U.S.’s Startup Myth; China’s ‘Ford Moment’: Commentary Review

Job-Creation Faith Is Misplaced

Recently an acquaintance at the next table in a Palo Alto, California, restaurant introduced me to his companions: three young venture capitalists from China. They explained, with visible excitement, that they were touring promising companies in Silicon Valley. I’ve lived in the Valley a long time, and usually when I see how the region has become such a draw for global investments, I feel a little proud.

Not this time. I left the restaurant unsettled. Something didn’t add up. Bay Area unemployment is even higher than the 9.7 percent national average. Clearly, the great Silicon Valley innovation machine hasn’t been creating many jobs of late -- unless you are counting Asia, where American technology companies have been adding jobs like mad for years.

The underlying problem isn’t simply lower Asian costs. It’s our own misplaced faith in the power of startups to create U.S. jobs. Americans love the idea of the guys in the garage inventing something that changes the world. New York Times columnist Thomas L. Friedman recently encapsulated this view in a piece called “Start-Ups, Not Bailouts.” His argument: Let tired old companies that do commodity manufacturing die if they have to. If Washington really wants to create jobs, he wrote, it should back startups. (July 2)

Andy Grove

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So Far, Capitalism Rules

If these factory strikes continue, China may have to go Communist.

It’s tempting to wonder which way China will go. Will it side with demands for higher pay and let strikes broaden? Might it clamp down on this budding Solidarity-style movement to protect the all-important export machine? Or will workers demand a true Communism -- not just one that abhors Google?

So far, China has taken the first path, going more the way of capitalism than Communism. It raises the specter of a “Henry Ford moment” in the most populous nation, with both good and bad implications for the global economy.

First, the good news. China’s leaders are taking a page from the industrialist who built Ford Motor Co. In 1914, Ford doubled the average automaker’s wage to $5 a day. It made his Model T more affordable to them and provided a model for a stable workforce that formed the core of the U.S. middle class.

It’s a dynamic China needs more of, and signs are that it’s spreading before our eyes. The positive domino effect it unleashes would create a growing domestic market for products factory workers produce. It would accelerate China’s shift from exports to a consumer-led economy. (June 28)

William Pesek

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Banking Bill Invites Meltdown

The financial overhaul bill set for passage sometime next week is supposed to “bring accountability to Wall Street.” In announcing an agreement between the House and Senate last week, Senator Christopher Dodd noted that “the American people have called on us to set clear rules of the road for the financial industry to prevent a repeat of the financial collapse that cost so many so dearly.”

The final bill, though, does little to prevent a systemically important bank from failing, and makes it far more difficult for regulators to assist one seeking to avoid failure. This all but insures that the system-wide calamity the bill should be trying to prevent will, in fact, occur again.

Most of the systemic risk in the U.S. is now carried in the six largest bank-holding companies (Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley). The bill lets them off easy: none is to be broken up and the effort to lower the risk they take on was diluted. (June 28)

Roy C. Smith

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EU Mulls Sovereign Default

The notion that default might be the only sensible exit strategy for an indebted euro nation is finally gaining traction with the authorities. With global financial markets still in a state of disrepair, investors would be wise to tread softly amid the potential nightmares.

A draft European Union document, dated June 25 and scheduled for discussion July 12-13, was obtained this week by Bloomberg reporter Meera Louis. The draft suggests the forthcoming stress tests planned for the region’s banks should assess the dangers posed by “exposures to sovereign risk.”

That’s a euphemism for asking whether banks would blow up if a government couldn’t pay its debts. Including that scenario in the analysis is an admission that the prospect of restructuring has, in the minds of the euro’s apparatchiks, moved up the scale to “possible” from “out of the question.”

On June 28, the Bank for International Settlements weighed in with its annual report. Cheery reading it is not. (July 1)

Mark Gilbert

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--Editors: John Lear

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The Chinese economy’s secret recipe

Comment by FAN GANG

CHINA’S GDP growth this year may approach 10%. While some countries are still dealing with economic crisis or its aftermath, China’s challenge is – once again – how to manage a boom.

Thanks to decisive policy moves to pre-empt a housing bubble, the real estate market has stabilised, and further corrections are expected soon.

This is good news for China’s economy, but disappointing, perhaps, to those who assumed that the government would allow the bubble to grow bigger and bigger, eventually precipitating a crash.

Whether or not the housing correction will hit overall growth depends on how one defines “hit.” Lower asset prices may slow total investment growth and GDP, but if the slowdown is (supposedly) from 11% to 9%, China will avoid economic over-heating yet still enjoy sustainable high growth. Indeed, for China, the current annualised growth rate of 37% in housing investment is very negative. Ideally, it would slow to, say, 27% this year!

China has sustained rapid economic growth for 30 years without significant fluctuations or interruption – so far. Excluding the 1989-1990 slowdown that followed the Tiananmen crisis, average annual growth over this period was 9.45%, with a peak of 14.2% in 1994 and 2007, and a nadir of 7.6% in 1999.

While most major economies in their early stages of growth suffered crises, China’s story seems abnormal (or accidental), and has elicited periodic predictions of an “upcoming crash.” All such predictions have proved wrong, but the longer the story lasts, the more people forecast a bad end.

For me, there is nothing more abnormal about China’s unbroken pattern of growth than effective macroeconomic intervention in boom times.

To be sure, both economic development and institutional reforms may cause instability. Indeed, the type of central government inherited from the old planned economy, with its overstretched growth plans, causes fluctuations, and contributed significantly to instability in the early 1980s.

But the central government must be responsible for inflation in times of overheating, lest a bursting bubble fuel unemployment. Local governments and state-owned enterprises do not necessarily have those concerns. They want high GDP growth, without worrying much about the macroeconomic consequences.

They want to borrow as much as possible to finance ambitious investment projects, without worrying much about either repayment or inflation.

Indeed, the main cause of overheating in the early 1990s was over-borrowing by local governments. Inflation soared to 21% in 1994 – its highest level over the past 30 years – and a great deal of local debt ended up as non-performing loans, which amounted to 40% of total credits in the state banking sector in the mid-1990s.

This source of vulnerability has become less important, owing to tight restrictions imposed since the 1990s on local governments’ borrowing capacity.

Now, however, the so-called “animal spirits” of China’s first generation of entrepreneurs have become another source of overheating risk. The economy has been booming, income has been rising, and markets have been expanding: all this creates high potential for enterprises to grow; all want to seize new opportunities, and every investor wants to get rich fast.

They have been successful and, so far, have not experienced bad times. So they invest and speculate fiercely without much consideration of risk.

The relatively high inflation of the early 1990s was a warning to central government policymakers about the macroeconomic risks posed by fast growth. The bubble bursts in Japan’s economy in the early 1990s, and the South East Asian economies later in the decade, provided a neighbourly lesson to stop believing that bubbles never burst.

Since then, the central government’s policy stance has been to put brakes on the economy whenever there is a tendency toward overheating. Stringent measures were implemented in the early 1990s to reduce the money supply and stop over-investment, thereby heading off hyperinflation.

In the recent cycle, the authorities began cooling down the economy as early as 2004, when China had just emerged from the downturn caused by the SARS scare in 2003. In late-2007, when GDP growth hit 13%, the government adopted more restrictive anti-bubble policies in industries (steel, for example) and asset markets (real estate), which set the stage for an early correction.

Economic theory holds that all crises are caused by bubbles or over-heating, so if you can manage to prevent bubbles, you can prevent crises. The most important thing for “ironing out cycles” is not the stimulus policy implemented after a crash has already occurred, but to be proactive in boom times and stop bubbles in their early stages.

I am not quite sure whether all Chinese policymakers are good students of modern economics. But it seems that what they have been doing in practice happened to be better than what their counterparts in some other countries were doing – a lot on “de-regulation,” but too little on cooling things down when the economy was booming and bubbles were forming.

The problem for the world economy is that everybody remembered Keynes’ lesson about the need for countercyclical policies only when the crisis erupted, after demanding to be left alone – with no symmetric policy intervention – during the preceding boom. But managing the boom is more important, because it addresses what causes crises in the first place.

In a sense, what China has been doing seems to me to be the creation of a true “Keynesian world” – more private business and freer price competition at the micro level, and active countercyclical policy intervention at the macro level.

There may be other factors that could slow down or interrupt China’s growth. I only hope that policymakers’ vigilance will prevail (and be improved upon), enabling China’s high-growth story to continue for another 10, 20 or 30 years. – © Project Syndicate

Fan Gang is Professor of Economics at
Beijing University and the Chinese Academy of Social Sciences, director of China’s National Economic Research Institute, Secretary-General of the China Reform Foundation, and a member of the Monetary Policy Committee of the People’s Bank of China.

Migrants from new EU states increase London homeless tally

• UK capital's homeless now 4,000, from 2,500 three years ago
• Growth in new rough sleepers attributed to economic tailspin

 

Rough sleeping in central London. Photograph: Martin Godwin for the Guardian

Almost a quarter of London's rough sleepers are from new EU states, a trend exacerbated by rising unemployment that is reversing a decline in homelessness in the capital, a report says .

Most of those sleeping on the streets come for a better life but many find limited opportunities, and, in some cases, become destitute. While the number of homeless British nationals in the capital has stabilised at about 2,500, citizens of the 10 central and eastern European states account for hundreds more added to the most authoritative tally of rough sleepers. The database Chain, or Combined Homeless and Information Network, which is maintained by Broadway, a homeless charity, tomorrow publishes figures showing that London ‑ the location of more than half of the country's rough sleepers ‑ has almost 4,000 homeless people, a figure up from the 2,500 listed three years ago.

The biggest single factor contributing to growth in the newly homeless is the tiny fraction of 1.5 million migrants who came in search of work from the EU's new border regions but who ended up on the streets as the economy went into a tailspin.

These people are often left to fend for themselves; unless they have worked full-time for a year, migrants from former eastern bloc countries that joined the EU in 2004 and 2007 have no right to public funds and only limited access to services. The outcome is often isolation and homelessness.

British charities say that while the tide of largescale migration from eastern Europe has largely reversed, many people are staying on thinking there is a only a limited safety net in their own country.

This assertion has been denied by Krzysztof Lisek, a Polish MEP who has helped homeless Poles in the UK. He said that if it were a question of social security then "the migrants would probably choose the Nordic countries".

Last week during a series of interviews in London where homeless people queued for breakfast provided by charities, many of those on the streets shrugged off the hardships. Most sleep outside, often on church steps. They scavenge at markets because "so much good food is thrown away", and their days are spent traipsing between shelters or begging; an hour seems to yield a less than a pound.

"You can buy a baguette after a few hours of begging," said Roman Maciejewski, a 39-year-old former hospital porter from Poznan, west Poland, who arrived this year looking for work but ended up sleeping under a tarpaulin. "It is a open air apartment by the Thames. The weather is much harder in Poland than here."
Broadway's chief executive, Howard Sinclair, said: "Clients live on bendy buses, scrounge for scraps, have to endure snow and rain. The life expectancy of a homeless person on London streets is 42. That is not something that should be happening in 21st century London."

Sinclair said that if the problem were not tackled, Boris Johnson, London's mayor, would find it "very difficult" to make good his promise that by 2013 that no one would be living on the city's streets. Unlike the government figures, which count the number on the streets on one night of the year, and which have been criticised by some homeless charities for providing only a partial snapshot of the problem, Chain tallies the homeless throughout the year.

The spurt in rough sleeping has led to some radical measures. Since June 2007 more than 1,000 eastern and central Europeans have been flown home, at taxpayer expense. Many flock to the capital's most prosperous parts; the City of London "reconnected" 130 people with their families last year.

Ewa Sadowska, chief executive of Barka UK, a project that aims to help European migrants, said that those arriving here did not realise that their own governments now helped homeless people. She said that in Poland homeless people were paid cash benefits and got free access to services in "social integration centres".

She added: "Many of the homeless come from a generation that went through communism, they are scarred and don't trust authority. They drink and find a group that behaves like them. It becomes a lifestyle, and not an easy one to get out off." 

• Randeep Ramesh, social affairs editor
• The Guardian, Monday 5 July 2010

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