Thursday, September 22, 2011

What's happening in China?

That's a question my friend in Houston often asks when we have our weekly telephone conversations.  Readers of this blog have asked why I haven't written more about China recently. So here are 2.5 items about China.

Item 1. This blog is blocked in China, so my old Danish friend Sven living in Chengdu in Sichuan can't read it unless I cut and past the posts into a normal email.  I don't think the Chinese government has identified me as a threat to their harmonious society. They tend to block almost all of Google's services other than regular Gmail and the blogger.com service I use is a Google platform. Perhaps I could try another blog host but it would likely be blocked as well.  The Great Firewall has meant that I can't use Google Groups and Google Docs to communicate with by Business School students,  some of whom live and work in "mainland"" China.  This is inconvenient as the university platform, which is not blocked, is not as user friendly.

Item 2. The Chinese economy.  I don't feel qualified to pontificate in writing on this topic so let me quote in full an op-ed piece from today's South China Morning Post, Hong Kong's major English language daily newspaper which is not subject to censorship by the Chinese government:

China's real worry is not the growth rate, but the structure of its economy
Hu Shuli says the widely acknowledged distortions of its
development model cannot be corrected without the political
will to go beyond pledges - and act
Updated on Sep 22, 2011
Once again, forecasts of gloom in the Chinese economy are doing the
rounds amid the continuing turbulence elsewhere. Premier Wen Jiabao's
assessment, made last week at the "Summer Davos" in Dalian , was timely.
He said the pace of China's economic growth had slowed after the second
quarter, as expected, and largely as a result of the government's cooling
measures.
Recent economic data confirms the slower pace of growth. If China is
making progress towards reducing its over reliance on policy stimulus for
growth, then less spectacular gross domestic product figures should not
unduly worry us. The real concern is with economic restructuring.
Shaken by the earthquake in Japan and power shortages on the mainland,
the Chinese economy experienced some unexpected fluctuations after the
second quarter. But GDP growth for the full year is still expected to top 9
per cent, so a slowdown is not a worry. What is causing the pace of
growth to ease? Instead of focusing on the short-term challenges, China
should worry about its longer-term risks, and whether the economy is
restructuring as planned.
In the 30 years since market reforms began, the Chinese economy has
capitalised on its triple advantages of low capital costs, low energy prices
and cheap labour, growing - through exports and investments - to become
the world's second-largest economy last year. But this development
model is flawed and cannot be sustained. To ensure steady future growth,
China must propel its economy onto another level. It must revamp its
economic structure.
It's easier said than done. The central government has promoted
economic restructuring since 1996, at the start of its ninth five-year plan.
Yet, it has little to show for its efforts. In its 12th five-year plan, unveiled
this year, it again stressed the need to transform our model of economic
development. But not all analysts are optimistic about its implementation.
China's current development model is the main reason progress on
restructuring is slow. With its control over a substantial amount of
resources, the Chinese government can react more quickly to a crisis
than other similarly large economies. However, the model impedes efforts
to restructure it.
In the wake of the global financial crisis, local governments have made
use of Beijing's 4 trillion yuan (HK$4.5 trillion at exchange rates then)
stimulus package to extend loans and provide land to boost state-owned
enterprises and build infrastructure. Private-sector industries could not
compete in the face of such resource distortion and monopolistic
practices. The "de-industrialisation" of capital is becoming a serious risk.
The government-led allocation of resources has other unintended
consequences. By following the central authorities' directive to develop the
economy in prescribed ways, local governments are in fact homogenising
their economies. Not only will they have lost their own comparative
advantages, they will also find themselves fighting one another for a
shrinking market share. And, while China's real economy is in decline, the
country's demographic dividend is also coming to an end. So, a major test
for China's restructuring is how to improve factory productivity and build
comparative advantages.
First, the government should be clear about its function. It should ease
itself out of its role as resource allocator, and instead focus on creating a
fair environment for business. It should provide equal opportunities for
education, employment, entrepreneurship and innovation, and build a
social safety net commensurate with the country's development.
In his speech in Dalian, the premier spoke of the need to "uphold and
improve the basic economic system, speed up fiscal, taxation and
financial reform, reform of the prices of factors of production, reform of
monopoly sectors and other important fields". These are precisely the
areas where reform has stalled.
The example of rationalising resource prices is typical. China's export oriented
economic model has meant that a substantial share of its price
subsidies in fact flows out of the country. This not only means a net loss
of national welfare; it also places a heavy burden on our resources and
environment. Hence, factor price reform and a plan to introduce
environmental charges have been high on China's to-do list for a long
time, but they have been pushed back repeatedly because of worries over
inflation and the moribund global economy.
The State Council's guidelines on private sector investments - released
last year as a follow-up to its policy set in 2005 - made clear the principles
of equal access and fair treatment. But, in practice, such guidelines are
easily "neutralised" by department documents, and state-owned
enterprises continue to monopolise their sector and influence decision making.
Private enterprises are effectively shut out.
For economic restructuring to succeed, China must be clear about its
own strengths and weaknesses, and not let talk of the "Chinese model" go
to its head. Its structural problems aren't new, and there's even agreement
on some of the solutions. What's worrying is that the over emphasis on
"maintaining stability" is putting a veneer of untouchability on the status quo. In the end, it's political will that will determine whether reforms are used, as the premier has pledged, to solve China's development problems.
This article is provided by Caixin Media, and the Chinese version of
it was first published in Century Weekly magazine. www.caing.com
Item 2.5 Hu Shuli, the author of the piece above is the most courageous and influential economics journalist in China.  You can learn more about her from this fascinating article in the New Yorker two years ago. After the New Yorker article was published the fat cats in Beijing who controlled the publishing company for which Hu Shuli worked decided that it was too risky to provide her a pulpit.  She and her team of investigative journalists didn't miss a beat. They relocated to a base in Guangdong province just north of Hong Kong.  You can read her work in English here--http://english.caixin.cn/.

Wednesday, September 21, 2011

A Reader and Friend Comments on the Sept 19 Post

This was too long to go into a "comment"

President Obama’s deficit cutting plan (including its exclusion of a Social Security component) can be interpreted in a number of ways.  Let me offer three possible ones here.  One interpretation is that the plan is designed to be mainly a starting point for what could be very contentious negotiations with congressional Republicans this fall in a context shaped by the recent debt ceiling negotiations in which the Republicans repeatedly escalated their demands.  In that regard, the Republican approach was so tough that you characterized it as terrorism and Steve Arbogast referred to it as brinksmanship (with a fair number of Republicans in the House evidently prepared to go over the brink). Regardless of how one characterizes their approach, the President’s recent experience dealing with the Republicans might reasonably have led him to alter his negotiating strategy this time around.  One change might have been to keep at least one big item off the table initially, because there are so many large items to contend with.  After all, he could put Social Security on the table at some point if it looked like it would help reach a good agreement from his perspective.
 
A second way to interpret President Obama’s plan is that it is designed mainly as a political document for next year’s election.  As you know, many liberal Democrats were unhappy with reports that the President’s efforts to reach a “grand bargain” in his private debt ceiling negotiations with Speaker Boehner earlier this year included tentative offers to make large cuts in both Social Security and Medicare that evidently would have included raising eligibility ages for each program. Public opinion polls also show considerable opposition among older voters to such changes.  By excluding Social Security and not including an increase in the eligibility age for Medicare in his deficit reduction plan, President Obama may be reasoning that he can strengthen his standing with his Democratic base and win points with some elderly independent voters.  A variation of this interpretation is that it demonstrates a good faith starting point for the negotiations to his Democratic base.
 
A third way to interpret the plan is that President Obama wants to maximize the chances of reaching an agreement with Republicans that includes substantial real cuts in the component of domestic spending—Medicare—that is projected to have the largest impact on the deficit in the future.  As you know, that is a complicated agenda because our nation needs not only to reduce the growth of Medicare spending over the next 10-20 years, it also needs to slow the growth of our nation’s overall per capita health care spending and (preferably) reduce the percentage of our nation’s GDP spent on health care as well.  Raising the age of eligibility for Medicare by, say, 2-to-4 years would reduce the cost of the program.  But, without other actions, that might have relatively little impact on the per capita and GDP spending problems.  That is because most people who would have to delay enrolling in Medicare would want to get health insurance elsewhere if possible.  Assuming that the quasi-universal health insurance legislation passed last year is not repealed and the Supreme Court does not strike down the individual purchase mandate in that law, we would expect that many if not most of the people impacted by a raise in the Medicare eligibility age would be able to get a health insurance policy (or keep a policy that they already have)—and in some cases it would be subsidized by the government.
 
As you know, with the exception of the United States, all high income democracies have some form of universal health care system while spending much less than the United States in both per capita and percentage of GDP terms. For example, in the years leading up to the Great Recession, the United States was spending about twice as much per capita as Germany and about 50% more as a percentage of GDP even though about one-sixth of our population didn’t have health insurance and another one-sixth was estimated to be significantly underinsured.  (Regarding GDP, Germans were spending 10-11% of their GDP while we Americans were spending about 16% of ours.  In the most recent year for which I have seen data for the United States, which was for 2009 or 2010, we spent over 17% of our GDP on health care, although some of the increase was related to the slow economic recovery in a context in which health care costs continued to rise.)
 
As you also know, Germany and other high income democracies with universal health care accomplish these results in large measure by regulating the costs and coverage (therapies, procedures, etc.) of their health care systems much more than is the case in the United States. I doubt that Republicans will be willing to move in the direction of much greater regulation along those lines any time soon, especially since one of their major themes is to cut regulations in almost every area, not just health care.  Consequently, they might decide to focus a lot on raising the eligibility age of Medicare in the negotiations this fall.   If so, that may make President Obama reluctant to put Social Security on the table because it probably does require an eligibility age increase. Negotiating an increase in the eligibility age for Social Security, while trying to resist such an increase for Medicare as long as European-style cost and coverage regulation approaches are off the table, might be very difficult for President Obama to undertake.  Moreover, because making changes in Social Security is not as pressing, he might reserve those negotiations for another day.
 
By the way, President Obama’s proposal to cut $320 million from Medicare (and Medicaid) includes a lot of things that will probably be challenged by powerful interests, regardless of what Republicans do.  For example, the drug companies will undoubtedly strongly oppose the proposal to lower drug costs.  Organizations representing senior citizens will be out in force opposing the several ways in which Medicare recipients would pay more of the costs of the program under the President’s plan.
 
The upcoming deficit negotiations might be much uglier than most of the recent legislative sausage-making on Capitol Hill, which is saying something.  It could be much more akin to making hash.       
 
Scott Miller

Monday, September 19, 2011

Separating Sense From Nonsense

There's plenty of nonsense and some sense filling the airwaves about the Federal budget deficit, national debt, etc.  A good place to keep up with the discussion is the website (especially the blog) of The  Committee for a Responsible Federal Budget.  I agree with CRFB that Obama's plan is seriously flawed in ignoring reform of social security.  As a number of moderate groups are advocating, now is the time to think BIG and incorporate spending cuts including entitlement reform with changes in the tax code that simplify it, raise additional revenue and provide incentives for savings and growth.

Thursday, September 15, 2011

Sept 3 Editorial from Bloomberg--Social Security Is No Ponzi Scheme (Note to Rick Perry)


I find the Bloomberg editorials the sanest of the business publications.  Just below I have reprinted the full text of one from Sept 3 about fixing Social Security.  This topic is especially relevant right now as I turned 65 yesterday (ouch!).  Discussions about Social Security and Medicare usually take place in fact free space. It's refreshing to find a clear headed exposition.  You can read the original here.
As Rick Perry campaigned in Iowa late last month, he made it clear that he doesn’t have much faith in Social Security, one of the most popular U.S. government programs.
“It is a Ponzi scheme for these young people,” Perry said. “The idea that they’re working and paying into Social Security today, that the current program is going to be there for them, is a lie. It is a monstrous lie on this generation, and we can’t do that to them.”
As we celebrate a holiday devoted to American workers, it’s worth asking whether, as the Texas governor and leader of the Republican pack claims, the retirement program created for those very workers is at risk.
The answer, as we have argued in this space, is yes … and no. Social Security’s finances need shoring up. But there is nothing wrong with the program that Congress couldn’t fix in a week. Gradually raising the retirement age to 69, changing the formula for cost-of-living increases, and raising the cap on wages subject to the payroll tax would close most of Social Security’s funding gap for the next 75 years.
Such changes would rely about 60 percent on tax increases and 40 percent on benefit cuts, and would mainly affect the wealthiest Americans by asking them to pay more and get less in return. In the end, Social Security would be more progressive and benefits for the very oldest and the very poorest retirees would be enhanced.

Ticking Clock

In May, the Social Security trustees reported that the government pension system will run dry in 2036. That means payroll taxes levied on workers in 25 years will cover only three-fourths of benefits. The program by law can’t borrow money to pay retirees, so recipients will face immediate across-the- board cuts unless something is done.
That something can only take two forms -- raising taxes or reducing benefits. Fortunately, there are many options within those broad categories that spread the burden widely.
We don’t think private accounts should be among them. If workers divert some of their payroll taxes to an investment account, that would decrease the flow of money into Social Security and deprive retirees of benefits of equal value. Bad investment choices, or bear markets that lower returns on stocks and bonds, could add to their woes. In other words, private accounts would only make matters worse.
Instead, a very gradual rise in the standard retirement age would be the fairest solution. When President Franklin D. Roosevelt signed the Social Security law in 1935, average life expectancywas 64 and the official retirement age was set at 65. As life spans have increased, the retirement age hasn’t kept up.
The official age of retirement -- when full benefits are paid -- is now 66 (due to rise to 67 by 2027), well below the average life expectancy of 78 years and four months. The gap is even wider for the 40 percent of Americans who opt for early retirement and start collecting benefits at age 62, albeit at a lower rate.
President Barack Obama’s bipartisan deficit commission was correct to recommended indexing the retirement age to longevity by adding one month every two years, until 2075. That year, standard retirement would begin at 69 and early retirement at 64. Those who physically can’t work beyond 62 could apply for hardship exemptions. Adjusting retirement ages alone would erase about 21 percent of the 75-year Social Security shortfall.
Adopting a more accurate measure of inflation to calculate cost-of-living adjustments is the next best method for closing the Social Security funding gap. The government now uses the standard Consumer Price Index. But the Bureau of Labor Statistics and many economists say the CPI overstates inflation because it fails to account for the product substitutions people make when prices rise.

Switching to Apples

A better index, called the “chained CPI,” models actual consumer behavior. Most consumers, for example, switch to apples when the cost of oranges goes up, and thus keep household expenses steady. Using the chained CPI would close an additional 25 percent of the funding shortfall.
With those two changes -- raising the retirement age and measuring inflation better -- we’re almost halfway toward the goal. To close much of the remaining gap, the best choice involves raising taxes on those in high wage brackets, thus making the system more progressive.
Currently, Social Security taxes are paid on wages up to $106,800, at a rate of 12.4 percent -- half paid by the employer and half by the employee. (The self-employed must pay the entire 12.4 percent.) Earnings above $106,800 are exempt, yet that’s where most of the wage growth has been in the past few decades. In the early 1980s, payroll taxes covered 90 percent of wages; today they reach only 85 percent.
To restore the 90 percent standard, Congress could raise the payroll-tax cap to $180,000. Such a change would hit high- income Americans whose savings, private pensions and tax- protected 401(k) retirement plans provide nest eggs far beyond what Social Security provides. This would take care of 38 percent of the shortfall.
An additional 14 percent could be raised by taxing Social Security benefits the same way that private pension income is now taxed -- that is, on the portion of the pension contributed by the employer -- phased in over 20 years. The employee portion would not be taxed because it was already subject to income tax. Yes, this would result in a tax increase for future beneficiaries, but those in lower-income brackets could be exempted to keep the payroll tax progressive.
Now we are just 9 percent short of our goal. We can close that gap -- with room to spare -- by requiring newly hired state and local government workers to pay into the federal system. About 5.7 million public-sector workers don’t pay Social Security taxes because they are covered by state and local government pension plans.

Helping the Poorest

We’ve now closed 107 percent of the 75-year shortfall. That leaves enough wiggle room to add benefits for the oldest and poorest retirees, who are often one and the same. By 2050, there will be 19 million Americans, up from 6 million now, over 85. Octogenarians often outlive their personal savings just as their health is deteriorating. To keep them from falling into poverty, lawmakers could create a minimum benefit of 125 percent of the federal poverty level (now about $1,100 a month), adding about 6 percentage points to the Social Security deficit.
The final tally? These changes would close 101 percent of the funding gap. Each of these suggestions, moreover, has been endorsed or included as part of a menu of options by the president’s deficit commission and other economic research groups. The savings and cost estimates come from the Social Security chief actuary, the independent official who has analyzed the financial effects of dozens of proposals, all available at www.ssa.gov/oact/.
More than 50 million people now receive a Social Security check. It’s the main income source for more than half of all elderly households. It’s the core of the compact working Americans have with their government. And though it’s increasingly unstable, it can be fixed.

Thursday, September 8, 2011

More on Strong Language and Political Hair Loss

Joe Nocera has a worthwhile article in the NYT that addresses some issues related to my post of Sept 6.

I have had numerous comments on my use in that post of the term "terrorist tactics" to describe how Republicans caused a crisis around raising the debt ceiling. Most of those comments, but by no means all, agreed in principal with the criticism that I reported in my Sept 7 post "Strong Language". However, only one of the respondents, Stephen, submitted his thoughts via the comments feature of the blog. Thank you, Stephen! I urge you to follow his example as this makes it easier to share your thoughts and keep the discussion going.

Ed

Wednesday, September 7, 2011

Strong Language

In yesterday's post I used the term "terrorist tactics" to describe how Republicans engineered the debt ceiling crisis.

A very dear and respected friend reprimanded me with a note that said " That's a very disappointing comment that not only ignores what happened but uses a term that when properly applied conveys horrible physical outcomes for innocent people.... please be more careful with your choice of words than the people you criticize."

What do you think? Does organized and irresponsible behavior have to result in burning buildings, pools of blood and severed limbs before it can be called terrorism? Millions of Americans have already suffered horrible outcomes due to the calamities that began in 2007, reached a crescendo in the autumn of 2008 and still continue. Now, I don't blame this mess we are in solely on the Republicans. There is plenty of blame to apportion to both political parties, to unethical businesses, etc. And I would not use the T-word generally to apply to the actions that contributed to the mess.

But some of the Tea Party legislators were ready to push the country into default to get their way even though they are a minority. Such zealotry, had it been successful, would have dealt a serious blow to the government's ability to meet its obligations not just to its creditors but also to the general citizenry. It would surely would have amplified greatly the suffering so many of our neighbors are already experiencing. Terrorism or not? You be the judge.



Tuesday, September 6, 2011

I'm Surprised I Still Have Hair

I began this blog in October 2010 during the Congressional election campaigns.  The first few posts dealt with the abysmal quality of political speech in the USA and with the threat that it posed to democracy.  I also wrote briefly about the need to consider both limitations on corporate speech and changes in the way state and federal level government was organized.

Over the last three months I have been pulling my hair as Republicans resorted to terrorist tactics on the debt ceiling and President Obama helplessly sulked in the dog White House.  I know that many of my friends, Republicans and Democrats alike, suffered from the same political alopecia.

The antics of both parties have left me mad, deeply disappointed with the President's failure to lead and with grave doubts about the future of the country.

If you share this anguish, I highly recommend that you set aside some time and read

"Can the Middle Class Be Saved", Don Peck's thoughtful (and long) analysis of the impoverishment of the middle class in American and of what can be done about it in The Atlantic September issue.

"Goodbye to All That: Reflections of a GOP Operative Who Left the Cult",  A shocking diatribe by Mike Lofgren who for thirty years worked on budget and defense issues for Republican Congressmen.


"People Don't Realize How Fragile Democracy Is" James Fallow's blog post commenting on Lofgren's piece and adding more insider testimony.