'Tis An Ill Wind...
Dave Price
Via Glenn, here's a couple interesting pieces from Megan McCardle and Derivative Musings on rising wages in India and China, and the resulting worries over inflation here at home. As is often the case in economics, what's bad news for some is good news for many others — but, as in Iraq and Afganistan, bad news is more newsy. As we hear that higher food prices are hurting the poor, we rarely see mention of the boom times for farmers. And it seems we're always either suffering "low wage growth" or "inflationary wage pressure." Rising housing prices are making it harder for people to afford a home, or the real estate market is collapsing.
Several things will happen as wages rise in India and China. First, and most importantly, Indians and Chinese will consume more, meaning they will import more goods from the U.S., yielding more jobs and more profits for Americans; this is not just a "psychic" benefit. Second, American companies will be at less of a disadvantage in labor costs, which again means more domestic business/employment success. Third, countries poorer than China and India will inherit their relative labor cost advantage, which will tend to dampen the putative inflationary threat.
Said threat is probably well-overstated, in keeping with the news trend noted above. Free trade creates deflationary efficiencies, as it widens the consumer's choices, and ever-accelerating productivity gains are profoundly deflationary. These forces have created a Western lifestyle undreamt of half a century ago: in today's America, even the poor generally have plenty of food and major appliances. And someday, the same will be true in India and China.
I'm a big believer in free trade, but Asian trade continues to test my faith.
Japan has been running trade surpluses with the USA since the 1960's. It hasn't ever come close to balance. I don't see why China or India will be any different.
Thanks, I've often quoted Zakaria's observation in FoF that 2/3 of democracies at GDP per capita of $3000 - $6000 do not fail, and that no democracy has ever failed at GDP per capita of $9,000 or higher (iirc the numbers correctly).
Scott,
The trade deficit is just a natural result of the fact we're richer and can buy more stuff from all those countries. Consumer uber alles!
In the days of the gold standard, this could be a problem since a country eventually ran out of gold, but the move to fiat currency means we're trading reputation paper for goods.
They'll allow it to if they perceive that keeping the gravy train rolling is in their interests; otherwise they won't. Just that simple. China is not a democracy and it probably won't become one in my lifetime. Might it eventually? Sure.
Well, China's U.S. imports tell a different story. They're actually the fastest growing U.S.export market.
Despite that, last year's $41.8 billion in U.S. exports to China represented a 157% increase compared with 2000's $16.3 billion. Over the five-year period, exports to China grew more than five times as fast as exports to the rest of the world, making China the USA's No. 4 export market, behind only Mexico, Canada and Japan.
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All but unnoticed, however, is the steady expansion of U.S. exports. Companies prospering by exporting to China run the gamut from hardwood lumber suppliers to manufacturers of sophisticated coal-mining equipment. As a building boom remakes Chinese cities and towns, heavy equipment maker Caterpillar is thriving. Iowa soybean farmers and cotton growers in Georgia also number China as their top customer.
Could you have imagined 30 years that China would be executing officials for not properly maintaining consumer safety standards? They're changing pretty dramatically.
Locally, it has fueled explosive inflation in real estate values and the prices of ordinary consumer goods, including foods (at least those not fixed in price). This has caused spiraling demands for wages in other, support industries.
Money, of course, is also a big population attractor. Thousands flood into Hyderabad (and other cities, like Mumbai with its film industry). These immigrants all want high wages, decent housing, and the other things one associates with a middle class. Shocking, but true.
This does have a distorting effect on the Indian economy as a whole, moderated by two factors: a) the fact that most Indians are still uneducated and work in agriculture, and b) there are several communist-governed states that have enormous social safety net programs.
All in all, an interesting phenomenon to observe; a miserable one to try to live in.
And the grocery stores have been running a trade surplus with me for almost as long.
"Iinternal market," would seem to refer China's domestic consumption, which has been growing by leaps and bounds, both in terms of internal demand and imports. Not sure what your point is re the lack of an "internal market." Stock market? Futures exchange? They have those too.
Also not sure why their proportion of imports per China's GDP would matter to us. That just means imports are growing less fast than their economy.
Of course we all lose our tempers now and then. Dean freely admits to being imperfect in this regard, which is why regulars to this establishment will generally be cut more slack than people who we don't know very well.
Still: behave like an adult, or go find somewhere else to play. Thanks.