China's Emergence as a Superpower (till 2014)

[Uboat509]

It depends.

For starters, you are usually completely wrong with your assertion.

Imagine a shipyard competing with South Koreans. Let's say South Koreans are 20% more competitive (in part due to subsidies).
Does it make sense to subsidize the shipyard by 20%?

Likely YES.

This assumes A) that the state is better at picking winners than the private sector and B) that competitiveness can be raised simply by throwing money at the problem. I am not saying that the state should never provide subsidies to young industries with potential (although the whole Solyndra debacle clearly illustrates the danger in that), but the key word is temporary.

Taxes and stuff mean that half of those 20% come back to government coffers (even without considering any service sector multipliers) within 12 months.

Now we're down to 10%.

That depends entirely on your tax system.

The alternative for the shipyard workers was to be unemployed, unemployment pay is probably something like 50%. Now we save a lot instead of having 20% losses.

That assumes that 100% will remain unemployed. Even allowing for that, how long do you continue to subsidize an uncompetitive business before the cost of subsidies becomes greater than the cost of paying temporary unemployment benefits? How does the state address the underlying cause of the uncompetitiveness?

I know that popular economics doesn't consider such second-order effects and prefers a more Darwinian approach, but the reality is messy. Millions of workers have no alternatives to speak of. One worker fired at a closing shipyard equals an increase of the structural unemployment by more than one person.

Modern economics most certainly does consider second order effects, which is why the auto industry was bailed out in the US. The overall losses to the economy from the loss of the auto industry would have been catastrophic but the bailouts were temporary and the industry was required to repay the cost as soon as it was back on its feet. It is not that modern economics prefers a Darwinian approach, it is simply that Darwin is inevitable. Industries that fail to innovate and remain competitive will eventually fail.

The Darwinian stuff only applies to some markets, it does not apply to old industries at all.

In which old industries do the markets not determine success or failure?

[tequila]

This assumes A) that the state is better at picking winners than the private sector and B) that competitiveness can be raised simply by throwing money at the problem. I am not saying that the state should never provide subsidies to young industries with potential (although the whole Solyndra debacle clearly illustrates the danger in that), but the key word is temporary.

...

In which old industries do the markets not determine success or failure?

The banking, oil, natural gas, nuclear power, defense, and agricultural industries disagree with you. Nat gas and nuclear might be more "new" industry, but all the rest have been around for centuries and depend enormously on government largesse/policy/regulatory authority to survive.

[Uboat509]

The banking, oil, natural gas, nuclear power, defense, and agricultural industries disagree with you. Nat gas and nuclear might be more "new" industry, but all the rest have been around for centuries and depend enormously on government largesse/policy/regulatory authority to survive.

Banking is a special case. Countries need at least a functional banking system to grow and an outright collapse of the banking system will be devastating to the economy. Part of the problem with growth now in the rich world is that the banking system is only barely functional in many places.

Natural gas and oil do get significant help from various governments but remember, many of the states that provide these commodities and have gotten rich from them like Saudi Arabia, Russia and Venezuela for instance, are wholly dependent on them. A significant drop in commodity prices could be devastating to their economies. They can ill-afford not to support these industries in any way they can. Conversely, countries that are net fossil fuel importers are also dependent these commodities although it is a significant rise is prices that can devastate their economies. No other industry, with the possible exception of banking, has as much power to destroy a nation's economy.

The defense industry is another special case because the main customers for the defense industry are governments. The goods and services provided by the defense industry are important to their home states not only as providers of defense technology but also as useful tools of foreign policy.

Nuclear power is also a special case because of the immense (and necessary) regulation necessary to build and run a nuclear power plant as well as the huge start-up cost.

The enormous benefits that the agricultural industry has enjoyed in this country has far more to do with blatant populism than need. The only reason that we have not seen sharper cuts to agricultural subsidies in this country is that both parties lack the political will to make those cuts although that may be changing.

[Dayuhan]

US agricultural subsidies are 100% politics and make no economic sense at all... the Japanese and the Europeans are even worse.

The Chinese have of course taken a different approach to subsidizing export manufacturing, relying heavily on a distorted exchange rate and controls on lablr cost. How sustainable that will be remains to be seen. The extent of corruption in China, generally under-recognized in the West, will eventually become a significant stumbling block, I suspect. You can get away with a lot when everything's growing at 8-10% annually, but that's not going to last forever.

[Fuchs]

This assumes A) that the state is better at picking winners than the private sector

No, that's entirely unrelated.

I am not saying that the state should never provide subsidies to young industries with potential (although the whole Solyndra debacle clearly illustrates the danger in that), but the key word is temporary.

It's questionable whether this "temporary" is really a good idea. in regard to industries which face foreign competition. Subsidies or another privileged status can make sense as permanent institution if they lead to the lesser evil.

That depends entirely on your tax system.

Not really. It's 40-60% for all developed countries. This automatic return plays a huge role in regard to arms purchases; it means a factor 2 preference for domestic suppliers. They're often effectively cheaper even if their price is substantially higher.

That assumes that 100% will remain unemployed. Even allowing for that, how long do you continue to subsidize an uncompetitive business before the cost of subsidies becomes greater than the cost of paying temporary unemployment benefits?

I tell you that the vast majority of those workers will often end up unemployed or employed in such poor jobs that keeping them in their old job means a vastly higher productivity even before taking subsidies into account.
It makes no sense whatsoever on the macroeconomic scale to tolerate such a change.

How does the state address the underlying cause of the uncompetitiveness?

I don't care. I was pointing at an optimisation problem that's only visible if you're willing to look at issues on a case-by-case basis. Nobody will ever recognise such counter-intuitive details if he or she only applies general rules or even ideologies.
The optimisation problem does not require an answer to your question, in fact my remarks about the problem already reveal a decision model that leads to an optimal decision without any addressing of the underlying cause of competitiveness.
Shed off the blinders and forget this overemphasis on relative performance (competitiveness). In the end, absolute performance should not drop.

It is not that modern economics prefers a Darwinian approach, it is simply that Darwin is inevitable. Industries that fail to innovate and remain competitive will eventually fail.

That's wrong. Many industries are very mature and have next to nothing left to innovate. Moreover, some sectors are so much privileged (as oil in the U.S.) that even the worst management debacles don't keep the company from producing a huge profit.

Industries in mature economies that fail to compete with rising economies' industries don't do so because they're not innovating (often times the upstarts innovate nothing).
The typical reasons are rather
* a wage disadvantage that's outweighing transportation issues only until the rising economy has reached a better income level about a decade later
* subsidies and other privileges offered in the rising economy
* low profit in the mature economy (not the same as lack of competitiveness at all, for the foreign competitors who rise often do so with a string of losses; see South Korean shipyards). The low profit cuts the chance to finance necessary re-investments with outside capital.

In which old industries do the markets not determine success or failure?

In monopolies and oligopolies.

You misunderstood me, though. I was referring to the desirability of evolutionary selection, not to it itself.

[Entropy]

Fuchs,

It seems to me you're ignoring deadweight loss, not to mention political reality. It may theoretically be possible to do what you're suggesting, but one must account for the politics. A political system (especially the US) isn't going to determine subsidies and when to end them on a strictly technocratic basis.

[Fuchs]

I'm not sure how this deadweight loss does happen in your opinion.
We didn't really talk about shifting prices?

[Entropy]

You are talking about subsidies, right? Subsidies produce deadweight loss.

[Dayuhan]

I tell you that the vast majority of those workers will often end up unemployed or employed in such poor jobs that keeping them in their old job means a vastly higher productivity even before taking subsidies into account.

Vast majority? I doubt that. Based on what empitical evidence?

[Fuchs]

Vast majority? I doubt that. Based on what empitical evidence?

It's such a non-controversial thing usually that I merely had to do a quick google search to come up with an examples study:
http://www.ncbi.nlm.nih.gov/pubmed/2732771

You are talking about subsidies, right? Subsidies produce deadweight loss.

I had to look it up initially (languages...) and so far found it to be similar to "Wohlstandsverlust" (at least deadweight loss marks the areas on diagrams which we would mark as "Wohlstandsverlust".

Subsidies are transfers, and I do not remember a theoretical basis for claiming that a transfer itself means a Wohlstandsverlust. There are transaction costs, of course - administration, enforcing of revenue, distortions caused by tax dodging etc.


Even if there was a deadweight loss; I pointed at the output loss by closing the factory and sending a fraction of the workers to marginal jobs, a small fraction to decent jobs and a large fraction into unemployment.



Finally, there's a macro level to the problem: Contrary to antiquated free trade theory, it's simply stupid to believe that everything should be produced by the fittest ones. This would inevitably leave some unfit ones without the exportable output to afford a decent material standard of life.
Mali et al have no choice, but countries with industries (for technically export-capable products, that is; at the very least suitable as substitutes to imports) should not give them up easily and de-industrialise, for they would move to join Mali.


Relatively inefficient industries can very well be good industries and vital to a countries' material standard of life.

[Dayuhan]

It's such a non-controversial thing usually that I merely had to do a quick google search to come up with an examples study:
http://www.ncbi.nlm.nih.gov/pubmed/2732771

Nothing there indicating a "vast majority". If "This excess of disabilities then stayed relatively constant at approximately 17 per 100 persons from 5 to 10 years after the shut-down", wouldn't subsidizing that excess of 17 per 100 through retirement be cheaper than subsidizing the entire factory ad infinitum?

Companies which fall behind in productivity/competitiveness are much more likely to do so because of a lack of capital investment or because of management errors.

Labor cost and regulatory burden don't enter into it at all? Do you really think any level of capital investment and management expertise could have kept, say, the US textile industry competitive?

Subsidies in developed also have a negative global impact, posing a serious obstacle to countries that are trying to develop viable industries

This thread needs to get back to China...

[Fuchs]

Nothing there indicating a "vast majority".

Actually,

After the factory closure, the annual employment rate of the study group showed a steady rise to a maximum level of 44% within 6 years, but even after 10 years never matched the employment rate of the controls.

AND I didn't only refer to unemployed, but rather wrote

...the vast majority of those workers will often end up unemployed or employed in such poor jobs that keeping them in their old job means a vastly higher productivity even before taking subsidies into account.

Now look at my emphasis, please.


I don't believe that you think about the same as I do. I think of the economy as something that creates goods & services, sustains itself and distributes the goods and services (and there are some trade effects).

To close a factory in a distressed sector usually means to reduce the goods produced in the country, for the workers don't simply move to another factory.

It's a strange idea of efficiency to favour substantially less output and substantially less consumption only because a company failed on the market.
This makes sense when there's a lot of flexibility, when workers get a new job of at least equivalent productivity and when capital is simply allocated to a better use.

The reality in Germany is that the former doesn't happen and the latter takes the shape of capital export that helps nobody but a handful of big ticket capital owners.
The reality in the U.S. and UK is more about the former, while the latter cannot be said as long as the macro picture includes a substantial net capital import.


Keep in mind that the economic theory that says 'bad' companies shall be liquidated to free up resources for better uses is a very primitive one (early 20th century) and so very basic that it doesn't include the substantial limits on those "better uses".
Moreover, economic theory is not nationalistic-egoistic, but rather totally fixated on efficiency. Studying macro and micro basically means a three to five year indoctrination of aversion against waste of resources.
A nation has different priorities than to optimise the global economy.


Some developing countries have used subsidies to horrible effect (example low oil prices in Iran) while others have become the foundation of the countries' new prosperity (example electronics and shipyard industries in South Korea).
Subsidies aren't only good for attack (gaining market shares), but also for defence (keeping market shares).

Western countries can use subsidies (and other privileges, as subsidies are IIRC a problem under the WTO regime) to help the development of all-new sectors (biochemical technology etc) and to sustain old sectors in order to avoid the after-effects of losing them.

[Ray]

“The new American ‘pivot towards Asia’ is a brilliant illustration of the place of this region which is now key to the balance of today’s world and in defining our security interests. This area is indeed a strategic stake for France which is and will remain a power in the Pacific and Indian Ocean. I came here to affirm that France firmly intends to remain committed to fostering security in the Asia Pacific area.”--------- French Defence Minister Jean-Yves Le Drian, Address at Shangri-La Dialogue Singapore June 03 2012.

http://www.southasiaanalysis.org/pap...paper5081.html

[Uboat509]

No, that's entirely unrelated.

On the contrary, if the state is going to pour a bunch of subsidies into a business they are usually doing it with the expectation that the business will return to profitability at some point in the future.

It's questionable whether this "temporary" is really a good idea. in regard to industries which face foreign competition. Subsidies or another privileged status can make sense as permanent institution if they lead to the lesser evil.

How often does that happen?

Not really. It's 40-60% for all developed countries. This automatic return plays a huge role in regard to arms purchases; it means a factor 2 preference for domestic suppliers. They're often effectively cheaper even if their price is substantially higher.

Actually the top rate in the US is %35. Most of the employees will be in a lower tax bracket and will not pay that much. The Corporate tax take will also be lower than that after deductions. The bottom line is that subsidies will not pay for themselves over the long term.

I tell you that the vast majority of those workers will often end up unemployed or employed in such poor jobs that keeping them in their old job means a vastly higher productivity even before taking subsidies into account.
It makes no sense whatsoever on the macroeconomic scale to tolerate such a change.

I am not sure that is true but even if it is, pouring subsidies into an uncompetitive business simply maintain employment crosses the line from economics to social welfare. As someone pointed out already, as long as the business remains open, new workers will be brought in to replace those who leave thus passing the cost of maintaining the business open on to a new generation. As a social welfare program this would do nothing to address the problem all the while being a net drag on the economy. A far better way to spend social welfare money is on programs like job retraining schemes.

I don't care. I was pointing at an optimisation problem that's only visible if you're willing to look at issues on a case-by-case basis. Nobody will ever recognise such counter-intuitive details if he or she only applies general rules or even ideologies.
The optimisation problem does not require an answer to your question, in fact my remarks about the problem already reveal a decision model that leads to an optimal decision without any addressing of the underlying cause of competitiveness.
Shed off the blinders and forget this overemphasis on relative performance (competitiveness). In the end, absolute performance should not drop.

You cannot simply ignore the cause of uncompetitiveness. Throwing money at the problem while failing to address the underlying cause is treating the symptom while ignoring the disease. That can only work in the short term. Ignore the disease long enough and it will kill the patient. The question then becomes how many resources will be expended in fruitless palliative measures before the patient dies?

That's wrong. Many industries are very mature and have next to nothing left to innovate. Moreover, some sectors are so much privileged (as oil in the U.S.) that even the worst management debacles don't keep the company from producing a huge profit.

Which industries have nothing left to innovate?

Industries in mature economies that fail to compete with rising economies' industries don't do so because they're not innovating (often times the upstarts innovate nothing).
The typical reasons are rather
* a wage disadvantage that's outweighing transportation issues only until the rising economy has reached a better income level about a decade later
* subsidies and other privileges offered in the rising economy
* low profit in the mature economy (not the same as lack of competitiveness at all, for the foreign competitors who rise often do so with a string of losses; see South Korean shipyards). The low profit cuts the chance to finance necessary re-investments with outside capital.

All of those things will provide short term benefits but ultimately only the persistent innovators can hold market share. Apple did not get where it is through subsidies wage advantages etc, they did so through innovation. The oil companies are continuously innovating (fracking for instance). Auto makers must innovate or die (Saab). In short, anyone who is not looking for a way to provide a product or service that is better, faster and/or cheaper will eventually lose out to someone who is. There are some few exceptions but that is not the norm.

I should mention that good marketing can mitigate a lack of innovation to some extent but only in the short term for the most part.

[Fuchs]

On the contrary, if the state is going to pour a bunch of subsidies into a business they are usually doing it with the expectation that the business will return to profitability at some point in the future.

You probably haven't heard of the German coal subsidies...

Actually the top rate in the US is %35. Most of the employees will be in a lower tax bracket and will not pay that much. The Corporate tax take will also be lower than that after deductions. The bottom line is that subsidies will not pay for themselves over the long term.

The U.S. is easily in the 40-60% bracket because of second-order effects. Workers may pay up to 35% taxes on their income, but then they pay VAT in many places, pay fees, qualify for less transfers...

I am not sure that is true but even if it is, pouring subsidies into an uncompetitive business simply maintain employment crosses the line from economics to social welfare. As someone pointed out already, as long as the business remains open, new workers will be brought in to replace those who leave thus passing the cost of maintaining the business open on to a new generation.

You really don't know German coal subsidies.

The Ruhr area coal sector as a whole was subsidised, but one mine after another closed. very few new workers were hired, and very few old workers were fired. The sector largely dismantled itself over decades.

You cannot simply ignore the cause of uncompetitiveness. Throwing money at the problem while failing to address the underlying cause is treating the symptom while ignoring the disease. That can only work in the short term. Ignore the disease long enough and it will kill the patient. The question then becomes how many resources will be expended in fruitless palliative measures before the patient dies?

Some diseases cannot be defeated, and simply giving up the countries' industrial base is no option. Without it, the country tumbles sooner or later to a much lower material standard of life.

Which industries have nothing left to innovate?

Many. One example being the producers of ceramic underground sewage tubes.
It's not important, though; specifically the Chinese upstarts are NOT competitive because of their innovation (in)capability.

All of those things will provide short term benefits but ultimately only the persistent innovators can hold market share. Apple did not get where it is through subsidies wage advantages etc, they did so through innovation. The oil companies are continuously innovating (fracking for instance). Auto makers must innovate or die (Saab). In short, anyone who is not looking for a way to provide a product or service that is better, faster and/or cheaper will eventually lose out to someone who is. There are some few exceptions but that is not the norm.

You vastly overrate innovation. Almost all of what passes as innovation is actually merely adaption of others' innovation or superficial fashion stuff.

Again; low prices (at times including subsidy-driven dumping and undervalued currencies) drive the gaining of market shares by developing countries, not innovation.

Innovation is no great problem; the Japanese were the horror of the Germans in the early 90's and only half a decade later the Japanese advantages in management had been adapted.
Companies which fall behind in productivity/competitiveness are much more likely to do so because of a lack of capital investment or because of management errors.