Some of the most important sentences in economics

This is from Larry Summers and Lant Pritchett:

…knowing the current growth rate only modestly improves the prediction of future growth rates over just guessing it will be the (future realized) world average.  The R-squared of decade-ahead predictions of decade growth varies from 0.056 (for the most recent decade) to 0.13.  Past growth is just not that informative about future growth and its predictive ability is generally lower over longer horizons.

The main point of this paper is to argue that Chinese growth rates will become much lower, perhaps in the near future, here is a summary of that point from Quartz:

Summer and Pritchett’s calculations, using global historical trends, suggest China will grow an average of only 3.9% a year for the next two decades. And though it’s certainly possible China will defy historical trends, they argue that looming changes to its  authoritarian system increase the likelihood of an even sharper slowdown.

The piece, “Asiaphoria Meets Regression Toward the Mean,” is one of the best and most important economics papers I have seen all year.  There is an ungated version here (pdf).  I liked this sentence from the piece:

Table 5 shows that whether or not China and India will maintain their current growth or be subject to regression to the global mean growth rate is a $42 trillion dollar question.

And don’t forget this:

…nearly every country that experienced a large democratic transition after a period of above-average growth…experienced a sharp deceleration in growth in the 10 years following the democratizing transition.

As Arnold Kling would say, have a nice day.

Comments

But I can recall hearing much of the same logic in, say, 2008. It seemed pretty persuasive then, too.

how is this argument consistent with alwyn youngs argument?

And here is another, even older sentence -

"If something cannot go on forever, it will stop." Herbert Stein, http://en.wikipedia.org/wiki/Herbert_Stein

But guessing the moment it will stop is full of interest ...

Is there anything in economic theory that suggests you ought to be able to outguess investment markets on a $42 trillion question? I know Larry Summers is a very bright fellow, but doesn't the size of the question suggest that an awful lot of bright fellows are already thinking very hard about the China Question and that whatever insight Larry comes up with is likely already baked into the current market price of investments?

Chinese equities trade at cheaper earnings ratios than American equities. Some of that is to compensate for the generally lower quality of Chinese earnings due to fraud. But it goes a long way to suggesting that asset markets are already skeptical of sustained Chinese super-growth.

I'm sure somewhere there are some people short China to some huge degree and now bleeding profusely. Then, when things go off a cliff, Michael Lewis will write a bestseller about the ones that don't cover beforehand and everyone will laud their investing prowess.

Indeed.

Law of large numbers, people. Nothing can grow like that forever, it's numerically impossible. Same reason the dotcom bubble stopped. Are there actually people who think that China can grow forever, or even much longer, at 7%?

here is the most important sentence--economics is ideology, not science, the ideology of the rich and powerful.

Luckily we have brave and noble trolls (such as yourself) to show us the Way To The Light.

indeed

Oh Lord, Tyler Cowen wrote a widely read clueless book about some "great stagnation" that he thought would only rebound around 2040. (!)

This is what we call "junk economics".

Now Sumner projects 3.9% growth for China for two decades?? Hilarious! Not 3.8% or 4.0%? Come on guys. A little seriousness, please.

Summers...not Sumner

If you take the article in Quartz at face value the answer is obvious: China should give up this reform drive and stick to crony capitalism since that is what will drive growth in the long run.

"A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury."

Although misattributed, this quote is, alas, true.
http://en.wikipedia.org/wiki/Alexander_Fraser_Tytler#Misattribution

That's the real reason behind the economic malaise of Europe and the Western civilisation in general.
http://www.devilsdictionaries.com/blog/welfare-state-is-not-dead

Nice graph on your site, but how would it look adjusted for the proportion of elderly? Demographical changed could be one of the most imprtant drivers. The welfare state is in trouble when the proportion of retirees incerase.

Is demographic change driven by the ability of the populace to vote themselves care in their old age?

This explains why so many people are yearning to get out of Western civilization and get accepted for citizenship in places like China, Africa, or the Middle East.

Have you been to Africa recently?, there's certainly a palpable feel of "return of the empire" in places like Maputo, Nairobi, Blantyre..... the great grandchildren of once colonizers searching for middle class jobs.... oh! how the worm turns.

Why would one leave a country in which he can vote himself generous gifts from the treasury?

What does your graph have to do with whether that statement is true or not? Absolutely nothing that I can see.

Maybe you have some historical examples?

"looming changes to its authoritarian system increase the likelihood of an even sharper slowdown"

I'd think anything away from authoritarian would be more market-driven, more efficient, and thus lessen the slowdown.

two points:
the only 3.9% growth rate is staggeringly high relative to expectations about the USA; it's impossible for China to grow at that very high quantitative amount every year without causing much more trade to/from the usa and without much more domestic consumption in china...leading to the second point:
If China grows its economy at that rate for the next 20 years on a carbon-energy platform then climate change is irreversible, accelerating, arriving sooner than anyone thinks, and of catastrophic proportion -- especially in China, which in turn means that this forecasted spurt of high growth (the fact that the percentage is lower than it has been is a red herring) will destroy China....unless the underlying energy platform comprises renewables.

Since the world is made up of individuals, how is the "global mean growth rate" meaningful to any particular individual? If the global mean blood pressure rises to 180/140 does that mean everybody is in greater danger of a stroke? If the global mean temperature goes down one degree will everyone buy a goose down jacket? Will the slowing of the rate of growth in China have a discernible effect on a gaucho in Argentina or a lumberjack in British Columbia? Or an economist in Cambridge, MA?

You post dumb but not this dumb usually...does the Chinese growth rate have an effect on demand for beef from Argentina, or timber from BC, or economic models from the US? Self-answering.

The "global mean growth rate" isn't the same as the "Chinese mean growth rate", is it? Just as a rise in the supposed "global mean temperature" doesn't mean that it won't be necessary to cover your tomatoes next week, the phony global mean growth rate is a bogus number that can't apply to any particular situation. Or maybe unemployed brick layer Joe Jones can blame the Chinese banking system for his lack of a job.

I apologize. After some research I discovered that if the Chinese mean growth rate stays at 3.9% for another year, an Argentine cow herd from Santa de Vaca named Paulo Perini will be able to buy a new bridle for his favorite mare, Shakira. If the Chinese mean growth should fall, Paulo will be forced to ride Shakira with the old tack and be the butt of jokes by his fellow drovers. He's probably not even aware that the policies of Chicom appartachiks determine if or if not his bay mare looks good.

Hey, I get it, you have trouble with aggregates and global accounting. No worries. Let the grownups talk now.

Aggregates and global accounting don't even count as abstractions. They're imaginary numbers used by individuals that don't have the ability to frame a house, sharpen a knife or tie a bowline on a bight but need to eat just the same. The world is so wealthy that it can afford to feed and house these parasites when the money would be better spent on Ziegfeld showgirls and cubist art.

How precious! Abstraction = bad, sharpening knives with rough-hewn hands = good.

I'd love to know what chuck martel does for a living, since snarking like Woody Guthrie on an econ blog doesn't pay much.

The paper looks quite interesting. But the sentence "nearly every country that experienced a large democratic transition after a period of above-average growth…experienced a sharp deceleration in growth in the 10 years following the democratizing transition" is not very convincing. After a period of above-average growth, it is normal to expect a deceleration of growth, if "Regression Towards the Mean" as any meaning. Has the democratic transition anything to do with that ? This is not clear. After a democratic transition, countries like West Germany, Japan, Italy had a long period (1945-1975) of exceptionally high growth-rate.

Exactly.

Kling's supposed profundity tells us little or nothing.

3.9% is still pretty good in growth terms, even if China's only a middle-income country instead of a rich one. That's around what the US's growth rate was even in the best periods of the 20th century.

That said, I think people are underestimating potential gains from developing the countryside of China.

"nearly every country that experienced a large democratic transition after a period of above-average growth…experienced a sharp deceleration in growth in the 10 years following the democratizing transition"

so the neo-monarchists are right? i gues this means we should start building putin statues...

Is there argument really that because past statistical performance does not lead to future performance China must mean revert? That only makes sense if you think Chinese growth over the past 3 decades was some kind of statistical 'fluke'. What their data shows is that the empirical conditions that lead to strong growth do not generally persist for extended decades. But China's future growth path will be controlled by the empirical conditions of Chinese gov/society/economy. All this seems to say is that we can't look at just growth rates and figure out what those conditions and future rates will be.

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