On Mon, Aug 19, 2013 at 7:26 AM, Marv Gandall <[email protected]> wrote:
> A bubble in pessimism > China’s economy is inefficient, but it is not unstable > The Economist > Aug 17th 2013 > > [...] > > Indeed, the inefficiency of Chinese investment may be one reason why it > will not create great instability. Mr Lee and co-authors point out that > China now requires ever higher investment to generate the same rate of > growth (its incremental capital-output ratio, as economists call it, is > rising). But a corollary is that the same rate of investment is consistent > with China’s slowing rate of growth. > > Pessimists worry that slower growth will require less investment in > capacity, which will, in turn, depress demand. But if the reason for slower > growth is a reduction in the efficiency of investment, then slower growth > will require just as much of it, precisely because it delivers less bang > for the buck. > This is too facile. The Economist is arguing with a strawman rather than the biggest issue that China pessimists (Krugman, Pettis) are worrying about: the possibility of a self-fulfilling change in psychology, animal spirits, call it what you will. It is true for the economy overall that inefficiency itself can limit overcapacity. Reductio ad absurdum, if you just pay workers to dig up ditches, then fill them back in and confiscate their wages through financial repression to pay for more ditch-digging, it is true that you will never suffer over-capacity. But what about those investors holding paper promises who are expecting investment returns on all that ditch-digging. What will happen when they realize their investments are worthless? -raghu.
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