MacroScope

from Ian Bremmer:

The secret to China’s boom: state capitalism

By Ian Bremmer
The views expressed are his own.

One of the biggest changes we’ve seen in the world since the 2008 financial crisis can be summed up in one sentence: Security is no longer the primary driver of geopolitical developments; economics is. Think about this in terms of the United States and its shifting place as the superpower of the world. Since World War II, the U.S.’s highly developed Department of Defense has ensured the security of the country and indeed, much of the free world. The private sector was, well, the private sector. In a free market economy, companies manage their own affairs, perhaps with government regulation, but not with government direction. More than sixty years on, perhaps that’s why our military is the most technologically advanced in the world while our domestic economy fails to create enough jobs and opportunities for the U.S. population.

Contrast the U.S. and its free market economy with China’s system.  For years now, that country has experienced double digit growth. Many observers would say that China’s embrace of capitalism since 1978, and especially since joining the World Trade Organization in 2001, has been responsible for its boom. They would be mostly wrong. In fact, a new study prepared for the U.S. government says it’s not capitalism that’s powering China, but state capitalism -- China’s massive, centrally directed industrial policy, where the government positions huge amounts of capital and labor in economic sectors it intends to nurture. The study, prepared by consultants Capital Trade for the U.S.-China Economic and Security Review Commission, reads in part:

In a world in which central planning has been so utterly discredited, it would be natural to conclude that the Chinese government and, by extension, the Chinese Communist Party have been abandoning the institutions associated with the communist economic system, such as reliance on state‐owned enterprises (SOEs), as fast as possible. Such conclusion would be wrong.

In a G-zero world where no country can claim the mantle of international leadership, China has pulled an accomplished head fake. While the media focuses on China’s special economic zones, like Hong Kong and Macau, and the rise of the banker class and Chinese tech industry, state directed spending is the real engine of growth.  Capital invested in infrastructure like factories, heavy industry, roadways, and high speed trains continues to power annual double digit growth in GDP. Reliable data from 2004 shows that 76% of Chinese non-financial firms are classified as State Owned Enterprises (firms with government ownership of greater than 10%).

In short, while the U.S. has spent decades and vast treasure building up its defense system (and yes, by extension, the sectors of the economy that service it), China has spent its time and money building up control over the broad direction of its entire economy. In today’s world, where the first sentence of this essay rings true, which country currently looks better positioned to, pardon the pun, capitalize, in the years ahead?

Why this blog really is worthwhile

This blog may actually be worth the web page it is electronically printed on. A paper from the Center for Economic and Policy Research (not Dean Baker’s shop but the other CEPR, in London) discussed here at VoxEU by University of Bologna economist Paolo Manasse, finds that, at least for American economic thinkers, blogging yields high returns — even from an economists’ strictly utilitarian, efficiency-maximizing perspective.

In the U.S. the blogs of individual economists, often academics, significantly increase the visibility of scientific papers, the reputation of the authors, and affect the readers’ opinions – three good reasons to ‘waste’ time blogging.

Why then, Manasse wonders, have Italian economists not taken the lead of their American counterparts and started their own blogs? He thinks it has something to do with lower economic literacy and a less individualistic culture. Yet the urgency of economic matters in Italy and a strong presence of Italian journalists and economic pundits on Twitter suggests there is room for the emergence of more Italian economics blogs.

Fed’s 2013 low-rates window no cause for alarm: paper

When the Federal Reserve announced back in August that it expected to keep interest rates at very low levels until at least mid-2013, three top policymakers voted against the decision —  and a number of non-voting officials grumbled as well. St. Louis Fed President James Bullard is one prominent critic of the policy, arguing in a speech last month it ties the central bank down unnecessarily and potentially threatens its credibility if conditions require a course correction:

It is time for the Committee to discard one-time policy changes with fixed end dates. The Committee in the past never contemplated announcing several hundred basis point moves to be completed at a date certain. Yet that is how the Committee behaves today. Research indicates quite clearly that optimal monetary policy should continuously respond to ever-changing economic conditions.

Not to worry, argue two young economists in a paper on VoxEU. Olivier Coibion at William and Mary and Yuriy Gorodnichenko of Berkeley say the move toward using specific time horizons for the purpose of policy guidance is a perfectly consistent next step in the Fed’s gradual push toward greater transparency. They conclude opponents of the policy are misinterpreting its intention:

Will Fed policy go the Swedish route?

The Federal Reserve’s long-quiet doves are becoming increasingly louder about championing more aggressive forms of monetary easing, including possibly setting employment and inflation targets and/or engaging in another round of bond purchases. Most prominent among these have been Charles Evans, the Chicago Fed president who openly favors more transparent policy guidance and Eric Rosengren, who told CNBC on Wednesday a third round of monetary easing could be in store:

If the economy were to be weaker than most people are forecasting, that would certainly be cause for doing additional monetary policy.

Rosengren also said he favors more explicit policy targets, which could take a rather controversial form known as price-level targeting. Under this arrangement, the Fed would temporarily shoot for higher inflation to make up for the almost deflationary readings seen late last year, in an effort to boost investment, spending and hiring.

Being poor is no fun: study

Poor people have shorter life spans and more health problems than the wealthy. Surprising? For growth-obsessed economists, yes actually. A new study from The Organization for Economic Cooperation and Development represents a worthy attempt to move economics away from its traditional tendency to equate growth with well being. Its rankings suggest factors other than the rate of gross domestic product expansion are important in determining quality of life.

But as often happen when economists look for a human angle in their research, they end up stating the glaringly obvious. Take this statement:

Some groups of the population, particularly less educated and low-income people, tend to fare systematically worse in all dimensions of well-being considered in this report. For instance they live shorter lives and report greater health problems; their children obtain worse school results; they participate less in political activities; they can rely on lower social networks in case of needs; they are more exposed to crime and pollution; they tend to be less satisfied with their life as a whole than more educated and higher-income people.

Macroeconomics deserves a prize?

Europe on the brink. United States risks double-dip recession. Financial turmoil threatens world economy. Not the sort of headlines you would associate with a Nobel-prize-winning contribution to the progress of humanity. To their credit, recipients Christopher Sims of Princeton and Thomas Sargent of New York University did develop methods and models that are wisely used by economists around the world, including central banks. But it’s unclear what practical applications their findings have for the world’s current economic predicament.

Alfred Nobel himself was not shy about hiding his disdain for the dismal science, which was not part of the original set of awards given in his name. The Nobel prize in economics came into existence in 1968, when Sweden’s central bank decided to create it in the dynamite tycoon’s honor. As German journalist Karen Ilse Horn writes (Thanks to @RecklessMonkeys for bringing the quote to our attention):

Economics was nothing Alfred Nobel appreciated as such, even though he was himself a pretty successful businessman. Rather to the contrary: ‘I have no training in economics myself and also hate it from the bottom of my heart,’ he wrote.

The euro zone recovery is over

“The recovery has finished, we are now contracting. The forward looking indicators suggest that things will deteriorate further in the coming months,” – Chris Williamson, chief economist at PMI compiler Markit.

Thursday’s PMI surveys make very worrying reading. Not a single economist out of the 37 polled by Reuters predicted the euro zone services number would fall below the 50 level that divides growth from contraction. In the event, it fell from 51.5 last month to 49.1 in September – its lowest reading since July 2009.

Economists like the PMI surveys because they have a very good track record of predicting moves in the economy. Before the Great Recession hit in 2008, they were among the first indicators that hinted at a downturn to come.

Evans doctrine gains traction at Fed

Chicago Federal Reserve Bank President Charles Evans takes a question during a round table with the media in Shanghai March 23, 2010. REUTERS/Nir Elias

Once seen as an extreme, even imprudent notion in the corridors of respectable central banking, the idea that a little bit of inflation is needed to let some of the air out of a decades-long debt bubble is gaining ground in establishment economics. Even the U.S. Federal Reserve, a central bank that prides itself in offering a high degree of steady predictability on inflation, is now actively pondering taking more drastic steps, such as linking the path of interest rates to the direction of unemployment or inflation.

One particularly striking passage in minutes to the Fed’s August meeting signaled such an approach was much closer to becoming policy than investors and economists had believed:

In choosing to phrase the outlook for policy in terms of a time horizon, members also considered conditioning the outlook for the level of the federal funds rate on explicit numerical values for the unemployment rate or the inflation rate. Some members argued that doing so would establish greater clarity regarding the Committee’s intentions and its likely reaction to future economic developments, while others raised questions about how an appropriate numerical value might be chosen. No such references were included in the statement for this meeting.

Philly Fed – the nightmare index economists can’t grasp

“Horrendous”

“Stink”

“Meltdown”

These are just a few of the (printable) words analysts have used to describe the August release of the Philadelphia Fed’s factory activity index.

And well they might — the Philly Fed has proven to be a nightmare indicator for economists. At -30.7 in August, the index came in far below the consensus forecast for a rise to +3.7 from July’s +3.2. Even the lowest forecast was only -10.

That’s probably one of the worst misses the Reuters polling team can recall in recent memory.

About those low rates … we really really mean it

The Fed this week took the unprecedented step of putting interest rates of virtual permahold for a set period of time — in this case, until the middle of 2013. That’s a long time away, and the promise underscores just how concerned about the central bank is about the U.S. economic outlook. In the short-run, it looked a clever trick, stemming a precipitous slide in global stock markets. (The hint that it might be prepared to take even further action didn’t hurt either). But will the Fed’s doubling-down on its “extended period” pledge work to support a flagging economic recovery when other, stronger unconventional monetary tools have already been deployed to questionable avail?

Many economists think the move is unlikely to have a major impact on growth or the nation’s jobless rate, which has been hovering around 9 percent since the start of the year. A lack of employment prospects, weak consumer demand and a major housing overhang — not high borrowing costs — are the main impediment to economic progress at the moment, they say.  And for that particular ailment, monetary policy has proven an especially blunt tool.

Yet with Washington focused on cutting spending, fiscal policy appears largely off the table. Fed Chairman Ben Bernanke has warned Congress that despite the need for longer-term steps to reduce the U.S. budget deficit, the government should be careful not to cut spending too quickly. Given just how weak U.S. GDP growth has proved this year — economists in a Reuters poll now see 2011 growth at a paltry 1.7 percent — Bernanke may be wishing he had been a little more vocal in urging for a proactive fiscal policy to get the country of the doldrums.