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China’s Yin and Yang Economy
In Part 1 of my interview with Professor Galbraith, we talked about his view of the role of the state in the economy. Dr. Galbraith believes that planning is a central part of every economy.
His main critique is that planning in the American economy should be directed from the Left rather than the Right…
He asserts that the conservative state is predatory in nature, and therefore, an undesirable political and economic outcome.
By contrast, the rise of a powerful state from the Left is a good thing in his view—and even moral--though he does not openly admit it…
JRG: “Is state power any better, any more efficient or any more edifying or even moral than say, corporate power? Or even individual power?
Dr. G: “I don’t know why the word morality comes into it, or why the question of states versus corporations has to be posed in those terms. I think both of these entities serve useful purposes, and I don’t think you could have one without the other."
JRG: "But is there not a tension between the two? In terms of the predator state, it doesn’t really matter whether it’s a predator state from the Right or the Left. The state in itself tends to usurp power in its goal to obtain certain results, equalities, whatever the rhetoric might be."
Dr. G: "I don’t make that equivalence. I think that when one gets down to specific programs—Social Security, Medicare, Medicaid—the leading examples, but by no means the only ones, that…social insurance is a valid and useful function of the state.”
JRG: "Well certainly there is quite a lot of fraud in government programs…quite a lot of inefficiencies."
Dr. G: "Fraud exists everywhere, but I don’t think that the Social Security Administration has been accused successfully of any substantial amount of fraud, no."
JRG: "Well, there is tension between the regulators who can actually tell people what to do. The state says we’re going to invest in this technology…the Solyndra Syndrome, even though the market said that you’re paying twice as much for the same thing that is twice as better in China.”
And from there, China became the focus of the discussion….
And the question of whether a rising China is an effective example of planning came up…
Or, if China is in the process of entering into a prolonged economic crisis.
Dr. G: "Do I think China is rising? China is a spectacular story of economic construction of the past forty years."
JRG: "Did you read the article from Dr. Gordon Chang? Every province in China is Greece. The deficits are probably twice what is reported, (and) there is so much fraud in the state organizations."
Note: Gordon Chang recently said the following: “There is disagreement as to how much debt the central government is really carrying. Some put the debt-to-GDP ratio at 89 percent and others believe it’s closer to 160 percent. At 160 percent, China’s ratio is worse than Greece’s.”
Dr. G: "You could say they’re Greece, but the reality is, there is nothing equivalent to the European Central Bank. There is a group of precariously perched national leaders who are not going to let non-profits fail or any other significant part."
JRG: “That may be, but their domestic consumption rate has dropped by 20%.”
Dr. G: “I am a deep skeptic of this very conventional notion that China is investing too much and consuming too little…”
JRG: “They’ve built 64 million apartments with no one living in them. They have these ridiculous ghost cities out in the middle of nowhere.”
Dr. G: “Fair enough. It’s a huge distortion, and I think it actually is on a scale which interferes with the design of the state to distribute and develop more broadly."
JRG: “Exactly. And there are tremendous dislocations of labor in the countryside as well. There are land seizures, ridiculous pollution levels…”
Dr. G: "There is tremendous discontent on environmental and corruption and labor rights, grounded in the countryside and that’s potentially a more serious problem. Is it a manageable problem? Well, so far. So far they’ve been rather effective managing it….(Although) the consequences of a massive real estate bust in Shanghai or Beijing may well be going on as far as we know.”
JRG: “I think it is. Do you see their debt problem being an Achillies heel?”
Dr. G: “No. My view is what drove people into the streets back in ’89 was food price inflation. If you went to the universities in ’89, they were stacking cabbages outside the dormitories. That’s how they fed people through the winter. This is a changed world now.”
JRG: “They’re reporting their inflation rate at 5.5%- to 6%. Do you buy that?”
Dr. G: “I don’t know. I think prices and costs have been going up…But it’s the world’s cheapest place to live, in fact, if you happen to have taken the prudent precaution of acquiring a Chinese spouse, which I recommend.”
JRG: “You have?”
Dr. G: “I have. For shopping in China, it’s really very sensible.”
As you can tell, there are some marked contradictions in our perceptions of China, and sharp distinctions in our respective views on the effectiveness of planned economies
Where Dr. Galbraith sees great progress-in China’s economic rise—which is undoubtedly true--I also see great weaknesses threatening China’s current status.
The question remains open whose point of view more accurately reflects the reality today…and China’s future.
It may be some of both...
But if past is prologue in China, then there are great problems ahead that no amount of top-down planning will be able to fix.
And those are…The Gorrie Details.