The plunge in U.S. stock markets, along with various bourses around the world, is a result of fears that whatever is happening in China is a portent of worse things to come, and that what happens in China is contagious. Whether that is true is difficult to discern, however: We don’t have any historical record to base this on because China hasn’t experienced a bona fide recession since it embraced a quasi-market system in the early 1980s. Over the last 37 years it has averaged a growth rate of nearly ten percent, and its economy is 26 times larger than it was when the economy started to open up.
China did this by both embracing market capitalism but also by emulating Japan and the rest of the Asian tigers and practicing a form of mercantilist economics, whereby most of the growth is driven by the development of the export sector of the economy, and most capital investment is directed by the state. The problem is that the state turns out to not be very good at allocating capital investment. When an economy has no capital it’s hard to go wrong--every investment tends to pay off in some way—but when the economy is more developed it becomes a bit trickier. Investments start going to politically important industries or—in China’s case—they may go to prop up state-owned industries that have trouble competing with the private sector or with foreign competitors. As a result, growth begins to stall. Japan’s spent the last two decades mired in moribund economic growth and South Korea has had mediocre growth lately as well.
The current premier of China, Li Keqiang, appeared to recognize the problems inherent in the economy and started taking them on as soon as he assumed his office. He began trying to get China away from an export-driven economy and recast it as a consumer-driven society. He pushed to have the state assume less of a role in the allocation of capital, and made a concerted effort to root out corruption in government.
These are all sensible things to do but it takes time before they have a beneficial impact on the economy. In the meantime, the state also went to great lengths to boost the stock market, and its sharp, predictable collapse this summer sent shockwaves through the Chinese economy. The state has gone to considerable lengths to prop it up, just recently giving the okay for state pension funds to invest a portion of their funds in the market. In the meantime, various measures of economic activity are going down the tubes, suggesting that there may be a recession brewing in the country.
No one knows how this might play out, and it’s the uncertainty that’s killing the markets.
It’s always been a truism that the people put up with the restrictions imposed by the communist government as long as it delivers solid growth, and it looks like we are about to see what happens when one side doesn’t keep up its end of the bargain. The fear is that the Chinese government reverses its sensible reforms for the sake of momentarily propping up the economy, or delivers needlessly strong fiscal or monetary stimulus—such as building more needless bridges or airports, or flooding the market with Yuan—to forestall a quarter where economic growth is negative.
Some of this has been occurring for a while: We’ve written on these pages about how China has resorted to using bogus regulatory enforcement to hinder the operations of foreign firms successfully competing against state-owned businesses, with few objections uttered from foreign countries anxious to stay on the massive country’s good side. There may be more such behavior in the offing.
The greater fear is that we have civil unrest in the country, which could potentially crush the Chinese economy and take the economies of the rest of Asia with it. Or that its leaders foment a military encounter with one of its neighbors in a wag-the-dog scenario, perhaps by picking a fight with Vietnam or else following through on its claim on Taiwan.
Even if the Chinese government refrains from going to war, the fact remains that we have no precedent for this. How will the slow-down affect the other Asian economies, Europe, and the U.S.? We’re just guessing at this point. It ought to be able for a recession to exist in China alone and not impact the rest of the global economy, but that’s predicated on most other economic actors believing that to be the case.
The Commerce Department released revise first-quarter GDP numbers this morning. They were expected to show that the economy had actually shrunk a bit, instead of expanding by 0.1 percent as the initial report showed. The contraction was predicted to be somewhere around .5 percent. And while this was not something to be celebrated, it could be written off as the consequence of a particularly harsh winter. Climate change strikes again.
President Obama likes to talk about income inequality, but what matters far more is the actual income of the typical American. And how has the typical American household income fared on Obama's watch? Well, the economic "recovery" has now spanned an Olympiad, and during that time the typical American household income has not only dropped—it has dropped more than twice as much as it did during the recession.
In response to the news today that the economy contracted -.1 percent in the final quarter of last year, Democrats are touting the claim that this is "the best-looking contraction in U.S. GDP you'll ever see." The claim was originally made by chief U.S. economist for Capital Economics Paul Ashworth.
Americans must be wondering how much more of this “recovery” they can afford. New figures from the Census Bureau’s Current Population Survey, compiled by Sentier Research, show that the typical American household’s real (inflation-adjusted) income has actually dropped 5.7 percent during the Obama “recovery.” Using constant 2012 dollars (to adjust for inflation), the median annual income of American households was $53,718 as of June 2009, the last month of the recession. Now, after 38 months of this “recovery,” it has fallen to $50,678 — a drop of $3,040 per household.
Bill Clinton, who rode a recession into office and left the scene just before another one began, knows something about the blame game. Addressing the Democratic convention on Wednesday night, he made a full-throated effort to defend the Obama presidency by putting it in the context of past Republican failure.
Why would the president oppose raising taxes when economic growth was 5.6 percent but propose raising taxes when it’s at 1.9 percent? When it’s politically advantageous to be seen as raising taxes on the rich.
When did President Obama change his mind on the wisdom of raising taxes in an economic downturn? And, perhaps more important, if the U.S. economy slipped back into recession, would the president abandon his proposals to raise taxes on the wealthy?
President Obama just announced from the White House a plan to maintain current tax rates for the middle class, while hiking the tax rates for those earning above $250,000 per year. And while Republicans have already voiced opposition to the president's plan, Democrats are now beginning to express their dissatisfaction.
Today, President Obama said, “It has typically taken countries up to ten years to recover from financial crises of this magnitude.” In truth, however, the historical norm has been as follows: the deeper the recession, the stronger the recovery.
Last year, the mega-law firm Dewey & LeBouef generated revenue totaling $782 million. It was the 20th largest firm according to the National Law Journal. Its clients included the Los Angeles Dodgers, the NFL Players Association, and eBay. But over the last five months, 206 of its partners defected. It currently owes approximately $315 million to creditors. There is a criminal investigation involving a pension plan allegedly underfunded by $80 million. Last week, the legacy firm, which dates back to 1909 (and whose "Dewey" refers to the Thomas Dewey), filed for Chapter 11 bankruptcy protection.