Tag Archives: Economic policy

China’s Curious Growth Data

What significant economic news from Asia cheered the global markets last week? The Chinese central bank decided to permit many financial institutions to lend more of their cash deposits to borrowers, a move that is expected to stimulate their economy.

As a result, analysts estimate that 1.5 trillion additional yuan (i.e. approximately $242 billion in American dollars) will be placed into the hands of Chinese businesses. China clearly needs this economic stimulus, given that the nation may miss its annual economic growth target for the first time since 1998.

Oddly enough, though, no one appears to have stopped for a moment to ponder the meaning of an annual target that has not been missed in sixteen years. Indeed, most pundits appear to share the universal assumption that the Chinese economy has been enjoying a perfect winning streak of real growth during that entire period.

Of course, that is certainly possible. And yet, sometimes, entities only appear to achieve an unparalleled string of economic or financial success through the adroit manipulation of statistics. General Electric, for instance, used advanced “earnings management” strategies to generate an astonishingly smooth and consistent string of annual profit announcements during the final years of the twentieth century.

To be sure, Nobel Prize winning economist Paul Krugman and others have cast occasional doubts on the validity of China’s statistical announcements. Nevertheless, generally speaking, most Western news organizations simply accept these announcements at face value and repeat them for public discourse.

So what should we make of this sixteen year Chinese winning streak that suddenly appears to be in peril? If most news organizations are correct, and if the winning streak is a real one, then the sudden threat to its continuation is indeed a serious concern about an unforeseen slump in economic growth.

And yet if the streak is simply a product of an actively “managed” series of economic statistics, then the sudden threat may represent far more than a simple slump. Indeed, it may represent the government’s unwillingness to continue to “manage” its economic statistics, a new position that may portend a long term shift towards a more transparent (and thus a healthier) Chinese economy.

The Auto Bailout: Was It Worth The Cost?

Do you remember the great American bailout of the automobile industry? Following in the footsteps of the retiring President George Bush’s bailout of the financial industry, the auto bailout represented one of the first major decisions of the Obama Presidency.

A variety of reasons and reassurances have been offered by the President and his administration officials in defense of their decision to spend billions of dollars on resuscitating General Motors and Chrysler. They were saving thousands of American jobs. Iconic American firms would remain under American ownership. The federal government would (eventually) be repaid in full. And while under governmental control, the firms would aggressively support a socially desirable transition towards electric vehicles and renewable fuels.

Five years have now passed since the time of the bailout. How many of these four goals have been achieved?

On the one hand, General Motors and Chrysler continue to employ over 200,000 and 70,000 workers, respectively. Their networks of suppliers and dealers continue to employ thousands of additional workers as well. Many of these individuals would have undoubtedly lost their jobs if the firms had been permitted to fail.

In addition, when General Motors emerged from bankruptcy three years ago with an Initial Public Offering on the New York Stock Exchange, it resumed its historic role as an American firm with a corporate headquarters in the United States.

On the other hand, though, earlier this week, the Italian automobile company Fiat announced that it was completing its full acquisition of Chrysler. And last month, the federal government of the United States announced that it was closing the books on its investment in General Motors by writing off a $10.5 billion loss.

Furthermore, based on the 2013 annual vehicle sales totals that were announced this week, it appears that the American automobile industry remains as reliant on gas guzzling SUVs and pickup trucks — as opposed to fuel efficient small cars — as ever. Meanwhile, the General Motors electric Volt vehicle posts meager sales, struggling to remain ahead of electric vehicle competitors like the Nissan Leaf.

So how many of the bailout’s four goals (i.e. saving jobs, maintaining American corporations, getting repaid in full, and transitioning to renewable fuels) were actually achieved during the past five years?

Well, the first goal was certainly achieved via the bailout. The second can be deemed a partial success. But the third and fourth goals? It’s very difficult to declare victory about either one of them.

It’s impossible to know, of course, what would have occurred in the absence of the government bailout. On the one hand, 2012 Presidential candidate Mitt Romney may have been proven correct when he asserted that the free market would have continued to serve America’s need for motor vehicles. But on the other hand, it’s just as possible that Detroit’s total failure might have provided the “tipping point” to sink the global economy into a second Great Depression.

If you were the Chairman of the White House’s Council of Economic Advisors in 2009, and if you could foresee the results of the automobile industry bailout, would you have recommended it to the President?

A Holiday Gift From Mexico: Energy!

As Jose Feliciano’s classic song Feliz Navidad enters its fifth decade of holiday season popularity, people around the world are dashing from store to store, trying to find gifts for their family and friends.

There are times, though, when companies receive gifts too. As well as industries. And entire sectors of the global economy.

Last week, the Mexican government approved legislation that essentially delivered an attractive gift to the global energy industry. It’s quite possible that the gift will ultimately benefit the Mexican people, although one legislator literally stripped off his clothes in protest before voting against the measure.

The gift is a law that will permit private corporations around the world to develop Mexican energy resources, to own Mexican retail gasoline stations, and to operate other facilities and programs. For the past 75 years, prior to the law’s passage, the energy industry was a government monopoly led by the state owned Pemex.

For decades, the creation of Pemex was a source of immense national pride. During the Great Depression of the 1930s, Mexican oil workers went on strike against an array of foreign energy companies from the United States, Great Britain, and the Netherlands. President Cardenas, siding with the labor movement, seized all foreign energy assets and declared public ownership over them.

But over the ensuing decades, the often cash strapped Mexican government struggled to find the resources to maintain energy facilities and invest in new research and development activities. Mexico’s new conservative President, Enrique Pena Nieto, thus supported the drive to privatize his nation’s energy industry.

Congressman Antonio Garcia Conejo protested that the decision would strip the Mexican people of their natural resources; he literally stripped off his clothing on the floor of the legislature in protest. Nevertheless, the measure was signed into law last week.

Will the legislation prove to be effective? Will it benefit the Mexican people? Ironically, the answer to that question may not be determined by the global energy industry at all.

It is, indeed, likely that an infusion of private capital will lead to a wave of modernization and an increase in efficient energy production. And that, in turn, will likely generate more government revenue.

But in order to generate benefits for the Mexican people, the government will need to find a way to channel that revenue into programs that support social and economic growth at the grass roots level. In other words, the success of the privatization initiative will ultimately be determined by the capabilities of the government sector.

That’s quite ironic, isn’t it? Although the Mexican government is looking to the private sector to help the Mexican people, it will inevitably need to look to itself to ensure the success of the initiative.