In 1990, I interviewed for a job at A. Tuck Business School
, Dartmouth College. At lunch, someone brought up the need for business schools in the U.S. to adopt Japanese methods and teaching techniques.
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.
Labels: Mr. China Bubble, this is bad business