Malkiel: Ignore China At Your Own Peril

September 18, 2013

Malkiel (cont'd.): I think the Fed has been responsible for the fact that housing has turned around, and the private sector is doing as well as it is. A lot of people say that all of this didn’t work. I think it’s worked remarkably well.

Now, do I think fiscal policy’s been fine? I don’t. The main criticism I would have of fiscal policy is that we’ve really done nothing about the long-run fiscal problem, which is the huge changes in demography that are going to mean entitlement programs become more and more unfeasible. The fact that we won’t even talk about the things that are easy to fix, like Social Security—you could fix it by snapping your fingers—and the fact that we haven’t done the long-run entitlement programs is, I think, a real black eye for fiscal policy.

But as far as I’m concerned, the Federal Reserve has basically been our savior in terms of having the U.S. economy do as well as it’s done. Are you optimistic that the Fed is going to continue to extricate the economy from the perilous straits that it was in, the so-called tapering and the overall working down of the balance sheet?

Malkiel: I’m generally optimistic. I’m not one of these people who says there’s going to be a disaster. I think we’ll have a moderate tapering. I would frankly be surprised if it didn’t happen right away, if not this month. I think it will happen, and as the near-term fiscal drag gets a little less, I think that’ll be just fine. I think the economy will do well in 2014, despite the fact that the Fed will begin a tapering program.

Am I optimistic? Yes, I am. Let’s move to subjects that are near and dear to you. First of all, China. It’s beginning to transition. How’s this new regime going to handle the transition? What is your general view of that country right now and its next phase of development?

Malkiel: There’s no question about the fact that there is a necessary structural change in the Chinese economy. They have relied upon two pillars for their growth: exports and investment. You can’t continue to have the export-led growth proceed the same way. For one thing, some of their markets—like Europe, which is one of their main markets—are not in great economic shape. And while I think Europe will do a little better next year, Europe is still going to be weak. It just can’t be the same export-driven expansion that we’ve seen before.

And similarly, with investment, there’s excess capacity in some industries, such as real estate. There’s just no question about the fact that the structure of the economy is going to have to change.

Now, what is, for me, very positive, and I think, not appreciated to the extent that it should be, is that consumption is only about a third of GDP. And there’s no reason in the world why consumption couldn’t be 50 percent of GDP, or even more than that. It’s 70 percent of GDP in the United States.

So I think you’re going to see a change in the composition growth of the economy toward one where there is more consumption relative to investment and export and net exports.

Also, the growth can’t stay at 10 percent year. It’s just mathematically not possible to keep this up when you’ve become a really large economy. I’m not saying that this change isn’t going to be tricky, but I think the Chinese government will be able to help engineer this change.

I think that there’s far too much pessimism about China than there should be. And growth may slow down to 7 percent or even 6 percent, but China is not going to crash and burn. Quite the contrary: It’s going to continue to be, among the large economies of the world, the one that has the highest growth rate.



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