Category: ECONOMICS

Audio-book Review
By Chet Yarbrough

(Blog:awalkingdelight)
Website: chetyarbrough.blog

Red Flags

By: George Magnus

Narrated by : Derek Perkins

George Magnus develops a cogent argument that illustrates differences between American and Chinese economic strengths and weaknesses.

Magnus develops his analysis by recalling the history of China. He recounts a country ruled by authoritarian Emperors, a nationalist dictator (Chiang Kai-shek) and communist revolutionaries (Mao and Deng Xiaoping). He then offers an analysis of the revisionist leader, President Xi Jinping.

After Mao’s death Deng Xiaoping chose to expand; some would say re-envision, Mao’s version of communism.

Deng still believed in a controlled or “planned economy” but opened the door to private enterprise. The results speak for themselves.

Ordered isolation of Singapore’s residents tests Xi’s autocratic economic style of government. The economic impact of China’s command economy remains to be seen. Though America has dealt haphazardly in its response to Covid19, China’s actions may fare little better.

Magnus explains the growing importance of State Owned Enterprises (aka SOE’s) is raising China’s debt. Magnus argues Xi’s focused attention on increasing GNP is a red flag because of its negative economic impact on a burgeoning middle class. The middle class is earning less even though GNP continues to rise.

This disproportionality exists in the United States as well as most post-industrial nations. The gap between rich and poor in America is well documented in Piketty’s book about “Capital in the Twenty First Century”.

However, America is acknowledged by the world as a capitalist country that encourages and multiplies innovation. Even Putin, in a “60 Minutes” interview, applauded America’s innovation. Putin expressed a wish for the same level of innovation in his own country. Controlled economies limit innovation to a few controllers. Capitalist economies expand innovation based on a multitudinous and diverse citizenry.

Interestingly, China considers itself a Democracy though classified as a communist state. Note that the word Democracy is capitalized. There are no democracies in the world. The closest one comes to democracy is as a republic. America is a Democratic Republic meaning it has a representative government. By that definition, one would classify China as a Democracy. President Xi is popularly elected. He represents his country’s controlling majority. There is a fine line between democracy and autocracy. That fine line is drawn by a majority of a country’s people who popularly elect their leaders. No government guarantees equality of all its citizens. America’s history of slavery, and institutional discrimination are a case in point. China’s imprisonment of Uighurs is another case in point.

Magnus implies another distinction between America and China.

Magnus notes China can more quickly respond to an economic crises. America is more deliberative. The chance of being correct or wrong when taking action is quickly implemented in China. Quickness is both a danger and a benefit. It is a danger when the decision is wrong; a benefit when it is right. (One would be hard-put to suggest China did not respond more correctly and quickly to the Covid19 pandemic than the United States.)

Xi’s emphasis on party ideology and a controlled economy has the potential for another disastrous cultural revolution.

America’s system of decision making, though slower, has made it the wealthiest country in the world. America managed to implement an economic policy that revived the economy in the face of a near financial collapse in 2008.

Magnus combines China’s history with its demographic and political changes. In building his argument, Magnus explains China carries an economic risk if it fails to adjust economic goal setting for more domestic goals.

Magnus sees population ageing as another red flag.

Magnus illustrates this unrest comes from a conflict between communist ideology, and cultural difference. The unrest is amplified by Deng’s opening of a door to private enterprise.

Magnus notes the history of China as one of strong leaders unburdened by institutional checks and balances. President Xi’s move to increase his control of China is a contrast to an electoral process in the United States that restricts Presidents to two four year terms, or one four year term if the public is dissatisfied.

On the one hand, it is necessary for America to fight unfair trade practices. On the other hand, a broad trade war with a giant consuming and manufacturing country is a meat cleaver approach to what should be a surgeon’s scalpel.

If one company can build something faster and cheaper, the money saved by a consuming country can be used to innovate.

America became the richest country in the world because of its ability to change, to innovate, to adjust to the demands of the market. The Trump administration looks to the past rather than the future.

Magnus strongly suggests China is at risk of economic failure if it chooses not to reduce its focus on GNP as a measure of success. Magnus argues more attention must be paid to domesticate needs and consumption. The Road and Belt initiative has potential for Chinese growth but it should not be emphasized at the expense of domestic need.

Magnus implies China’s ecological environment is on a knife’s edge. One side chooses growth at any cost. The other side moderates growth based on cleaning the environment for future generations.

China and the world must recognize the importance of the health and welfare of its citizens. Magnus suggests China is at a crossroad. They can continue to grow GNP at the expense of its citizens or re-direct their economy to address the needs of a rising middle class. It does not mean they have to adopt a different form of government but they need to revise their goals.

One may conclude from Magnus’s book, there will always remain the potential for economic calamity with top down management. Magnus reflects on the history of China and infers it is unlikely to change.

Xi’s interference in free markets is troubling. China’s growth and prosperity depends on a continuation of philosopher kings which have not sustained any country in the modern age. The next king may not be as far sighted or wise as the current king.

President Xi cracks down on Hong Kong’s independence and stops the IPO scheduled for the ANTGROUP in China.

Top down management may have worked in ancient times, but world interconnectedness and interdependence require cooperation and competition for independent countries to grow and prosper.

Audio-book Review
By Chet Yarbrough

(Blog:awalkingdelight)
Website: chetyarbrough.blog

Good Economics for Hard Times (Better Answers to Our Biggest Problems)

By: Abhijit V. Banerjee, Esther Duflo

Narrated by James Lurie

Abhijit Banerjee’s and Esther Duflo’s book, “Good Economics…”, seems like a play book for Bernie Sander’s, and Andrew Yang’s campaigns for President.  It is not, but much of what they write resonates with their campaigns.

These two authors are professors of economics at MIT.  They received a Nobel Prize in 2019 for their work on an “…experimental approach to alleviating global poverty”. Both are obviously well respected for their research and economics acumen.  Professor Barnerjee  is a research affiliate of Innovations for Poverty Action. Professor Duflo specializes in Poverty Alleviation and Development Economics.  Their credentials speak for themselves.

Now, with the election of President Biden, one wonders if Banerjee and Duflo’s ideas will be tested. The leader of the Senate, Mitch McConnell, is quoted as having said “One hundred percent of my focus is on stopping this new administration”.

The concern one may have with a “hands off” approach to a weakened economy is that it offers little hope for those at the bottom of the economic ladder. Those who have a job (namely congress men and women) seem to have little empathy for the poor. It is a view based on belief that the poor are poor because of their failure to take advantage of American opportunity to work and prosper.

Banerjee and Duflo cite several studies that suggest there might be a solution, but the scope and conclusions of the studies seem ill-suited for the largest economy in the world.  The authors’ conclusions are based on small social experiments that show mixed results.

On the one hand, self-interest and freedom have made America’s standard of living among the highest in the world.  On the other hand, it seems self-interest and freedom mitigate against fairness in the American economy. 

Human nature gets in the way of understanding what lower income Americans need to survive Covid19. For the President of the United States to say “It is what it is..” reflects on our lack of empathy for a loved-ones’ death caused by the pandemic.

The Senate drinks from the same trough when they argue the economy is getting better. Over 1,000,000 Americans remain unemployed. It is getting better for whom? Certainly not for restaurant workers, small business owners who closed their doors, or the nurses and teachers who are compelled to go to work despite the risks of a deadly virus. (That is not to mention the children who are going back to congested class rooms with potentially catastrophic consequence for their families and others.)

Job creation benefited the rich after Reagan’s tax cuts.  Wages of workers did not increase but the stock market rose, corporate executive salaries skyrocketed, and dividends to stockholders increased. Workers in the middle class and the poor were left behind.  Banerjee and Duflo argue that tax cuts for the rich are unfair and they exacerbate the gap between the rich and poor. 

The rich get richer; the middle class lives paycheck to paycheck, and the poor remain poor.

Both Banerjee and Duflo infer there is a path to economic equality, or at least fairness.  They argue for incentivizing corporate interests for the common good, disincentivizing executive compensation, modifying the federal tax structure, and subsidizing employment for the unemployed (or those who are soon to become unemployed because of technology).  They argue that taxes should be increased to create public works programs that benefit the general welfare of the nation. 

Banerjee and Duflo argue that most Americans associate jobs with identity and self-respect.  Without a job, Americans lose a part of their identity and self-respect.  With a guaranteed basic income, the unemployed will continue to seek employment because of their need for self-respect.  As they become employed, their guaranteed basic income could be reduced in proportion to their rising income.

There is a great deal to commend Banerjee and Duflo’s ideas. 

Believing in a “rising tide theory” of economics continues to distort the truth of qualified freedom and unregulated self-interest. Freedom has always been qualified in America. The intent of the founding fathers is to provide freedom for those who do no harm to their neighbors. Unregulated self-interest harms our neighbors.

Banerjee and Duflo offer an economic plan to America, but it is founded on sociological studies that are often small in scope. When the economic theories are tested on broader scales, the conclusions are mixed. Though belief in a guaranteed basic income makes sense in light of the studies shown by Banerjee and Duflo, the impact on American innovation remains unknown. On the other hand, the many jobs the government could create–from public works, to environmental clean-up, to elder care, to medical care, and housing for the homeless–are widely needed in America.