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Sunday, March 25, 2012

Will China drag us down?

Tony Paradiso

China continues to rear its ugly head and the news is increasingly worrisome. The March flash HSBC Purchasing Managers’ Index posted another decline in manufacturing activity. The reading of 48.1 was down from 49.6 in February. Any reading below 50 signals contraction. I consider this data point one of the most important indicators of China’s economy. And given the current global economy, as China goes so goes the world.

China’s economy is manufacturing-based. Although domestic consumption is increasing, it is also heavily dependent on exports. That’s why I key on this single data point.

With housing and construction remaining weak, the U.S. economic recovery has depended on exports. That’s why in the past 18 months Main Street continued to feel the pain while multinationals were relatively prosperous. Now, Main Street is slowly catching up. However, if China slows it could stall the process.

If we were talking about one bad month we wouldn’t be talking. But the PMI readings have signaled contraction for five straight months. In technical economic jargon that’s what is called a trend. Most economists dismiss the possibility of a “hard landing” because China possesses the financial and political means to quickly stimulate the economy.

True enough, but such thinking is why economists are putzes. They assume China’s interests are aligned with ours. That may be accurate in the long term but not necessarily in the short term. China is fixated on inflation and they realize that they have a housing bubble brewing.

Unlike our leaders, who sat idly by until we imploded, China’s may be wise enough to attempt to slowly deflate their housing bubble. If they decide that finessing the housing market is more important than growth, China may be content to live with slower growth in the near term.

It wasn’t whimsy that caused China to lower its official growth target for the first time in seven years. Again, unlike our leaders who routinely say things they don’t mean to gain a political edge, China’s officials - unencumbered by the need to run for office – don’t speak frivolously. One gets the sense that they mean what they say.

A final reading on the HSBC number is due in the next few weeks and China’s first-quarter GDP and March industrial production are due on April 13. Pay attention to these numbers. If they signal continued weakness and if Chinese officials don’t take stronger action shortly thereafter, we’ll have our answer on where China’s priorities lie.

On the subject of putzes, I make no secret that I believe the average economist has his or her head in a place devoid of light. If you’re interested in the details why I take this position, check out “The Errant Economist” on my website.

For this column, suffice it to say that economists just don’t get it, and what they do get would be question fodder for the game show “Are You Smarter Than a Fifth Grader?” In the case of the average economist, the answer is no. Regardless, their proclivity for being correct only when stating the obvious doesn’t stop them from being awarded Nobel Prizes.

The latest example of this was brought to my attention by my other half who enjoys reading the New York Times. For me the business section of the Times is best defined as “all the news that’s unfit to print.” But my disdain for the paper’s economic contributions doesn’t deter her from sending me links. And I must admit – like a blind squirrel – occasionally there’s an interesting tidbit. This wasn’t one of those times.

The headline of the latest drivel is “It’s the Economy: Why Some Countries Go Bust.” Notwithstanding the intriguing headline, I was leery of wasting my time reading the rest. I was right to be leery.

The brainchild behind the latest theory of why countries go bust is Daron Acemoglu. Mr. Acemoglu, an M.I.T. professor, is evidently a rock star in the economic community.

The article first walked readers through previous theories on the subject. Adam Smith thought the freedom of the markets determined rich versus poor. Thomas Malthus blamed poverty on overpopulation. I guess China is screwed. Keynes claimed it was due to the lack of technocrats. Now we know why we became the world’s greatest economy, we have technocrats coming out of our ying yang. And Jeffrey Sachs believes poor soil, lack of navigable rivers, and tropical disease are in part to blame.

What do these theories have in common besides being stupid? Nothing. Add another to the list. Not because it’s stupid but because it’s incredibly obvious.

Acemoglu and his collaborator James Robinson believe that wealth is highly correlated to the degree in which the average person shares in the wealth. Stop the presses! He’s on to something. Is that why communism failed? Does it explain why capitalist economies generally outperformed their socialist counterparts? I pay homage to Mr. Acemoglu. Next we’ll hear he stumbled on a Bic lighter and discovered fire.

Here’s the best part: the notion of sharing the wealth was first put forth by Adam Smith but it was ignored for centuries. That sums up the economic community.

Author, professor, entrepreneur, radio and TV commentator, Tony Paradiso is a marketing and management expert. His website can be found at www.tonyparadiso.com.