Paul Krugman: The dangerous "delusions of competence"

It's not difficult to prove that a nation's political class has "no idea what they're doing" with the economy

Published July 31, 2015 11:59AM (EDT)

 (AP/Lai Seng Sin)
(AP/Lai Seng Sin)

Economist Paul Krugman used his column Friday to outline how "those who preside over economic booms often develop delusions of competence," a category which includes both individuals like former Florida Governor Jeb Bush and the current Chinese leadership, which is attempting to shore up its economy in a manner that proves "the nation's rulers have no idea what they're doing."

The problem with the Chinese economy, he said, isn't economic -- it's political. "China's leaders appear to be terrified," he wrote, "by the prospect of even a brief recession." The measures undertaken to avoid one -- blocking shareholders from selling, suspending trading on floundering companies, etc. -- are capable of propping up an economy for a short period of time to avoid an unjustified panic, "but they're being applied on a sustained basis to a market."

"What do Chinese authorities think they're doing?" he asked.

China is at the end of an era -- the era of superfast growth, made possible in large part by a vast migration of underemployed peasants from the countryside to coastal cities. This reserve of surplus labor is now dwindling, which means that growth must slow.

But China’s economic structure is built around the presumption of very rapid growth. Enterprises, many of them state-owned, hoard their earnings rather than return them to the public, which has stunted family incomes; at the same time, individual savings are high, in part because the social safety net is weak, so families accumulate cash just in case. As a result, Chinese spending is lopsided, with very high rates of investment but a very low share of consumer demand in gross domestic product.

This structure was workable as long as torrid economic growth offered sufficient investment opportunities. But now investment is running into rapidly decreasing returns. The result is a nasty transition problem: What happens if investment drops off but consumption doesn’t rise fast enough to fill the gap?

Read the rest at the New York Times...

By Scott Eric Kaufman

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Business China Economics Jeb Bush Paul Krugman Stock Market