One reason why China has done as well as it has

by on April 13, 2015 at 1:34 am in Economics | Permalink

Consider China, which has extremely rapid productivity growth, and hence very rapid nominal wage growth, despite an inflation rate that’s fairly similar to the US. Because the trend growth in nominal wages is so high in China, you’d expect downward wage inflexibility to be much less of a problem in China than in the US. I frequently argue that NGDP growth is often the best proxy for the welfare costs and benefits of inflation, better than inflation itself. This is one more such example, as NGDP growth is strongly correlated with productivity growth plus inflation.

That is from Scott Sumner, the rest of the post is interesting too,mostly about stickiness.  That is one reason why the Chinese (but not everyone) can “wait out” recessionary pressures with fiscal policy.  By the time the fiscal policy runs out, the underlying rate of productivity growth has helped solve the wage stickiness problem, and time has validated the demands of at least some of those stubborn workers.

1 Ray Lopez April 13, 2015 at 2:48 am

This entire Sumner post is wrong. It assumes workers have bargaining power in a centrally-planned economy like China; it assumes there’s no such thing as falling wages, it confuses productivity with inflation with NGDP, and, last but not least, it presupposes money illusion and the non-neutrality of money, without any other evidence than wage increase distributions are not Gaussian (which is ludicrous if you think about it: wage increases would be symmetrical and Gaussian only if they were random. What businesses give random wages increases, both positive and negative, especially when fiat money is constantly printed every year, putting upward pressure on wages?)

2 dan1111 April 13, 2015 at 3:50 am

Every single point that you make about Sumner’s post is wrong.

3 dan1111 April 13, 2015 at 4:19 am

I really should not take the time, but:

Workers have bargaining power in China.

The Chinese economy is not wholly (or even mostly) centrally planned.

The post does not assume wages fall, and even provides evidence that they fall sometimes.

It posits productivity growth and inflation as two different reasons that wages tend to go up, rather than confusing them.

It provides (strong) evidence of the money illusion, and doesn’t assume it at any point.

Last (but truly not least, as this is one of your dumbest points). The distribution of wage changes being gaussian would not require individual actors to assign wages at random. The fact that you would claim this is kind of amazing (and quite revealing).

In short, next time just stick with “First post! I am so awesome!” etc.

4 dan1111 April 13, 2015 at 4:22 am

Should be “The post does not assume wages never fall”

5 Ray Lopez April 13, 2015 at 8:27 am

@dan1111 (zero) – I should know better than reply to a troll baiter, but…

“Workers have bargaining power in China… The Chinese economy is not wholly (or even mostly) centrally planned.” – so wrong it’s not even funny. Cite please?

on ‘falling wages’ I see you got it wrong and had to correct yourself.

“It posits productivity growth and inflation as two different reasons that wages tend to go up, rather than confusing them.” – wrong. You know nothing about Sumner. He posits that money is not neutral, and that there is money illusion. For you to influence the economy (including productivity, which rises when GDP rises), with Sumner’s monetarism, you need to conflate (big word huh?) both inflation and productivity together. One will bring rise to the other, due to sticky wages and money illusion. If you don’t see that, you’re just ignorant. Put another way: if money was (and it is) super-neutral, and there was little or no money illusion, do you think inflation would matter? No. Would it influence the economy? No. Would there be a liquidity trap and other such nonsense that both monetarists and Keynesians talk about? No (and in fact, on this last point, there’s no such thing as a liquidity trap, you are being fooled by randomness if you believe it). Do you even know what I’m talking about? No. Yet you want to critique me?

“It provides (strong) evidence of the money illusion” – cite please? You got nothing.

“Last (but truly not least, as this is one of your dumbest points). The distribution of wage changes being gaussian would not require individual actors to assign wages at random ” – yes it would. Viewed from a neutral observer, non-symmetrical wage increases of the kind Sumner complains about (as evidence of sticky wages) means businesses in Sumner’s view should behave as if they give random wage increases (or decreases). Yet, due to fiat money constantly debasing and expanding, as evidenced by inflation, we know this cannot be true. Yet it’s not evidence of sticky wages, just that fiat money in constantly being debased. Why is this so hard for you to understand? Semantics is your only point, like the top of your head.

Vamos troll! You’re dismissed. I will not be commenting on anything you post in this thread.

6 dan1111 April 13, 2015 at 11:47 am

1) Check out this report: http://www.uscc.gov/sites/default/files/Research/10_26_11_CapitalTradeSOEStudy.pdf, which shows that the private sector accounts for 50% of GDP. The 50% that is public sector also includes many enterprises that aren’t directly government, but are indirectly controlled by government. It is obvious that there is a competitive market for labor, and wages are not dictated by government.

2) Your total response to my second point is that I had a typo! Nice. Still, it remains true that the article shows evidence that wages can fall in some cases.

3) This just plain does not make sense. Whether or not people think about money in nominal terms has nothing to do with productivity. Productivity and inflation are simply two separate mechanisms for causing nominal wages to rise.

4) Even if you disagree with that evidence, the money illusion is not an assumption on which the article rests. The article considers some of the evidence for that theory.

5) Non-random actions can still lead to a gaussian distribution. Like everyone’s score on a test is likely to result in a gaussian distribution, even if no one’s score is random. Also, the existence of an effect like inflation does not mean wage changes could not follow a gaussian distribution. It just means the distribution would not be centred on 0. You don’t seem to know what the gaussian distribution is or how it works.

7 magicman April 13, 2015 at 8:03 pm

“the arithmetic mean of a sufficiently large number of iterates of independent random variables, each with a well-defined expected value and well-defined variance, will be approximately normally distributed, regardless of the underlying distribution. That is, suppose that a sample is obtained containing a large number of observations, each observation being randomly generated in a way that does not depend on the values of the other observations, and that the arithmetic average of the observed values is computed. If this procedure is performed many times, the central limit theorem says that the computed values of the average will be distributed according to the normal distribution”

Wage changes would follow a Guassian distribution if they were the result of many independent random variables, the wages themselves don’t need to be assigned at random.

8 Nathan W April 13, 2015 at 5:19 pm

Workers do not have strong negotiating power, but the government has ensured that this does not lead to problems by raising minimum wages a lot.

9 Harun April 13, 2015 at 1:24 pm

Your assumption that China is a centrally planned economy is wrong.

Your assumption that Chinese workers have no bargaining power is exponentially wrong.

For example, every year factory owners get worried sick that their employees won’t return from Chinese New Year having found a better job elsewhere. And in fact this happens a lot. So wages go up. Workers have extreme bargaining power in China because there are simply so many jobs available.

One interesting thing about Chinese wages is the role of minimum wage increases. These tend to happen after a bout of food price inflation or some labor unrest. I suspect this is simply a way to revalue the Yuan using the price of labor rather than letting it strengthen. I’m sure the workers view this as a plus, though it definitely leads to nominal wage increases that have nothing to do with productivity: the slow service for your cold beer yesterday is replicated the next day despite a large jump in wages.

10 ohwilleke April 13, 2015 at 2:59 am

This all sounds well and good, until you step back to look at the forest level analysis and compare it to the title of this post.

China has done as well as it has because its real wages are surging because its workings are rapidly becoming more productive does pretty much all of the work here, with the “wage stickiness problem” taking a decidedly back seat role in reaching the overall conclusion.

This is particularly true when we happen to know from a post made at this blog on Saturday, that China has been experiencing intense producer price deflation every single month for more than three years in a row. Deflation of that magnitude for that length of time is pretty much unprecedented. In other words, Chinese wages are about as sticky as they can possibly be, consistent with rapid productivity growth.

11 Cooper April 13, 2015 at 3:29 am

Gross capital formation is about 45% of China’s GDP. It’s the highest ratio of any country in the world (except Mongolia, which is an economic appendage of China at this point).

China invests more than the United States does on an aggregate basis.

Even if a large chunk of that is wasted, it’s still a huge amount of investment. Given how low capital levels are in China, there’s plenty of room left for catch up growth. Not to mention that a third of China is still working in agriculture…

The China Bubble will burst eventually but there’s still a strong tailwind.

12 Harun April 13, 2015 at 1:25 pm

Mongolia may be due to the huge copper mine, not being an appendage of China.

13 Cooper April 13, 2015 at 3:12 pm

The Oyu Tolgoi mine is on the border of China and China buys essentially all output from that mine. China buys 80% of Mongolia’s coal output, I don’t have the figures for copper but I imagine they are in that range as well.

China accounts for well over 50% of all trade with Mongolia and that ratio is probably rising.

The slowdown in Chinese industrial production has reduced demand for Mongolia’s minerals, devastating their economy.

It’s a similar situation to the US/Canada trade relationship. Canada sends 3/4 of its exports to the United States and over half of its imports come from the US. It’s hard to imagine a severe US recession that doesn’t drag Canada down too.

14 guest April 13, 2015 at 4:39 pm

You mean like the severe recession of 2008 in the US that was just a mild inconvenience in Canada?

15 Cooper April 13, 2015 at 8:43 pm

Guest, not sure what you’re talking about, Canada and America’s GDP growth trajectories are *highly* correlated. Look at this chart of annualized GDP growth for both economies over the last fifty years. Since the creation of NAFTA, the two countries are more connected, not less. http://grab.by/GoMu

There’s no evidence of divergence in the data.

16 ohwilleke April 13, 2015 at 9:02 pm

Despite deep historical ties to China, the practice of communism in modern Mongolia was on the model of Russia and not China for most of the 20th century. It practiced a form of communism very similar to that of other central Asian republics that were actually in the Soviet Union. Of course, in a country where “subsistence herder” was the leading occupation for much of the 20th century and still might be this doesn’t mean what it does in an agricultural or industrial society. The post-communist conversion has been fairly effortless for them, because the old regime had shallow roots.

Now, its recent binge of mineral exploitation is mostly for the benefit of Chinese customers, but the ties aren’t nearly as deep as you’d expect for a nation so close to China.

17 prior_approval April 13, 2015 at 7:25 am

Well, seeing as how Chinese exports just shrank by about 15%, it must be that Chinese workers are finally able to enjoy the fruits of their labor, right?

18 ThomasH April 13, 2015 at 8:40 am

“Fiscal policy” should not be time limited. It really is (or rather would be if it were not constrained by deficit hawks who impose “austerity”) just the natural increase in public investment in activities with present costs and future benefits which have positive net present values at the interest rates prevailing as monetary policy is pushing NGDP back on track.

19 collin April 13, 2015 at 1:44 pm

Why has China done so well? Isn’t the growth of basic manufacturing with a relatively endless supply of cheap labor always a formula for high growth? China has great access to the most important resource which is a large number of people who are not having big families.

Also, being a command political system makes changes a lot easier for changes than the developed nations. I still say there is a bursting in 2022 similar to Japan’s issues in the 1990s.

20 jon April 13, 2015 at 2:00 pm

The reason China has done so well isbecause it followed the Japan and Singapore and Taiwan model. Basically a government planned economy with free market, where the government steps in where the free market fails. Yes the free market can fail, as the USA shows clearly. And China is still not dne. Expect 7-8% gdp growth per year for the next 10 years maybe 10%. Expect Chinas economy to double. lets hope they fix renewables by then or pollution will suck.

21 Bob from Ohio April 13, 2015 at 2:03 pm

Why do we continue to pretend Chinese economic stats are not completely made up?

22 ChrisA April 13, 2015 at 2:41 pm

Have you visited China recently? I don’t know the real rate of growth exactly but one can see at a glance how much more prosperous it is versus say 10 years ago. Its about buildings, car’s, businesses, clothes etc etc. If its an illusion, its a hell of an illusion.

23 jon April 13, 2015 at 3:06 pm

becausethey are not. the numbers have been scientifically studied and assessed to be 90-100% accurate.

24 Bob from Ohio April 13, 2015 at 4:02 pm

Coincidence I am sure that the GDP growth rate is so often around 7.5% lately. Is not 7.5 the current official target?

Over 9% in 2008 and 2009 in the face of a world wide “Great Recession” too. Who did buy all those products from China?

Last recession?

25 Cooper April 13, 2015 at 8:37 pm

Bob, it wasn’t export growth during those years, it was investment growth.

Net exports growth was basically flat during the great recession while investment growth soared as local government borrowing money cheaply from the central government to spend on infrastructure.

https://secure.fundsupermart.com/main/articleFiles/webarticles/6720/SG/3.gif

26 Cooper April 13, 2015 at 8:46 pm

Bob, it was an investment boom, not an export boom.

Net exports in China have been basically flat since 2008. During the Great Recession, local governments in China went on an investment spree, building millions of new housing units, highways, bridges, trains, etc.

27 Tom Warner April 13, 2015 at 2:06 pm

Standard economics models don’t deal well with modern advanced-economy unemployment, because the models assume an unskilled labor pool. Old classical models assume all-powerful employers and an undifferentiated pool of day laborers; Keynesian “stickiness” updates that very slightly to somewhat weaken the power of employers and mimic the loyalty of employers and employees to each other. But modern advanced-economy labor pools are highly differentiated. Family and public safety nets allow people to be much choosier. Employment is more about long-term team-building than short-term task completion.

If some economist is sitting there in his study with his sticky-wage model wondering why it took so long for wages to adjust after 9m people were laid off, he needs to put down his model and get out and talk to people.

28 Nathan W April 13, 2015 at 5:15 pm

Among other things, they traditionally negotiated that incoming FDI was tied in a way that ensured transfer of know-how.

29 gg April 14, 2015 at 12:36 pm

Very interesting points n convo Economists & thinkers. 🙂

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