It is rare that a major corporation subordinates its short-term interests for a moral principle. Google will apparently walk away from a 36% share [...]]]>

Google Inc. appears increasingly likely to shutter its Chinese-language search engine, a step that would remove one of the last major foreign players from the world’s most populous and fastest-growing Internet market.

It is rare that a major corporation subordinates its short-term interests for a moral principle. Google will apparently walk away from a 36% share of  China’s internet search/advertising market because it will not bow to censorship.

This event underscores the true nature of China’s ruling Communist Party of China. It is a repressive, oppressive, suppressive and violent organization that is not unlike any mafia.

The fact that Google will not kowtow to Bejing and walk away from the market of greatest potential is to me a commendable act.

China may have liberalized its economy but the Communist Party of China through the People’s Republic of China still rules with a tight oppressive fist. Young Chinese netizens may have access to some information available on the World Wide Web, but China’s rulers do all they can to prevent them from having access to information that is not controlled by the Party.

One must ask about the moral foundations of such a political system. Why would a relatively small group wish to oppress the masses? I am not so cynical to believe that no party members believe they are doing the right thing to help the people. After all the 75 million or so Party members leave room for a wide swath of personalities. But most members are there for one reason: to gain an advantage over their fellow non-member citizens and benefit from the Party’s largess.

China is controlled by a relatively small group of people; about 200 members of the Central Committee hold real power. Of course the Red Army is represented in the Central Committee. These people are China’s royalty and enjoy privileges that come with power. They (i) don’t wish to relinquish power because they like it, (ii) they probably can’t make it on their own absent the Party, and (iii) if they loosen their grip the worker heroes of the People’s Republic of China may just want to kill them.

While its apologists can point to the fact that things in China, economically and politically, are better than before, they miss the point that the ruling class is corrupt, parasitic, and useless. As an example, I urge you to visit the Communist Party of China’s web site to get a flavor of how superfluous they are.  At the end of this article you will see an excerpt from President Hu Jintao’s “Theory of Profound Changes” as a good example of how dynamic their intellectual discourse is.

So, in walks Google and takes on its competitor, Baidu who basically ripped off their business model, and takes over 36% of the market. When they balk at the government’s censorship over their search results, they have the courage to say no. And leave.

Some folks don’t think they should do that:

John Palfrey, a professor at Harvard Law School who studies the Internet, says Google’s China situation has broader relevance for how other technology companies manage their overseas operations. “Because [the Chinese market] is the largest Internet market in the world, it is impossible for a large technology company to ignore,” Mr. Palfrey says. “The outcome of this dispute is going to be enormously important for information technology companies elsewhere in the world operating in China.”

Perhaps if Professor Palfrey had Google co-founder Sergey Brin’s perspective as a former Soviet citizen whose family fled Soviet oppression and racism, he may have felt differently. This isn’t like Coca-Cola leaving an apartheid South Africa, as worthy as that was. China represents a huge market for Google and the loss of this business will hurt its bottom line and future revenues.

Google did the right thing. I will be a loyal fan and supporter of Google.

* * * * *

The Communist Party still takes “socialism” seriously and carefully parses its language to match what it really wants to do. To admit that socialism or marxism was and is a huge failure would undermine the “legitimacy” of an illegitimate regime. So they come up with reams of useless ideas and commentary that everyone but the Central Committee must take seriously. It reminds me of deconstructionist gobbledygook that is meaningless and no one can understand anyway.

President Hu has developed the Theory of Profound Changes. If someone can explain to me that this jargon has any profound meaning I would appreciate it. I think I am actually a pretty good student of Chinese history, art, and politics, so I am not unaware of the oracular vagueness of Party-speak. This introduction from the People’s Daily is pretty typical of this genre:

It is the Communist Party of China’s important experience drawn from 60 years’ administration to make both domestic and foreign policies in line with the development trend of human civilization, the progress of the times and the fundamental interests of Chinese people and people of the world. To achieve this, it is essential that all the policies are made based on a deep understanding of the world and an accurate grasp of the times.

The current CPC Central Committee led by Hu Jintao has inherited and developed the Party’s basic strategy thinking on the times, scientifically judged the changes of conditions, and brought about basic points on the subject. These basic points hold that we should conform to the historical trend, respond to the contemporary problems and take the lead in our times.

Hu’s five theories on the times demonstrate the theoretical innovation of the CPC on this subject in the new period. The five theories are the theory of profound changes, the theory of a harmonious world, the theory of common development, the theory of joint responsibility and the theory of active participation.It is the Communist Party of China’s important experience drawn from 60 years’ administration to make both domestic and foreign policies in line with the development trend of human civilization, the progress of the times and the fundamental interests of Chinese people and people of the world. To achieve this, it is essential that all the policies are made based on a deep understanding of the world and an accurate grasp of the times.

The current CPC Central Committee led by Hu Jintao has inherited and developed the Party’s basic strategy thinking on the times, scientifically judged the changes of conditions, and brought about basic points on the subject. These basic points hold that we should conform to the historical trend, respond to the contemporary problems and take the lead in our times.

Hu’s five theories on the times demonstrate the theoretical innovation of the CPC on this subject in the new period. The five theories are the theory of profound changes, the theory of a harmonious world, the theory of common development, the theory of joint responsibility and the theory of active participation.

If you want more, here is the intellectual contribution of Jiang Zemin’s “Three Represents,” from 2002. This had the intelligentsia buzzing for years.

Reviewing the course of struggle and the basic experience over the past 80 years and looking ahead to the arduous tasks and bright future in the new century, our Party should continue to stand in the forefront of the times and lead the people in marching toward victory. In a word, the Party must always represent the requirements of the development of China’s advanced productive forces, the orientation of the development of China’s advanced culture, and the fundamental interests of the overwhelming majority of the people in China.

Here is some Party commentary on the Three Represents:

Upholding the “three represents” important thought as the fundamental guideline enables us to scientifically judge and comprehensively grasp the development and change of the international situation, to scientifically judge and comprehensively grasp the basic national condition featuring the fact that China will long remain in the primary stage of socialism, to scientifically judge and comprehensively grasp the historical position our Party is in and the historical mission it is shouldering, to take a firm hold of initiative in accelerating China’s development in the increasingly fierce competition for overall national strength, to boost the coordinate development of material civilization, political civilization and spiritual civilization in the course of correctly handling the relations between reform, development and stability and constantly raise the level of the Party’s leadership and administration and enhance its abilities to repel the corrupting influence and prevent degeneration and resist risks in the course of reform, opening up and developing a socialist market economy.

Comprehensively implementing the “three represents” important thought enables us to correctly forecast the development trend of the modernization drive, to scientifically plan a magnificent blueprint and development strategy for building a well-off society in an all-round manner; to most fully and extensively mobilize all positive factors and gather up powerful strength for boosting the development of the great cause; to penetratingly analyze the interacting movement of various forces and contradiction of the international community and create a peaceful international environment and a good surrounding environment for China’s modernization dive; and enables our Party to always march at the van of the times and to always become the core of staunch leadership in the historical process of building socialism with Chinese characteristics.

Keeping pace with the times in our Party’s guiding ideology is born in the practical process of the development of the cause of our Party and people and it serves the practical need of the development of the cause of our Party and people. The “three represents” important thought is Chinese-styled Marxism oriented toward the 21st century and is the fundamental guideline directing the whole Party and the people of the entire country to strive for the development goal and magnificent blueprint in the new era and at the new stage. We must keep our thinking and action in line with the spirit of Comrade Hu Jintao’s “July 1″ important speech, firmly establish the guidance position of the “three represents” important thought in all fields of work of the Party, consciously use this important thought to guide our own thinking and action and continue to create new glory in this great, unprecedented practice of building socialism with Chinese characteristics.
By People’s Daily Online

We [...]]]>

We think that China is an indestructible economic juggernaut but its economy is very fragile and it is sitting on a property bubble which will burst. What China does in response has major implications for their economy and the rest of the world. This is the first part of a three-part series on this topic.

We are told that China has huge housing needs, that demand will continue for decades, and that prices have nowhere to go but up. But that’s not how economics works for housing or for any other product. It may be true for China’s long term, but the short run can kill you.

Having been in that business, we were told here that America’s long term growth potential was almost limitless, that new family formations, immigration, and abundant financing would continue to drive the housing market higher. And remember, they said housing prices had never declined on a national basis in the last 60 years.

“They” were wrong as it has now been painfully revealed to us. There are many factors affecting the supply of and demand for housing. And prices do go down, dramatically. So, when you hear that China’s housing market will grow in a linear direction and that its economy will not be impacted by a housing bubble, you can evaluate that statement in light of recent history.

4 Important Things to Know About China

Before I go into the details of what is happening in China right now, there are four things about China to consider.

First, most economic statistics from China are inaccurate. This is the result of state, top-down driven economic planning. The nice thing about a planned economy is that they can pretty well dictate what GDP will be because of the way they calculate it. What they mean by “GDP” is very different than what other countries mean by GDP.

China counts the funds that are distributed from Beijing to local governments and entities as spent when distributed. Retail goods are calculated as sold when factories ship goods, not when they are purchased by consumers. This is an artifact of communist central planning that brought them the ruinous Five Year Plans and the Great Leap Forward (Backward) of Mao Zedong.

Local or regional bureaucrats responsible for allocating resources or implementing policies are often corrupt, inept, and lie about the results of their efforts. What comes to mind is the school in Sichuan province (the so-called “tofu-dregs schoolhouse”) that collapsed during the earthquake in 2008 because local officials were bribed, paid off, colluded, whatever, by the contractor who was responsible for the shoddy product. You can multiply that ten thousand times. No one knows what is really spent and what goes into the pockets of corrupt officials.

Second, local and regional governments and state-run enterprises are in serious financial trouble because of the real estate bubble. A big revenue source for local and regional governments is from land sales to developers. We’ve all heard the stories of landowners and tenants getting kicked off their land to make way for a new block of homes or condos. Their compensation is small, and you can guess where a lot of the money goes. The local entities borrowed lots of money to finance developers. Beijing is so worried about the financial solvency of local governments that Premier Wen Jiabao announced at the National People’s Congress last week that it will issue 200 billion yuan worth of bonds on behalf of local governments.

In a “worst-case scenario,” the non-performing loans of local-government investment vehicles could climb to 2.4 trillion yuan ($350 billion) by 2011, Shen Minggao, Citigroup’s Hong Kong-based chief economist for greater China, said yesterday.

“The most likely case is that the Chinese government will engineer a massive financial bailout of the financial sector,” said [Northwestern University Professor Victor Shih] who spent months researching borrowing by about 8,000 local government entities. …

Su Ning, a deputy governor at China’s central bank, said March 8 that a “fairly high proportion” of total lending last year went to the funding vehicles. Chinese banks extended a record 9.59 trillion yuan of new loans in 2009. Su sees “a big risk” from local-government guarantees for money borrowed to fund infrastructure projects that may not generate returns, he said in Beijing.

Third, much of their “growth” is fake. Money sent to districts and municipalities to spend is not organic economic growth. Much of current GDP growth is a myth since most of it comes from government stimulus. Building roads and bridges is good because China needs to build its infrastructure, but it is very wasteful and inefficient. Whatever it is, it is not real organic economic growth: governments only spends money, they do not make money (actually they do in a perverse sense when they print it).

Fourth, China is still a big, robust, developing country. Despite what I said above, there is real growth and wealth. Deng Xiaoping’s “to get rich is glorious” revolution released China’s potential. It may be inefficient, and at times corrupt, but it is real. But, they are not immune to the laws of economics.

China’s Response to the Recession

China was hit hard by Western consumer cutbacks and their exports, the mainstay of their economy, plummeted. “The global financial crisis left 20 million Chinese migrant laborers unemployed and more than 7 million college graduates seeking work by March last year.”

In February 2009, a clash between police and about 1,000 protesting workers from a textile factory in Sichuan province injured six demonstrators, rights group Chinese Human Rights Defenders reported.

In China’s zeal to keep their economy going, the government injected about 4 trillion yuan since 2008 (14 percent of GDP) as fiscal stimulus. It expects to have deficit spending equal to 1.5 trillion yuan this year. Since they believe in Keynesian stimulus, and since they still have a quasi-centrally planned economy (the ultimate Keynesian technocrats), they will keep doing this until the crisis passes. You see, there is one thing the Central Politburo fears: their own people. If the economy collapsed, you would see massive unrest, and I believe they fear for their lives.

The extent of their stimulus:

In June [2009], growth in the money supply measure known as M2 surged to 28.5 percent year-over-year–up sharply from a 15 percent rate at the beginning of the year, which was far more typical of the pace of money growth over the past decade.

New loans by banks rose by about $1 trillion, or twice the expected rate, during the first half of 2009 and rose 34.5 percent year-over-year in June from a 30.6 percent growth rate in May. It appears that Chinese policymakers are experiencing difficulties in prompting total spending to match their ambitious growth targets implied by a production growth target of at least 8 percent, and so they have allowed a rapid surge of money and credit at midyear.

The resulting flood of money has–somewhat counterproductively–flowed into stocks, property markets, commodity stockpiles, and consumer durables (with the help of special incentives for purchases of durables).

The Real Estate Bubble

China is having an unbelievable housing boom (bubble, I would say). Read these examples of bubble behavior which, from a distance, are fascinating illustrations of behavioral economics:

In Shanghai, prices for high-end real estate were up 54 percent through September [2009], to $500 per square foot. In November [2009] alone, housing prices in 70 major cities rose 5.7 percent, while housing starts nationwide rose a staggering 194 percent. …

“Once the bubble pops, our economic growth will stop,” warns Yi Xianrong, a researcher at the Chinese Academy of Social Sciences’ Finance Research Center. On Dec. 27, China Premier Wen Jiabao told news agency Xinhua that “property prices have risen too quickly.” He pledged a crackdown on speculators. …

In Beijing’s Chaoyang district, which represents a third of all residential property deals in the capital, homes now sell for an average of almost $300 per square foot. That means a typical 1,000-square-foot apartment costs about 80 times the average annual income of the city’s residents. …

“When you sit down with a table of businessmen, the story is usually how they got lucky from a piece of land,” says Andy Xie, an independent economist who once worked in Hong Kong as Morgan Stanley’s top Asia analyst. “No one talks about their factories making money these days.” …

The government is reluctant to crack down too hard because construction, steel, cement, furniture, and other sectors are directly tied to growth in real estate. In November, for example, retail sales of furniture and construction materials jumped more than 40 percent. At the December Central Economic Work Conference, an annual policy-setting confab, officials said real estate would continue to be a key driver of growth.

And this:

China risks a “similar asset bubble” to that in 1980s Japan unless lending is reined in, Erwin Sanft, head of China and Hong Kong equities research at BNP Paribas, said Nov. 23. …

Accountant Wang Jin waited in a downpour for six hours last month to buy into a Pudong apartment project by Shui On Land Ltd., a Hong Kong-traded developer controlled by billionaire Vincent Lo.

More than 800 people lined up outside a sports stadium to buy about 220 units costing about $4,100 per square meter on average.

“I couldn’t believe what I saw when I got there,” Wang, 37, said. “I know the property market is sizzling now, but this?” …

Çao Guanzhou, a real estate agent in Shanghai, tried to take advantage of the boom. After selling his Pudong apartment in May for 54 percent more than what he paid three years ago, Çao closed his hot pot restaurant and started selling properties.

Business is slow, he said.

“Too many agencies have opened up,” Çao, 51, said. “There’s too much competition now.”

Tomorrow in Part II — The government’s dilemma: to tighten and risk a crash or inflate until it blows up.

Statewide Bank, Covington, LA Old Southern Bank, Orlando, FL Park Avenue Bank, New York, NY LibertyPointe Bank, New York, NY

This brings us up to 29 for the year.

Dear Senator Feinstein:

I oppose the proposed health care legislation because I do not believe it is real “reform.” I do not believe it will deliver the best health care to the most people at the lowest cost.

I believe that our current system has deteriorated [...]]]> I wrote my legislators opposing health care “reform.” Here is my letter:

Dear Senator Feinstein:

I oppose the proposed health care legislation because I do not believe it is real “reform.” I do not believe it will deliver the best health care to the most people at the lowest cost.

I believe that our current system has deteriorated because of the passage of Medicare. The rigged tax code, the prevention of competition, the lack of control by consumers of their health care dollars, meddlesome regulation, and the burden of Medicare costs being borne by non-Medicare privately insured consumers, have lead to our current mess.

The claims that this proposal is fiscally responsible is contrary to the evidence. A look at similar systems throughout the world reveal that they are all losing money and are resorting to more market based solutions as a fix to their problems.

I recommend a few simple reforms as the start of real reform to our health care system:

• Give Medicare enrollees a voucher and the freedom to choose any health plan on the market.
• Reform the tax treatment of health care with “large” health savings accounts to give workers control over their health care dollars.
• Allowing consumers to purchase health insurance licensed by other states could cover one-third of the uninsured without any new taxes or government subsidies.
• Reform Medicaid and the State Children’s Health Insurance Program by Block-granting those programs the way it reformed welfare in 1996.

These simple acts would contain costs, increase consumer choice, increase competition, and cover most uninsureds without government mandates.

Sincerely,

Jeffrey Harding

I had no illusions that Senator Feinstein would write back and say, “Mr. Harding. Thank you for your wonderful suggestions as I was not aware that government controlled health care systems were so inefficient. From now on I’m going to suggest more free market solutions for health care.”

Here is what Diane Feinstein wrote back:

Dear Mr. Harding:

Thank you for writing to me to express your concerns about healthcare reform. I appreciate the time you took to write to me, and I welcome this opportunity to convey my opinions on how we should reform our health care system.

I support reforming our healthcare system. The key is to find a healthcare plan that will provide coverage to the millions of uninsured Americans and keep premium costs affordable, while not adding to our nation’s unsustainable federal budget deficit.  On December 24, 2009, I joined 59 of my colleagues in voting to pass healthcare reform legislation.  The “Patient Protection and Affordable Care Act” passed by a vote of 60-39.

I voted for the legislation because I believe it makes several important improvements while preserving the parts of our system that work well. Some important changes will occur immediately and others will be phased in.  It will provide immediate assistance, including tax credits for small businesses and $5 billion to help subsidize coverage for some people who have been denied due to preexisting conditions. And the legislation would shrink the Medicare prescription drug coverage gap by $500.  As these health reforms take place, Congress will be able to assess and adjust the programs to improve healthcare for all Americans. All of this is accomplished in a fiscally responsible manner, reducing the budget deficit and preserving the solvency of Medicare.

On February 22, 2010, the President released a new healthcare reform proposal, and on February 25th, the President held a Health Care Summit that was televised nationally.  At the Summit, Democratic and Republican Members of Congress discussed the proposal, the issues they agree and disagree on, and openly worked on a way to reform our healthcare system.

On March 3, 2010, President Obama asked Congress to deliver a final healthcare reform bill to his desk by the end of this month.  The President believes that this legislation deserves an up-or-down vote.  Please know that I will keep your comments in mind as I continue to work with my colleagues to pass a health reform bill that makes healthcare affordable for all Americans.

Again, thank you for writing.  If you should have any further comments or questions, please feel free to contact my Washington, D.C. office at (202) 224-3841.  Best regards.

Sincerely yours,

Dianne Feinstein
United States Senator

My favorite party boy economist, Nouriel Roubini, just came out with his analysis for the second half and he notes that wemay be heading toward a double-dip recession. Too much negative news, he frets. I have been saying this for some time. The difference between me and Roubini is that he believes in the necessity [...]]]>

My favorite party boy economist, Nouriel Roubini, just came out with his analysis for the second half and he notes that wemay be heading toward a double-dip recession. Too much negative news, he frets. I have been saying this for some time. The difference between me and Roubini is that he believes in the necessity and efficacy of fiscal and monetary stimulus whereas I don’t. He went to Mises University but, apparently, only took Austrian Econ 101, not 201.

Here is his research note:

V, U and W

A slew of poor economic data over the past two weeks suggests that the U.S. economy is headed for a U-shaped recovery—at best—in 2010. The macro news, including data on consumer confidence, home sales, construction and employment, actually suggests a significant downside risk even to the anemic levels of growth which RGE forecast for H1. The U.S. faces continued challenges in H2—particularly as historic levels of fiscal stimulus fade—and appears far too close to the tipping point of a double-dip recession.

This is not the conventional wisdom. Heated debate continues to rage in the United States on whether the economic recovery will be V-shaped (with a rapid return to robust growth above potential), U-shaped (slow anemic, sub-par, below trend growth for at least the next two years) or W-shaped (a double-dip recession). The V camp includes distinguished research groups and individuals such as Ed Hyman’s ISI, Larry Meyer’s Macroeconomic Advisors, the research group of JP Morgan, Michael Mussa and others. The U camp includes—among others—Roubini Global Economics, Goldman Sachs’ U.S. economic research group, PIMCO and Ken Rogoff. As early as August 2009, I worried in a Financial Times op-ed about the risk of a double-dip recession even if our RGE benchmark scenario characterizes the risk of a W as still a low probability event (20% probability) as opposed to a 60% probability for a U-shaped recovery. Others concerned about the double-dip risk include also David Rosenberg, Gary Shilling and John Makin.

Ed Hyman and I debated whether the recovery would be U or V-shaped on a February 22 conference call attended by over 2,200 listeners. Since that call, a slew of new U.S. macro data have come out. They have been almost uniformly poor, if not outright awful. Consumer confidence, based on the Michigan survey, has tanked. On the real estate front, new home sales are collapsing again, existing home sales are also falling sharply, and construction activity (both residential and commercial) is sharply down. Durable goods orders are down, initial claims for unemployment benefits remain stubbornly high (way above the 400K mark). Real disposable income for Q4 has been revised downward while real disposable income (before transfers) for January was negative again. The manufacturing ISM index—while still expanding being above 50—has now fallen a couple of notches and its production and new orders index levels are falling, too; and global PMIs suggest a loss of momentum in the global economic recovery. Real inventories look unchanged in Q1 relative to Q4; auto sales were at best mediocre; core CPI was falling and core PCE was close to 0%, suggesting anemic demand and economic weakness. Q4 GDP growth was revised upward to 5.9% but most of it (3.9%) was due to inventories; final sales grew at a 1.9% rate while consumption grew at a dismal 1.7% (down from 2.8% in Q3). Q3 growth has been revised from an initial 3.5% to 2.8% to 2.2%, with final sales growing only 1.7%. So, at the time of maximum policy stimulus (H2 of 2009), final sales were growing only at a pathetic 1.8% average rate.

The eurozone (EZ) debt crisis, which RGE discusses in depth in a major new paper, predisposes Europe to a rising double-dip risk, due to the wave of fiscal austerity sweeping the periphery of the EZ. Even if the EZ doesn’t enter a double dip, the growth of domestic demand there will be as or more constrained than in the United States. This, in turn, will be a drag on the potential for U.S. export growth. The U.S. dollar rally on risk aversion reflects this risk. The U.S. dollar is settling back down and the threat of a debt crisis is headed off by a stronger Greek fiscal adjustment and potential adjustment package. But fiscal spending cuts, confidence hits and the looming threat of either rising unemployment or falling wages in the public sector—on top of private sector retrenchment—will remain. A similar retrenchment may well lie ahead in the United Kingdom, given rising fiscal sustainability concerns and the threat of a sterling crisis. Europe then will have great difficulty being a source of demand for U.S. exports, and may even provide impetus to faltering global demand growth, contributing to the threat of a wider double dip across high-income countries.

Employees will be furloughed without pay because a funding measure stalled in Congress, the department said in a statement today. The affected workers are in the Federal [...]]]>

March 1 (Bloomberg) — The U.S. Transportation Department will lay off 2,000 employees today, halting construction projects, reimbursements to state governments and highway safety programs, according to a statement.

Employees will be furloughed without pay because a funding measure stalled in Congress, the department said in a statement today. The affected workers are in the Federal Highway Administration , the Federal Motor Carrier Safety Administration the National Highway Traffic Safety Administration and the Innovative Technology Administration.

According to Keynesian theory, once government fiscal stimulus works its way through the economy, it will create real jobs and cause lasting economic activity. Maybe Paul Krugman and Joe Stiglitz are correct: they just aren’t spending enough. Maybe we haven’t allowed enough time. Maybe we aren’t spending it on the good government projects that really do create economic activity. Maybe …

Let me think about that … nope. It just doesn’t work. Again. And again. And again.