Category Archives: Economics

China’s Potential Technological Isolation

Source: Bloomberg, Aug 2020

the biggest obstacle to China’s rise as a global technology superpower may well be its own government.

As long as countries around the world mistrust China’s Communist regime, they will worry about Beijing using mainland companies to gather data on users, shape media content and interfere with critical infrastructure. If those companies in turn aren’t allowed to expand globally, China could find itself stuck in an increasingly uncompetitive bubble.

Other emerging economies that graduated to rich-world status all benefited immensely from having their companies compete abroad.

The need for a global presence is as important in the digital age as in the industrial. Reaching an international audience provides apps with opportunities to amass users, advertising and, most critically, data — the lifeblood of new tech.

China’s domestic market is so huge that it can sustain large-scale tech businesses that smaller economies can’t. ByteDance will probably survive quite nicely on the 400 million users of TikTok’s Chinese sister app, Douyin. Nor will all countries be offended enough by China’s authoritarian political system to ban its technology. Fifty-three United Nations members supported the controversial national security law Beijing recently imposed on Hong Kong.

Yet, as research firm Capital Economics noted in a recent report, those 53 nations together account for a feeble 4% of world gross domestic product.

One reason the U.S. has retained its dominance even as its share of global economic activity has shrunk is because the world is still running American apps on gadgets powered by U.S. operating systems and chips. If Chinese companies are locked out of major foreign markets, China could get stuck as a second-class technological power, unable to set standards for the rest of the world.

Worse still, China could fall into its own version of the Galapagos Syndrome, often associated with Japan’s famously insular mobile phone industry, whose products were so localized they couldn’t survive anywhere else. China might well become its own technological island, in which Chinese use chips, operating systems and smartphones that most of the world’s consumers don’t. These industries could become so embedded in the local market and disconnected from outside trends that they simply become uncompetitive.

Already, given the Great Firewall and Beijing’s strict censorship rules, China has its own version of the internet, with popular services at home having almost no influence abroad. The government’s goal of achieving self-sufficiency in technology will only add more pressure on Chinese companies to buy local, even over more cutting-edge foreign products.

Without foreign markets, companies would also face more burdensome research and development costs. Truly global enterprises can amortize R&D costs over a worldwide business. Bottled up at home, Chinese firms would have to absorb similar expenses without the international payoff. Or they might not be able to afford the costs of innovation to catch up or keep up with foreign rivals.

China might then fall further and further behind the U.S. and Europe, subsisting at an overall lower level of technology. That’s hardly the glorious future Chinese leaders are promising. They should remember that, in this new digital age, a state striving to maximize its power could easily erode it instead.


Reducing budget and trade deficits

Source: LawLiberty, Mar 2020

The market sent a shot over our bow to tell us that we cannot accumulate budget and trade deficits forever. We entered the crisis with full employment and a federal deficit of about 4 percent of GDP—an extraordinary situation. As noted, we may boost the deficit to 20 percent of GDP before the crisis is over.

There are a number of ways in which the necessary adjustment can occur, most of them unpleasant.

One is a general reduction in entitlements for future generations as well as spending cuts for the present.

Another is a higher level of savings, either on the part of households (who can save and buy government bonds) or on the part of government (which “saves” by increasing taxes on households and corporations in order to reduce “dis-saving” in the form of government deficits).

Both of the above would require a significant, one-time drop in consumption, and probably a severe recession. The political consequences of any of these scenarios would be ugly.

The other way in which the adjustment could occur is through a revival of productivity growth.

Labor productivity growth during the past decade has languished at the low end of an historic range. Productivity growth driven by technological innovation, for example, can substitute for savings, as it gives us more output for less effort.

If the United States were to reduce its current account deficit by reviving high-tech industries, which have inherently high productivity, average productivity growth would increase, especially if new technologies were brought to bear.

On the other hand, an industrial policy that centered on creating jobs in low-productivity industries would have the reverse effect. Conventional industrial policy tends to subsidize inefficient industries at the expense of the public, but government support for basic R&D on the model of the Kennedy Moonshot or the Reagan Strategic Defense Initiative has in the past put a tailwind behind productivity growth.

Economics (Double Oral Auction Experiment): From Chaos to Order

Source: Reed College, Fall 2010

Related Resource: Marginal Revolution, Mar 2020

always amazing to see how quickly the equilibrium is attained even though none of the participants has any idea what the equilibrium price and quantity are. The experiment can be run with paper and pencil or a laptop in a small class but that gets cumbersome for a larger class. Fortunately, there are some free tools.

Here’s Hampton and Johnson describing provides an online version of the double oral auction that works on all student Internet-enabled devices, including smartphones and iPads, without requiring students or instructors to download any special software.

Results can be projected on a screen for debriefing. Instructors can set key parameters. A version with price controls can be setup. The use of the experiment is free for instructors and students. Students do not have to give their email address to play.

The design is the classic market experiment for introducing students to demand and supply. Joseph (1970) makes a strong case for the benefits of the “market experiment” in teaching based on experience with high school and undergraduate students. The original experiment was created by Smith (1962).

….After a trading session, instructors can debrief showing dynamically the history of bids, asks, trades, individual attribution of bids/asks (by clicking the chart), individual total earnings, and the underlying demand and supply curves.

On China: Technology, Innovation and Growth

Source: Dan Wang, Jan 2020

The main ideas can be summed up in two broad strokes.

  1. First, China’s technology foundations are fragile, which the trade war has made evident.
  2. Second, over the longer term, I expect that China will stiffen those foundations and develop firms capable of pushing forward the technological frontier.

It’s not obvious to me that apps like WeChat, Facebook, or Snap are doing the most important work pushing forward our technologically-accelerating civilization. To me, it’s entirely plausible that Facebook and Tencent might be net-negative for technological developments. The apps they develop offer fun, productivity-dragging distractions; and the companies pull smart kids from R&D-intensive fields like materials science or semiconductor manufacturing, into ad optimization and game development.

The internet companies in San Francisco and Beijing are highly skilled at business model innovation and leveraging network effects, not necessarily R&D and the creation of new IP. (That’s why, I think, that the companies in Beijing work so hard. Since no one has any real, defensible IP, the only path to success is to brutally outwork the competition.)

I wish we would drop the notion that China is leading in technology because it has a vibrant consumer internet. A large population of people who play games, buy household goods online, and order food delivery does not make a country a technological or scientific leader.

How about emerging technologies like AI, quantum computing, biotechnology, and hypersonics, and other buzzing areas? I think there’s no scientific consensus on China’s position on any of these technologies, but let’s consider it at least a plausible claim that Chinese firms might lead in them.

So far however these fields are closer to being speculative science projects than real, commercial industries. AI is mostly a vague product or an add-on service whose total industry revenue is difficult to determine, and that goes for many of the other items.

In my view, focusing the discussion on the Chinese position in emerging technologies distracts from its weaknesses in established technologies. Take semiconductors, machine tools, and commercial aviation, which are measured by clearer technical and commercial benchmarks. They are considerably more difficult than making steel and solar panels, and Chinese firms have a poor track record of breaking into these industries.

The focus on speculative science projects brings to light another issue around discussions of China and technology: an emphasis on quantifying inputs. So much of the commentary focuses on its growth in patent registrations, R&D spending, journal publications, and other types of inputs.

One can find data on these metrics, which is why measures of “innovation” are often constructed around them. But these inputs are irrelevant if they don’t deliver output, and it’s not clear that they often do, neither in China nor anywhere else. Wonderfully asymptoting charts on Chinese patent registrations and R&D spending suggest that Chinese firms might overrun the rest of the world any day now. So far however the commercial outputs are not so impressive.

Learning by doing

I think however that long-term prospects are bright. In my view, Chinese firms face favorable odds first in reaching the technological frontier and next in pushing it forward. I consider two advantages to be important. First, Chinese workers produce most of the world’s goods, which means that they’re capturing most of the knowledge that comes from the production process. Second, China is a large and dynamic market. On top of these structural factors, Chinese firms have stiffened their resolve to master important technologies after repeated US sanctions.

My essay How Technology Grows argues that technological capabilities ought to be represented in the form of an experienced workforce. We should distinguish technology in three forms: tools, direct instructions (like blueprints and IP), and process knowledge.

The third is most important: “Process knowledge is hard to write down as an instruction: you can give someone a well-equipped kitchen and an extraordinarily detailed recipe, but absent cooking experience, it’s hard to make a great dish.”

We should think of technology as a living product, which has to be practiced for knowledge even to be maintained at its current level. I offered the example of the Ise Grand Shrine, which Japanese caretakers tear down and rebuild anew every generation so that they don’t lose its production knowledge.

Here’s an example I came across more recently: Mother Jones reported in 2009 that the US government forgot how to produce “Fogbank,” a classified material essential to the production of the nuclear bomb, because relevant experts had retired. The government then had to spend millions of dollars to recover that production knowledge.

I believe that the hard-to-measure process knowledge is more important more easily observable tools and IP. We would be capable of making few meaningful advancements if a civilization from 2,000 years in the future were able to dump blueprints on us, just as the Pharaohs and Caesars from 2,000 years in the past would have been able to do nothing with the blueprints of today.

Today, Chinese workers produce most of the world’s goods, which means that they engage more than anyone else in the technological learning process. Few Chinese firms are world-leading brands. But workers in China are using the latest tools to manufacture many of the most sophisticated products in the world.

They’re capturing the marginal process knowledge, and my hypothesis is that puts them in a better place than anyone else to develop the next technological advancements. To be more concrete, Chinese workers will be able to replicate the mostly-foreign capital equipment they currently use, make more of their own IP, and build globally-competitive final products.

China’s Economy on MMT

Source: ZeroHedge, Dec 2019

To see how well MMT works in practice today, we need only look at China, which has built its internal economy on fundamental points of MMT. The Chinese state, the central bank, and both public and private industry are all linked together in a recurring cycle of growth paid for by printing money.

The key point is that even though the money is in the form of loans, it is still capital in the system. Furthermore, that capital is the currency. And, whether printed or lent, the value of the nation’s currency is perceived by the rest of the world as being backed by economic productivity, or devalued by the lack thereof. Confidence in the issuing government and the integrity of the legal system are also related factors. (See the Zimbabwe and Germany examples above.)

The end results of China’s massive money printing are staggering. From 2013 to 2017, China added $25 in assets (debt) for every $1 dollar of GDP—more than 400 percent of its annual GDP. This is a historical first. What’s more, almost 80 percent of it was in shadow banking, unregulated lending with high default rates.

And yet, China’s economy has been slowing for the past decade. Its GDP is at its lowest in almost 30 years. Granted, a fraction of that is due to the trade war over the past 18 months, but where’s the $50 trillion worth of growth that should have come from it?

Today, China’s financial infrastructure is on the brink of collapse. It’s not that there’s a shortage of money in the country, either. China has injected over $126 billion in 2019 alone. At the same time, it’s controlling the quantity by very strict, government-imposed capital controls. That not only conveys its currency’s weakness to the rest of the world but also that even the average Chinese may not believe in the value of their currency.

As a result, Chinese investors themselves prefer to hold gold or real estate rather than their own currency, because they don’t have confidence in its value or the government. They also suspect that asset valuations denominated in Renminbi are unreliable and prone to collapsing bubbles.

The lesson for MMT advocates is that spending money alone does not create demand nor does it fuel long-term growth.

In the case of the United States, MMT spending doesn’t happen in a vacuum. Other nations have to adjust their currency levels to ours. That means the United States would be exporting inflation. What nation will accept U.S. dollars—the world’s reserve currency—if it’s saddled with an infinite level of debt and the very real prospect of hyperinflation at any time?

The answer is very few, if any. What’s more, competitor nations such as Russia and China would be tempted to help break the dollar by backing or partially backing their currency—or a basket of currencies—with gold.

That would be the end of the dollar and the U.S. economy as we know it.

National Productivity Affects Exchange Rates

Source: Economist, Dec 2019


Softbank and its WeWork Fiasco

Source: ZeroHedge, Nov 2019


US$ Purchasing Power’s Decline

Source: ZeroHedge, Nov 2019

today’s central bankers facilitate the growth of government by purchasing government securities in order to keep interest rates – and thus the government’s borrowing costs – low.

The Federal Reserve’s interventions enable the expansion of government well beyond what would be politically palatable if politicians had to finance the entire welfare-warfare state through direct taxation or borrowing at market interest rates, which would increase interest rates for private sector borrowers, lower growth, and increase unemployment.

Since the creation of the Federal Reserve, the US dollar has lost over 96 percent of its value.

The Biggest Economies in 2030

Source: Visual Capitalist, Mar 2019

US$86 trillion global economy

Source: ZeroHedge, Sep 2019