with that phrase—though when Jeremy Rifkin and others start getting worked up over it ($):

Eurocrats are understandably flattered by this unusual American praise for the grand European project; Mr Rifkin’s book has gone down well in Brussels. But the mood of real “builders of Europe” is often decidedly more pessimistic. This week European leaders are likely to take a big step towards admitting Turkey to the EU, a decision about which many of them have deep misgivings. Mr Reid’s argument that there is an inexorable historical logic driving forward European unity is often made by Brussels federalists too. But these same people are also well aware of the fragility of a process of political integration that has very shallow popular support.

Then there is the economy. Europe’s economic growth continues to lag that of the United States, let alone China and India. And Europe’s population is ageing and shrinking. Two-thirds of the way into his book, Mr Rifkin interrupts his dream to note that “the sad truth is that without a massive increase in non-EU immigration in the next several decades, Europe is likely to wither and die.” This looks like a fairly big qualification to the book’s general mood of sunny optimism. But no matter: within a few pages we are back to the “politics of empathy”.

Awareness of the depth of the political and economic challenges that lie ahead accounts for the fact that many European officials are more inclined to troubled pessimism than to Rifkinesque optimism. This European willingness to be self-critical is, as it happens, a genuine strength. Unfortunately, there is a lot to be self-critical about.

When Rifkin starts pimping an idea, you know it’s time to write it off.

(þ: The Professor)

Saturday, 1 January 2005

European Ascendancy

The Powerline guys are addressing the recent EU ascendancy meme; it’s still not persuasive. Europe is in decline, despite their posturing in recent years. I’ve discussed it elsewhere (here and here).

Saturday, 12 March 2005

How is this possible?

They wrote a report and everything!!

There’s been a lot of attention paid to this midterm meeting on the Lisbon Report, wherein the EU planned to catch up with the US on a number of economics measures. It’s apparently not working out (duh). Every time someone in the EU suggests substantial reforms, they’re shouted down as “neoliberals” (capitalists).

(þ: Tim Blair and The Professor.)

See also here, here, here and here.