Ever adept at making people like me, I snorted. "Japan is a giant economic bubble," I said. "And the only way that they have growth is by implicitly taxing their consumers with protectionism and diverting private saving into public investment. We ought to look at what Japan is doing, both publicly and privately, and do the exact OPPOSITE. Their growth is fake, and their business methods are short-sighted." (To be fair, I had gotten this view from my mentor Murray Weidenbaum; it was not original)
The reaction from the Tuckwads: Crickets. Utter disbelief. Would have been much better if I had loudly farted and then said, "Middle C! I usually can't hit that note!"
Finally, the Ass. Dean said, "(ahem). Dr. Munger, that would be a rather controversial opinion in these halls. We are trying to learn more about Japanese methods. I'm not sure you are really well versed in the latest research." (He was a Brit; just imagine the condescension ladled on to these words.)
No, I didn't get the job. But here is the growth path of Japan's economy:
Hey, Dean, you mother Tucker, bite me! I hope you lost your 180 thread count bespoke button-down shirt, you idiot!All that is prologue (and yes I have been badly wrong on a dozen things in the meantime). Anyway, here is my current view:
China's growth is fake. Not as fake as Japan's, because the China doesn't have a zombie financial sector. That's because they have ZERO financial sector, at least in the sense of being able to generate liquidity on a consistent scale. And the threat of nationalization rules out private offerings of publicly traded stock.
It is true that they are producing mountains of stuff. But what they are doing is taking all private saving and expropriating it, converting it into capital for more semi-state-owned factories.
The problem is that there are three reasons wages can go up. (Real Wages are shooting up, over much of China, by the way. Perhaps an index number problem, since an increase from near zero is a big percentage, but still.).
Wage Increase Reason 1: Production process becomes more capital intensive.
Wage Increase Reason 2: Skills and human capital of workers increase
Wage Increase Reason 3: Unions such as UAW or SEIU steal higher wages, driving employment offshore, and devestating the economy. Minimum wage laws work, too, though they mostly harm the poor and economically marginal.
Now, the US chose #3 in northern states ranging from Mass to Mich, and everything in between. And now those states look like a post-apocalyptic wasteland. So, that is a bad idea.
I had been under the impression that China was struggling along under Reason #1. But this study suggests Reason #2 is bigger than I would have thought. Interesting.
"The Contribution of Human Capital to China's Economic Growth," John Whalley & Xiliang Zhao, NBER Working Paper, December 2010
Abstract: This paper develops a human capital measure in the sense of Schultz (1960) and then reevaluates the contribution of human capital to China's economic growth. The results indicate that human capital plays a much more important role in China's economic growth than available literature suggests, 38.1% of economic growth over 1978-2008, and even higher for 1999-2008. In addition, because human capital formation accelerated following the major educational expansion increases after 1999 (college enrollment in China increased nearly fivefold between 1997 and 2007) while growth rates of GDP are little changed over the period after 1999, total factor productivity increases fall if human capital is used in growth accounting as we suggest. TFP, by our calculations, contributes 16.92% of growth between 1978 and 2008, but this contribution is -7.03% between 1999 and 2008. Negative TFP growth along with the high contribution of physical and human capital to economic growth seem to suggest that there have been decreased in the efficiency of inputs usage in China or worsened misallocation of physical and human capital in recent years. These results underscore the importance of efficient use of human capital, as well as the volume of human capital creation, in China's growth strategy. (Nod to Kevin Lewis)
The point is that China is going to run up against a captial constraint, and may (this is delightful) actually follow the Marxist predictions about industrial capitalism. Marx didn't understand capital, but neither do our Chinese friends. Unless the Chinese can get huge amounts of liquidity to feed the need for physical investment, wages from increased human capital are going to start to squeeze them really bad. And there may actually be the worker's revolt that Marx predicted for Western Europe. Except it will happen in a communist country, precisely because it is not capitalist enough to have common stock offerings.
7 comments:
This is irrelevant, but the last 2 summers I have taught a class in Beijing. My hotel had no english TV stations and I was bored so watched numerous war movies. My observation is that China does not have a John Wayne. The hero dies and the city is laid waste in the last scene of the movies....usually defeated by the Japanese Army in the sacking of Nanking. I have puzzled over this, not only because John Wayne never showed up, but I kept expecting him to do so.
My comment won't be much more relevant. I was getting my MBA at Directional U at the time of your interview. When in those BS strategy classes people would bemoan how our world was coming to an end and that the Japaneses would own us, I would laugh out loud. I would get pressed and explain to my classmates that the Japanese system of interlocking boards and such that they so admired left no one in charge or responsible for results. And, since Japanese CEO's had quit killing themselves over bad results, other, more competitive stuctures would soon out compete them.
Same thing with China, which has only one board of directors with no competition.
I should note that I eventually had to go into business for myself.
I also can't claim originality. I was very taken with Michael Jensen and agency problems at the time.
Classic Post. Thanks for sharing this. One of your finest.
Tuck Dartmouth?
I thought the kids said Duck Fartmouth.
The way we can tell the wheels are about to fall off (of Japan, Germany, Europe and esp China) is that all the deep thinkers tell us that they are the wave of the future and we must emulate them.
I think you were spot on at the time of your interview and don't know why the Tuckers could not look at the chart you posted and see the downward trend.
I am looking for people to bet with on China's future success. I've got $10 that says they are going to fall off a cliff in the next 10 years or sooner. Nobody wants to actually take me up on it.
John Henry
This simply means the Chinese higher education system needs reform. The problems are systemic and well-documented. And reform is happening, which will allow 1) elevation through the value-added chain and 2) proper management for a robust service industry.
I don't understand the doomsday-speak.
To flip it around, what about the suppressed labor revolt in the United States that, through partisan politics, has impeded coherent education, financial, health care, transportation growth strategy.
And given the global ramification of economic events the past three years, what country can actually make a compelling case to understand capital?
I'll take that $10 bet, if loser pays in 2011 valuation of rmb :)
Japan's growth has stalled because of demographic factors. Per working adult, growth in Japan has not been much different from the US or Europe:
http://super-economy.blogspot.com/2010/05/paul-krugman-wrote-in-nyt-that-we-are.html
There are plenty of strong Japanese companies and Western execs still try to imitate them - look at Toyota and the various people peddling "kaizen".
I don't understand why you say there are no common stock offerings - there's plenty in Shanghai and HK. Lots of US investors are hungry to get onto the China growth train, to the point of chasing frauds.
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