Today, the vast majority of the companies that accounted for the rise of the Internet in the late 20th and early 21st centuries are gone, but it’s not the culmination of that difficult leap into a better future. The Internet better defines life as we know it, and that’s exactly because the government didn’t intervene in the face of the thousands of mediocre or bad companies that went bankrupt around 2001.
It’s something to think about as U.S. economic pundits start to write post-mortems on China’s economy, while making their cases that “a China-dominated world is even less likely than it ever was.” The words in quotes are from an editorial published at the Washington Post about China’s “tanking economy.” One guesses that similar pieces were written by foreign and domestic editorialists back in 2001 about the U.S. Which is why economics writing can be a bit of an ass.
The Post’s editorial notes on China that “more than 50 primary developers are running out of cash or defaulting on their payments. “Fears abound that insolvency will leave millions of housing projects unfinished. “Bad news? Not exactly. Best of all, no one dies. Bankruptcy or failure will not result in the disappearance of the painters from the companies or from the paintings made so far through those companies, since the old painters and unfinished paintings will be sold at low value through others. As for the debts that will remain unpaid, the world is full of investment budgets that will fearlessly buy defaulted Chinese debt and, in some cases, recruit billionaires to enter the proverbial burning house. This is where it gets weird.
Rather than calling for government to get out of the way so that Chinese markets can clear in healthy fashion, the Post’s editorial board argues that “The government could take over unfinished properties to ensure their completion and to guarantee the prepayments of prospective buyers.” The latter is the modern equivalent of U.S. politicians stepping in to save theglobe.com, eToys.com, and NetZero from bankruptcy and obsolescence following the aforementioned internet boom.
Next, the Post asserts that as a way to “deal with its aging population, China could also widen its meager social safety net.” Has Social Security been that effective, or cost-effective here? The same editorial asserts that a safety net “could help the economy; people save rather than spend because of the lack of government support.” This one is wrong twice. For one, governments don’t pluck yuan and dollars from the sky to hand out, rather they get them from others. To increase demand from one pocket, they must shrink it from another. Second, economic growth is a consequence of investment, and investment springs from unspent wealth. We all love to consume, but savers are the drivers of growth.
In the U. S. , though with China’s aging population leading the way, evidence can be uncovered that Americans think a lot about our own “social safety net” in the vast expansion of private-sector savings vehicles on which more and more Americans depend. Security will pay so little. It’s simply a way of saying that if an aging society is a challenge (as opposed to a bullish signal that other people are living longer), the government is in no position to address it.
That said, the Post’s editorial makes a clever comment. He points out that China’s stock market has lost $6 trillion in value. This may be similar to Xi Jinping’s less passionate embrace of markets, however, as Post columnist George Will has long pointed out: Nothing lasts forever. Neither did Xi. Moreover, the drop may also indicate a healthy correction that would ultimately drive a healthy recovery as wealth is unleashed from the bad and mediocre to the smart and the great.
What is much more crucial for Americans as a whole is that the editorial notes that “China remains one of the United States’ largest trading partners. ” Yes. See above. The closed economy is the global economy, and if China’s economy falls, it will be felt here.
Still, for now there’s no evidence that “forever” has arrived in China as evidenced by just how much U.S. companies are betting on a better tomorrow there. As for Xi’s refusal to do much in response to economic troubles in China, the view here is that his do-nothing stance reveals a level of sound economic knowledge that isn’t always evident in his critics. In economics, failure is your friend.