Economics & Finance

Two Views on China

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Yesterday, Aron Sarin published an article at Quillette titled  Beijing in Retreat.   Also yesterday, Barrons published China’s Comeback is Getting Started.  (“Stocks Soar as China Revs Up its Reopening” in the print version)  You can read the Quillette piece for yourself, and should, but the Barrons article will require a subscription.

To summarize, the Quillette piece focuses on China’s birthrate deficit (likely to be exacerbated in the future by the memory of the bad treatment of pregnant women during the lockdowns, as well as by a pervasive feeling of gloom about the future)…China’s inability to manufacture high-end semiconductor chips…pervasive corruption…and the fact that in the modern world…the persistence of poverty….and declining trust in the CCP.  “The Chinese people learned that they can enjoy no certainty about the future and that Xi’s obsession with order leads, paradoxically, to chaos.”

The tone of the Barrons piece is rather different:

The catalyst is clear.  Policy makers in the world’s largest economy are pulling out the stops to revive the economy and get its 1.4 billion people spending more, after three hard years of stringent Covid restrictions and harsh crackdowns on technology and other industries.  Beijing has totally reversed its zero-Covid policy and had begun loosening regulations on business.  Up next: more stimulus to stabilize the residential property market.  “Domestically, all the switches that can be switched on have been moved toward growth, and there’s a lot of momentum behind it,” said David Semple of the VanEck Emerging Markets fund.  

(I’m reminded of Shakespeare’s passage in which Glendower says, “I can call spirits from the vasty deep,” to which Hotspur replies, “Why, so can I, or so can any man;  But will they come when you do call for them?)

Various metrics are cited to suggest a recovery: Subway traffic across 23 cities has returned to prepandemic levels, hundreds of millions are traveling for the Lunar New Year,  Citigroup analysts expect the domestic travel industry to recover to more than 85% of pre-Covid levels by the second half of this year.

The article notes that China is a formidable rival to the US in the ‘renewable energy’ sector, given its strengths in battery technology and rare-earth minerals.  It also notes that Chinese policy makers wanting to address the birthrate decline “might offer incentives for couples to have children, such as cash payouts or even making workplace promotions conditional on having a child.”  (Future conversation: “Mommy, why did you and daddy decide to have me?”  “Well, son….)

Abhay Desphande of Centerstone seems less optimistic about China’s future than many of the other individuals quoted:  “Xi is boxed in with multiple policy failures with his gambits with the US, his approach to the private sector and real estate, and people angry i the streets.  One lever he can pursue very aggressively is the economic lever to get people working,  get the economy going.  And even though he may change his attitude toward private enterprises in a few years, for now, he needs that part of the economy to work.

My question would be whether Xi can really step back from his highly centralizing worldview enough to truly reignite sustainable economic growth, however much he wants to.

China remains, of course, a formidable economic power, and there are many, many important products required by the US and other countries whose supply requires Chinese participation, either for the complete products or for essential components and materials.  Semiconductors are far from being the only items that are essential to the US economy and to the welfare of its people.  And the US economy, especially in manufacturing but by no means limited to that industry,  is being hampered by the worldview of the present administration, which is itself very centralizing in its orientation.

Your thoughts?

What’s the Deal with Construction Productivity?

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The data summarized here indicate that productivity in the US construction industry–both labor productivity and total factor productivity–has been much weaker than productivity for the US economy in general.  Indeed, productivity seems to have gotten worse:

To be clear, the raw BEA data suggest that the sector has become less productive over time. A lot less productive: value added per worker in the sector was about 40 percent lower in 2020 than it was in 1970.

Full paper here.

Your thoughts…

Do these findings seem correct?

If so, what are the causes of the poor and declining productivity?

What are the paths to improvement?

The Great Lightbulb Conspiracy

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This year has seen many historical anniversaries, and one that has gotten some recent notoriety is the 90 year anniversary of the planned obsolescence of the light bulb by an industry cartel.

How exactly did the cartel pull off this engineering feat? It wasn’t just a matter of making an inferior or sloppy product; anybody could have done that. But to create one that reliably failed after an agreed-upon 1,000 hours took some doing over a number of years. The household lightbulb in 1924 was already technologically sophisticated: The light yield was considerable; the burning time was easily 2,500 hours or more. By striving for something less, the cartel would systematically reverse decades of progress.

It’s even more notable because last week three pioneers in LED technology just won the Nobel Prize.

We all know about the efficiency standards for light bulbs that are effectively banning incandescent bulbs in slow motion. I’ve noticed during my usual stops at the home improvement stores that the choices for the vintage bulbs are fewer and farther between, and the prices for what’s left are creeping up.

The promise of the new standards is that the new LED lighting is far superior. While it’s much more expensive, the steady drumbeat of the diffusion of technology is supposed to reduce the costs, eventually putting them within reach of the common household.

The costs have indeed dropped exponentially, but that’s undoubtedly been helped by government aid and deliberate shortages of the old technology. Besides the federal standards, every state has some sort of efficient lighting rebate program that artificially decreases the price. Tax breaks and other incentives have encouraged manufacturers like GE to expand production in the US and create a few hundred jobs, which, although nice, don’t quite make up for the thousands they shipped to China during the Great Light Bulb Leap Forward. How much of the price gains can be attributed to Moore’s Law type improvements and how much to government supports is a legitimate concern.

Now there’s some question about how long prices are going to keep falling going forward.

In stark contrast to the promised dynamics that the technology is supposed to follow, LED prices actually rose considerably last month.

In contrast, 40W equiv. LED bulb prices were up 14.3% in the U.S. market. Manufacturers including Cree, Philips, GE and other renowned brands have raised prices for certain products in the U.S. market.

Because of industry consolidation, the top ten LED manufacturers now control 61% of the market. That much control brings pricing power over the market, and they are apparently now using it.

With green energy executive orders on Obama’s agenda and the unelected EPA issuing mandates, the oligopoly is sure to get worse with permanently higher cost per lumens the possible result.

The LED industry, taking a page from the incandescent bulb industry so many years ago, is discovering the key to the rent seekers’ success – competition is for losers, and unfortunately sometimes so is progress.