Monday, November 27, 2006

Thou shalt not fear false prophets like James Wolfensohn

Wolfensohn, the former head of the World Bank, is warning that China and India's economic growth will leave the West -- particularly the United States -- behind.

First, I think Goldman Sachs' estimate of the U.S. economy is off. The U.S. economy need only grow at an average of 3% per year to exceed 46 trillion by 2050. With a mere 2.5% annual growth rate, it will reach $37 trillion in 2050 -- and 2.5% is pessimistic, considering the trend since the Reagan Revolution. Or maybe Goldman Sachs is assuming a Democrat-dominated federal government from now through 2050, one which taxes the country to hell and back...

I'm not worried. China and India cannot sustain their respective growth rates: eventually they will hit a wall because of their dependency on exports. Any business expands only when its customers' income increases (so that they can afford to buy more), and/or when its customers increase in number. In other words, you can manufacture all you want, but you make money only when people buy from you. The disparity between Asian and Western population growth rates therefore eliminates the possibility of the U.S. and other major trading partners being "left behind." Also, you cannot make money by supplanting your customers' livelihood when your customers cannot find other work to do. Right now, China and India have found the balance by specializing in lower-grade manufacturing, allowing Westerners to pursue higher-tech professions. This leaves everyone better off with overall increased wealth. As the Chinese and Indians prosper, they can buy goods from Americans, like software and high-tech manufactured goods, that they can't produce themselves as efficiently. The reverse would not work very well because of the vast population differences. With a lot of designers and only a few manufacturers, there won't be enough product made for anyone to make a living.

China and India can become economically dominant only through a fundamental change in what they produce: they must start innovating. They are great manufacturers, but not (yet?) good designers, and the latter is just not a significant trait of their modern economies. Should that change in the future and they start innovating, the West will still have not stopped its own development. At the Star Trek TOS episode "A Piece of the Action" (one of the greatest), Kirk, Spock and McCoy feared that the "very bright and imitative" Iotians would dissect McCoy's communicator and advance rapidly. However, they forgot that the Federation already had a massive head start of centuries. Even if the Iotians could grow beyond their mere "copycat" abilities, that would not inhibit the Federation from continuing its own technological advancements.

Similarly, I don't believe that China's military expansion is a threat to the United States. Though the Chinese military is expanding rapidly, the U.S. is still so far ahead in technology and the amount of equipment: because the U.S. military is not standing still in its own development, it would take China several decades before it had might at all comparable. As I've expressed before, I don't think China's goal is a direct conflict with the U.S. What it wants is enough of a military so that when it takes over Taiwan, the U.S. will do nothing because the conflict over one island will be too bloody for Americans to stomach.

I recently thought of an analogy that properly compares the growth rates of China and the U.S., because 10% and 3% are meaningless when the baselines are so different. Imagine that the Chinese economy is like a compact car going 55 m.p.h. one year, 61 the next, then 67, and so on. While it's accelerating faster than other cars in its class, it's still much slower than the rocket-propelled American economy doing 500. Also, the driver of the Chinese car is forcibly squelching his 12 passengers, who dislike the cramped conditions and would like a say in the direction of travel. Since the driver wields an SKS while the rest are disarmed, some of the Chinese passengers just want to get out and hitch a ride with the three Americans. The three Americans travel in style, and though they occasionally squabble, their vehicle runs very well.

Then there's the French Citroën. Nowadays it's traveling a little slower than China, but it can't accelerate any faster now, and the driver Jacque would rather placate the kid in the back instead of preventing him from again setting the trunk on fire...

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Blogger TKC said...

Didn't we have this discussion not so long ago about education and advanced science degrees? The complaint was that countries like India were advancing the number of science degrees faster than the US was advancing the number of science degrees. Lost in the complaint is that it will take a generation or more for India simply to catch up provided that we stand still.
It is far easier for a second or third world nation to advance, especially when they have a first world country like the US helping them.

And then, on top of that, a wealthier India and China are good for us. Nobody got rich by trading with the dirt poor. The better they do the better we will do.

Tuesday, November 28, 2006 9:53:00 PM  
Blogger Perry Eidelbus said...

Yes indeed. Protectionists and their allied fearmongers are so blind to the true nature of wealth that they don't understand how it's really produced.

As I pointed out about a year ago, the poor never get wealthy by trading with other poor. Helping them build up their domestic industries so they can be self-sufficient is the wrong way to go. The right way is to buy their products so they can build up their industries themselves, allowing them to sell us more goods at cheaper prices, allowing them to build up even more. So simple only a protectionist couldn't understand it.

Friday, December 01, 2006 12:07:00 AM  

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