Part 1. Which side are you on?
Tyler Cowen linked to this Chinese review of Avatar:
In the film, the indigenous race Na’vi on planet Pandora has to be rescued by Jake, a paraplegic former marine of the human race. Huang argues this is yet another evidence of Eurocentrism prevalent in western films:
I believe if Edward Said is still alive, when he sees that Jake is saved by the princess of Na’vi, he would think: this damn screenwriter! Are you not going to let the princess fall in love with Jake, and let Jake rescue the Na’vi ?
From Madame Chrysanthème to Last Samurai to Avatar, when could Westerners stop seeing foreign cultures as female and themselves as male? And when could they stop the cross-cultural narcissism that, no matter how unsuccessful the Western man is, he will be loved by the Oriental woman?
More politically correct nonsense from the humanities? At one time I would have thought so; today I’m not so sure.
In recent posts I have noted how in the late 1990s we arrogantly lectured the Japanese on how they should run their monetary policy, only to make the exact same errors when we were confronted by near-zero interest rates. Or how (according to Simon Johnson) in the late 1990s we lectured the Koreans about how they needed to shake up their dysfunctional banking system, only to make the same regulatory errors when our banking system became dysfunctional. I still believe the Japanese and Korean policies were flawed, but I’ve lost my smug assurance that we knew how to do things better in the West. Today I’ll talk about some more examples.
In the last few weeks a debate has raged in the blogosphere over which is better, the European high tax model or the American “low tax” model. Many bloggers on both the left and right have snatched a few economic statistics out of the air that presumably prove their point. I tend to agree with Tyler Cowen, who argues that it is much more complicated that it seems. We differ from Europe in so many ways that it would be impossible to create the European system here, and vice versa. Impossible you ask? Yes, unless we divided up into 50 different countries, and then each adopted different languages to prevent large masses of people moving from high tax Buffalo and Detroit to low tax Houston and Dallas.
Just to be clear, I’m not saying there’s nothing to be learned from inter-country comparisons. I do agree that European countries do a better job of providing health insurance for everyone, and that America’s smaller government plays some role in explaining our higher per capita GDP (although it is difficult to know the exact factors that are most important.) But let’s stand back and ask what we are trying to do with these comparisons. My question is this: if we’re looking around the world for an optimal economic system, then why focus on the highly flawed US and European systems? How about Japan? They are about as rich as Europe, and also have universal health insurance. And they tend to have lower unemployment than either the US or Europe.
But it is even worse than that. The Japanese system does not offer any dramatic advantages over the US or European models, but the Singapore system does. Right now both the US and Europe are facing a fiscal train wreck. We have built systems of social insurance that are increasing difficult to maintain with an aging population. We both have tax and benefit systems that massively discriminate against savers, and this reduces investment and growth. We both have trade barriers. We both have incredibly wasteful health care systems where people over consume medicine because someone else is paying (or under consume because it is rationed.)
At this point someone will usually say “the Singapore model is not applicable to the US, it is a small city-state with 4.5 million people ruled by a semi-autocratic government.” But then why is the Danish model applicable? They are a small country of 5.5 million people, most of which live in a handful of metro areas. Perhaps Denmark’s political system is more like ours, but that begs a deeper question. If we are sitting around in armchairs waving magic wands and imagining turning America into Denmark or Denmark into America, then don’t we have to acknowledge that none of these grand schemes are politically feasible? After all, if they were, why haven’t they occurred already?
Actually, I am not that pessimistic about change. Lots of things that are politically infeasible in one decade get adopted in the next. Indeed lots of the privatization that has occurred recently in Northern Europe (trains, airports, security and air traffic control at airports, highways, postal systems, schools, water systems, etc) would have been unthinkable in the 1970s (or in America even today.) In 1950s America the top income tax rate was 90%; just imagine a proposal to cut it to 35%. So here’s my point. I am not opposed to dreaming of other systems, but if we are going to do so can be please be a bit less Eurocentric? It’s getting rather embarrassing; after all, the rest of the world already thinks we’re pretty arrogant.
So when people ask me whether I like the American or European economic model best, I answer that I like the Singapore model best. I like free trade and no taxes on capital and clean air and low taxes on work and paying for ordinary health care out of pocket and universal catastrophic coverage, and big budget surpluses and high rates of economic growth despite already being much richer than Europe. Why shouldn’t we be debating that model?
I wish I could think of a good metaphor for our current debate, all I came up with was this passage from an old pop song:
Praise be to Nero’s Neptune
The Titanic sails at dawn
And everybody’s shouting
“Which Side Are You On?”
And Ezra Pound and T. S. Eliot
Fighting in the captain’s tower
While calypso singers laugh at them
And fishermen hold flowers
Between the windows of the sea
Where lovely mermaids flow
And nobody has to think too much
About Desolation Row
Part 2. Bubble, Bubble, toil and trouble.
“It’s definitely a bubble,” said Beijing real estate broker Xu Xiangdong, a 24-year-old former nightclub cashier. “But it won’t break because there is lots of support beneath the bubble because buying power is really strong.”
Many economists say there are good reasons for such optimism. Rapid economic growth, rising family incomes, continued migration to the cities, pent-up demand for housing, and a banking system much less exposed to residential mortgages than banks in the United States or Japan could protect China, they say, from a real estate meltdown for years to come.
. . .
Arthur Kroeber, a Beijing-based analyst and managing director of Dragonomics, said China’s economy is “not even close” to being a bubble like those seen in Japan, which endured more than a decade of sluggish growth after prices retreated, or in the United States, which helped bring about the current sharp global downturn.
“At some point the music will stop,” Kroeber said. But he predicted that it would not happen in China for at least 15 years, when urbanization slows.
The bigger real estate problem in China now is access to housing. For many people — especially the young or people moving to the cities from rural areas — the dream of owning a home is more and more difficult to attain. The Xinhua news agency quoted Goldman Sachs as saying that housing price increases had outpaced wage hikes by 30 percent in Shanghai and 80 percent in Beijing in recent years.
. . .
Now top leaders are worried. In a year-end interview with the official Xinhua news agency, Premier Wen Jiabao said that “as the property market is recovering rapidly this year, housing prices in some cities are rising too fast, which deserves great attention of the central government.” He vowed to “crack down on illegal moves, including hoarding of land and delaying sales for bigger profits.” And he said the government would do more to provide affordable housing.
Last week, the government also nudged a key interest rate higher.
Still, many economists are sanguine.
“One of the legacies of China’s prolonged stagnant growth prior to economic liberalization is an overwhelming shortage of residential property that meets its new living standards,” Koyo Ozeki said in a report published by Pimco. “It will likely take a considerable period of time for supply to catch up to demand.” That wasn’t true in the Japanese or U.S. bubbles.
Ozeki, an executive vice president for Pimco in Tokyo, noted that the total credit for the property sector in China has grown to 40 percent of gross domestic product; in the United States, it hit 80 percent in 2007. For Chinese banks, exposure to real estate is less than 20 percent of assets, much smaller than in the United States. That should reduce the chances of a banking crisis.
In addition, while property prices are soaring in such areas as Beijing and Shanghai, price increases are more modest elsewhere. Government statistics say housing prices nationwide rose only 5.7 percent last year.
Moreover, China’s homeowners carry less debt than homeowners abroad and the economy’s rapid growth can probably keep incomes rising fast enough to cover mortgage costs. Kroeber said that mortgages issued from 2002 to 2008 equaled only 40 percent of the value of housing sold nationwide.
Liu Renping, a 30-year-old construction engineer originally from the countryside of Inner Mongolia, is typical of many first-time Chinese home buyers. After deciding to get married, he hunted for four months before buying a two-bedroom, 900-square-foot apartment on the northern edge of Beijing last March, even though it won’t be completed until this October. He paid $162 per square foot and took out a mortgage out for half the money needed. The other half came from his mother, friends and his savings.
About 30 percent of the couple’s pay will cover mortgage payments. “And my salary will increase in the near future. So I don’t feel big pressure from my mortgage,” Liu said.
Since he bought the apartment, prices in that development have jumped more than 50 percent. “I am lucky to have bought it early,” he said. “If the price was this high when I bought the apartment, I wouldn’t buy at all because it would have been too expensive and I wouldn’t have been able to afford it.”
Here is much more.
So what do you think? Prices have risen 5.7% in the last year in a country where nominal incomes have been averaging double digit increases for decades. A country with a billion people who still lack adequate housing. Does that sound like a bubble? You’re thinking; “Aha, but what about Beijing and Shanghai, where prices are rising much faster, surely that is a bubble?” Maybe, but I suppose it depends how you define “bubble.” Most people simply define it as a fast price run-up followed by a price retreat. By that definition the NYC housing market has had several bubbles in recent decades. But more sophisticated bubble theorists like Robert Shiller talk of price run-ups that are obviously excessive, where the future price will be predictably lower than the present. But by that criteria NYC has had no bubbles, after all at no time in the past 30 years has it been possible to forecast with any confidence that NYC condos would become cheaper over the next 3 or 5 or 7 years.
I have the impression that many people get confused over this point. How often have you heard “I knew NYC condos were a bubble when everyone started talking about them at cocktail parties.” The smug assumption is that the speaker was able to predict the crash. But this isn’t right. NYC condos never crashed, and still haven’t. Rather they have had tremendous price appreciation, interrupted by occasional modest downturns. As a result the real price of condos (even in this slump) is far higher than in the 1970s—the boom turned out to be permanent. Our minds trick us—we think the modest pullbacks after huge price gains confirm the bubble theory, when in fact they refute it. And of course this is true for many other cities like Boston and San Francisco.
But not Vegas and Phoenix. In those cities average houses suddenly rose from $200,000 to $400,000, despite a huge supply of cheap land and a nearly constant cost of production for building new houses. In 2006 an economist like Shiller might have said: “I confidently predict that in 5 years Phoenix and Vegas houses will be much cheaper, as new supplies come on the market.” And he would have been right. What is the difference? In the NYC case all we knew is that markets with huge run-ups are susceptible to occasional pullbacks. Indeed according to the EMH it must be so. Otherwise investing in a highly volatile market would be “heads I win, tails I’m even.” But we didn’t know when the correction would occur, so this knowledge was not particularly useful. In Vegas and Phoenix we could (if you believe Shiller) be fairly confident that between 2006-11 real estate prices would fall, as the fundamentals could not support the high prices for long.
Which model is more applicable to China? The simplistic cocktail party ”bubble” theory, or Shiller’s more sophisticated version? I say the simplistic version. But even if I am right it will be bad news for me, because most people don’t understand the distinction I am making. Thus once prices start falling (and they will at some point) some future blogger like this one will put me on a Hall of Shame list of people who were oblivious to the China bubble. In the probably forlorn hope that I can avoid this public shaming, one last attempt to explain this distinction:
1. Beijing and Shanghai prices will fall at some point in the next 10 years.
2. I have no idea whether Beijing and Shanghai prices will be higher or lower over any particular time scale (one year, two years . . . ten years.)
Why do I think these two cities are more like NYC and SF than Vegas and Phoenix? Because the current average price is about $1700 per square meter, or $170,000 for an 1100 square foot condo (spacious by Chinese standards.) Just imagine what that apartment would cost in NYC or London. I think that Beijing and Shanghai will increasingly become two of the great world cities (along with NYC, London, Paris, Tokyo, etc.) And when that happens people will say “remember when you could buy an 1100 square foot apartment for only $170,000.”
[By the way, if we have degenerated to the point where we are judging public intellectuals by their ability to out-guess markets, then I fear for the future of my profession. What’s next, judging statisticians by how often they win at Powerball? Comparing the 403b accounts of salt and freshwater economists? Are we on the same level as carnival fortune-tellers.]
The article raises another interesting issue when it mentions how the Chinese government is reacting to the “bubble” by encouraging the construction of new apartments to hold down prices. I imagine some ABCT-types might be horrified by this response; doesn’t it just make the post-bubble adjustment out of housing even more painful? But I am less concerned. If they end up building “too much” it will just mean that a few people get to live in nice modern apartments a bit sooner than optimal, and a few other people get some other nice modern good like a car a bit later than would be optimal. Right now the Chinese need lots more of almost everything. Theories of “reallocation” are not much use in countries where there is a massive flow of unskilled workers from the countryside to the cities, and if one industry gets a bit ahead of itself, it doesn’t decline, rather it simply absorbs unskilled workers at a slower pace whereas some other industry (like autos) absorbs unskilled workers at a faster pace.
The big challenge for China is to become much more efficient at everything so that they can produce lots more of everything. The much smaller challenge is to produce much more of everything in the right order. They are probably making some mistakes. Some of the high speed rail projects are too fancy for a country at China’s stage of development. But once people have enough food and clothing and TVs and cellphones, the biggest unmet need is a nice place to live. So I’m not going to second guess the Chinese housing market without a bit more evidence than is provided in the WaPo article.
[BTW, if you read Tyler’s post and mine back to back, you might note a subtle jab at Tyler’s editorial decisions. I don’t have the heart to attack him more directly, because he is always so much more polite than other bloggers.]
What does part 2 have to do with Western arrogance? Well I wonder if people in the West (including me) are well-placed to judge whether Chinese apartments are overpriced. After all, the Chinese investors who buy these units are pretty sophisticated, and understand local conditions far better than I do. And this leads me to the reason I am so optimistic about China (although I am a raging pessimist compared to Fogel):
1. The Chinese people generally think their government is doing a good job.
2. The Chinese people favor a free market system, indeed they (and Indians as well) like the free market system much more than do Americans or Europeans.
3. There is grumbling in China that the government is not moving fast enough toward a free market system. The press and the public have been critical of recent trends toward more lending to SOEs.
I think those three attitudes bode very well for the future, despite the very real and massive problems that China faces today.
So what can China learn from the West? They should develop some of our arrogance, and look to other Asian countries like Singapore for their economic model.