Home > Uncategorized > Paul Krugman, going green in China, and the which way is up problem in economics

Paul Krugman, going green in China, and the which way is up problem in economics

from Dean Baker

Paul Krugman’s column this morning raises the issue of whether China is on the edge of seeing a real estate bubble burst, in the same way that Japan saw its real estate and stock bubble burst in 1990. Krugman points out that this did lead to slower growth for Japan, but it was not an economic catastrophe, as it still saw rises in GDP, relative to its working age population, that were comparable to the U.S. (I would add that one reason why Japan did not see more GDP growth is that, unlike the U.S., it had a sharp reduction in the length of the average work year over the last three decades. This means workers were taking some of the benefits of productivity growth in more leisure time rather than higher income.)

Krugman points out that China is seeing a similar demographic story, where its working age population is shrinking and there is no longer a massive migration of people from the countryside to the cities, as well over 60 percent of the population already lives in urban areas. He argues that this will lead to major problems for China, since it currently spends over 40 percent of GDP on investment, compared to just over 20 percent in the U.S. His point is that there will be much less need for investment with a shrinking workforce and slower growth in the size of cities.

All of this is true, and the points are well-taken, but it is worth thinking more carefully about the nature of the problem being described. Krugman is arguing that China will have little reason to spend 40 plus percent of GDP on investment, given its current demographics. This means that China will have an enormous amount of unused resources, which could translate into mass unemployment in the absence of an effective government response. In short, this is a story of seriously inadequate demand.

One great way to create demand would be to spend large amounts of money shifting to electric cars, clean energy, and other expenditures designed to reduce greenhouse gas emissions. China already leads the world by far in the production of wind and solar energy and the number of electric cars on the road. But, as the world’s biggest emitter of greenhouse gases (on a per person basis, it still emits around one third of the U.S.) it can clearly go much further. Whether China chooses to go this route will be a political decision, but the fact that the investment share of GDP is so excessive means that it can hugely increase spending on going green, without requiring any reduction in consumption spending at all.

This gets us to the famous “which way is up?” problem in economics. Economics is usually concerned about inadequate supply. In fact, in the old days, many introductory textbooks begin by telling students something to the effect of “economics is the science of allocating scarce resources to competing ends.” (The textbooks may still say that, but I haven’t looked at any lately.)

But the story Krugman is describing for China (and Japan), is exactly the opposite problem. The country is producing more than it knows what to do with, which creates the risk that millions, or even tens of millions, of workers may end up unemployed due to lack of adequate demand in the economy.

Anyhow, it is worth pointing out this distinction. It is also worth noting that insofar as many countries around the world, including the United States, seem to be facing this problem of inadequate demand (a.k.a. “secular stagnation”), spending money on greening the economy is a great way to keep people employed.

  1. September 28, 2021 at 2:00 am

    Inadequate demand to stoke economic growth marks a mature culture. It could be there is subconscious species understanding that full employment is a weird concept when the economic growth trajectory is not very healthy. China has made a huge investment in education and continues to do so. Even so the Chinese continue to slavishly follow western automobile culture. This is what could be their undoing.

    Electric cars were mentioned as a positive but they are actually a scam to keep highway contracts rolling. I have read that sixty to sixty-five percent of automobile pollution occurs during production and scrapping. Thus, battery technology and infrastructure are directed at shaving a bit off 35% of automobile pollution. This savings on direct automobile pollution could thus be 15 – 20% and it does nothing to reduce the environmental damage of building and repairing roads.

    We need to think about what a healthy culture will be like and single brains can’t do it alone. Here is personal example. I have worked at shepherding autonomous democracy dot org as an aid to policy development that is insulated from the needs of GDP growth. It woks now yet is still at the point where I personally had to dream up eight policies for humanity to sort out, for practice. One of those policies is “Bring the troops home.”

    Here’s where my socioeconomic point comes into focus. I used the tool and placed bringing troops home as the most important. Very few have used the tool but, even so, my first choice has been moved to last place. What does this mean? It must be something like if subsidies are removed – one example – then we will automatically tend to bring the troops home.

    I do not know the answer as to what multiple brains are thinking because I am limited to one. Please try my old sociologist’s tool and see what might be done with it to help us chart a course http://autonomousdemocracy.org/

  2. September 28, 2021 at 3:16 am

    China should read Henry C. Carey’s “Harmony Of Interests.” Paul Krugman is the best of the Neo-classical Economists, but Neo-classical/Neo-Liberal Economics is only a tarted up version of British Colonial, Free Trade → Slavery economics. China needs Alexander Hamilton’s-Abraham Lincoln’s-Henry C. Carey’s American School of Economics.

  3. A.J. Sutter
    September 28, 2021 at 3:27 am

    I would add that one reason why Japan did not see more GDP growth is that, unlike the U.S., it had a sharp reduction in the length of the average work year over the last three decades. This means workers were taking some of the benefits of productivity growth in more leisure time rather than higher income.

    The inference of the last sentence isn’t necessarily correct. Following the trail of links starting from this piece and ending at the OECD statistics page, it turns out that the OECD figures for Hours Worked relied on in this piece include part-time and part-year workers. OECD stats also show a rate of part-time employment in Japan far above OECD average: OECD stats say 25.8%, but here in Japan one more often hears around one-third.

    Since a part-time worker counts as 1 worker in the OECD Hours Worked stats, the aggregate reduction masks an increase in precarity, even if some workers have more “leisure time.”

    I also wish economists would stop using the phrase “leisure time” as the complement to paid work: very often the time spent is on unpaid work, such as raising a family and elder care. Even in my own “part-time” job of adjunct prof at a university, my official work hours are logged in only for my lecture time, 5 hours per week, when my actual time spent on course and class preparation easily averages 30 hours per week or more in addition to lecture.

  4. Ken Zimmerman
    September 28, 2021 at 7:16 am

    “Anyhow, it is worth pointing out this distinction. It is also worth noting that insofar as many countries around the world, including the United States, seem to be facing this problem of inadequate demand (a.k.a. “secular stagnation”), spending money on greening the economy is a great way to keep people employed.”

    This plays out if the politicians, lobbyists, and other political actors genuinely want to keep people employed. High unemployment can be useful not just in winning elections but in fomenting revolutions.

  5. September 28, 2021 at 10:04 am

    Some economists have argued that China’s volume of investment is excessive and some of it poorly allocated, which is reflected in the rising debt burden. What China therefore needs is a redistribution of income away from real estate and industry and towards ordinary households in order to raise the consumption share in GDP and reduce the investment and savings share. Then investment would be lower but more efficiently allocated. Growth would slow but be more sustainable and ordinary households would be better off as the consumption share rises.

    The leadership apparently recognises the need for such a change, but it remains politically difficult, due to the vested interests which have benefited from China’s ‘high savings-high investment’ model.

    Michael Pettis has suggested that the difficulty of such a shift in economies which have experienced a ‘growth miracle’ has historical precedent, in postwar Japan and the USSR, in Brazil etc. In many cases the adjustment has been difficult and protracted, and has resulted in many years of sluggish growth following the years of rapid growth.

  6. September 28, 2021 at 2:20 pm

    The planet is finite. There are emerging a number of excellent reviews showing that the so-called “Greening of the economy” is more mythology than fact. Switching from a fossil fuelled energy system to a mineral-based energy system contemplated by Krugman and Baker as well as others in the Green New Deal movements ignore the problems inherent in ripping apart the earth and destroying marine habitat to search for the minerals needed to expand the life-style that a comparatively few now lead. If there are enough minerals for all living on the planet and those to come to live as we now do, that will entail massive destruction and further risk to life-sustanance.

    Nick Johnson above and many others still utilize the ridiculous GDP measure of economic progress. GDP should be seen as a tool to measure progress NOT a goal of economic societies. GDP is a total failure at measuring progress. The more disasters the greater the GDP. We need to abandon the GDP as a TARGET and look at a genuine progress indicator by picking up and elaborating on Values such as those in Carney’s book by that name and revisit the life values described in McMurtry’s Value Wars. There are many other writings on the topic.

    Here is a reference to Simon P. Michaux’s work in a video presentation. https://youtu.be/pRg5nBQVdio

    • September 28, 2021 at 3:20 pm

      I do think that GDP should be one of a variety of metrics used to measure human progress and should not be reified. I was merely using it do make my point about necessary rebalancing in China.

      In fact, if China does successfully rebalance away from excess investment and towards consumption, growth will be slower but more sustainable, less resource intensive and more skewed towards service industries and less towards manufacturing, so it would be a step towards a greener economy. It would be good for China and its people and better for the planet. Of course there is more that needs to be done on top of that to make human activity more sustainable, but the point remains.

  7. September 29, 2021 at 6:50 pm

    Shame there are no ‘like’ or ‘vote’ up or down buttons for these comment streams. It doesn’t always seem necessary to add anything, but it would be nice to be able to signify some support.

    As to ‘economies’ having surplus investment money: why should societies keep building things, when they have built far too much already? Concrete is one of the biggest CO2 emitters, and erosion causers through the vast quantities of beach and river sands it consumes, to say nothing of the almost universal adverse effects from overconsumption–or even just feeding, populations the size of China.

    If societies feel that they cannot shake off the ‘work or die’ habit entirely, a very simple solution to ‘not enough jobs’, would be to split the working week into two, three day, ‘shifts’, with one common ‘Sunday’ (Ideally of peace and quiet!), between them. Share out the ‘surplus investment money’, or burn it, if it’s not really needed. This situation is a success: not a problem. This is only decried because the rich always want to maintain a superior position, and, even in a ‘communist’ country, cannot bear the thought of everyone being actually equal and content.

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