The future might not belong to China

Replicating the success of other high-growth economies is about to become far harder

Martin Wolf

Do not extrapolate from the recent past. China has had a hugely impressive four decades. After their triumph in the cold war, both the west and the cause of liberal democracy have stumbled.

Should we conclude that an autocratic China is sure to become the world’s dominant power in the next few decades? My answer is: no. That is a possible future, not a certain one.

The view widely held in the 1980s that Japan would be “number one” turned out to be badly mistaken. In 1956, Nikita Khrushchev, then first secretary of the Communist party of the Soviet Union, told the west that “We will bury you!” He proved utterly wrong. The examples of Japan and the Soviet Union highlight three frequent mistakes: extrapolating from the recent past; assuming that a period of rapid economic growth will be indefinitely sustained; and exaggerating the benefits of centralised direction over those of economic and political competition. In the long run, the former is likely to become rigid and so brittle, while the latter is likely to display flexibility and so self-renewal.

Today, the fiercest political and economic competition is between China and the US. A conventional view is that by, say, 2040, China’s economy will be far bigger than that of the US, with India far smaller still. But might this view be mistaken? Capital Economics, an independent research firm, answers “yes”, arguing that China's period of stellar outperformance might be coming to an end quite soon. (See charts.)

There are two powerful arguments why this view will prove to be mistaken: first, China has great potential for continuing catch-up on the productivity levels of the most advanced countries; and, second, it has a proven ability to generate sustained rapid growth. It is brave to bet against both potential and capacity. But, argues Capital Economics, in its “Long-Term Global Economic Outlook”, we should. As with Japan in the 1980s, the policies of ultra-high investment and rapid debt accumulation, which kept China growing so fast after the 2008 financial crisis, make it vulnerable to a sharp deceleration.

Crucially, China’s investment rate, at 44 per cent of gross domestic product in 2017, is unsustainably high. This extraordinary investment rate did maintain the growth of supply and demand after the 2008 crisis. But China’s public capital stock per head is already far bigger than Japan’s at comparable incomes per head. Slowing urban household formation means that fewer new homes now need to be built. Not surprisingly, returns on investment have collapsed. In sum, investment-led growth must come to an early end.

Because of its size, China has also hit the buffers on export-driven growth, at a lower level of income per head than other high-growth east Asian economies. The trade war with the US underlines this reality. China’s working-age population is also declining. Given the huge rise in debt as well, sustaining fast growth will be very hard.

Future demand will depend on the emergence of a mass-consumer market, while growth of supply will require an upsurge in growth of “total factor productivity” — a measure of innovation. Yet, in 2017, private consumption was only 39 per cent of GDP. If it is to drive demand, the savings rate must tumble and the share of household incomes in GDP must jump. Neither will be easy to achieve. But the biggest hurdle of all, especially to the needed upsurge in productivity growth, is the shift towards a more autocratic political system.

For one and a half decades, China has benefited from the reforms introduced by Zhu Rongji, premier from 1998 to 2003. No comparable reforms have happened since his time. Today, credit is still being preferentially allocated to state businesses, while state influence over large private businesses is growing. All this is likely to distort the allocation of resources and slow the rate of innovation and economic progress, even if an outright financial crisis is avoided.

In sum, China may well fail to replicate the success of other east Asian high-growth economies, in becoming a high-income country in short order. It will surely be far harder for it to do so, because the distortions in its economy are so large and the global environment is going to be so much more hostile.

Meanwhile, suggests Capital Economics, the arrival of robotics and artificial intelligence might re-ignite productivity growth in the west and, above all, in the US. If one wished to be optimistic, one would also hope that experience of Donald Trump’s incompetence and malevolence will be salutary. His hardcore supporters are a minority. Majorities of the disgusted should win and then bring about the renewal of economic competition and social concern that the US needs.

The most interesting other economy is not Europe, which seems destined for a slow relative decline, but India, due to be the world’s most populous country in the near future. India is far poorer than China and so still has great potential for fast catch-up growth. Capital Economics forecasts 5-7 per cent annual growth until 2040. This is at least conceivable. India’s savings rates and entrepreneurial capacity are high enough to deliver such a rate. It will need much policy reform. But India’s politics are increasingly focused on economic performance. This does not guarantee success. But it does make it more likely.

Disheartened liberal democrats must not despair. The euphoria and hubris of the “unipolar moment” of the 1990s and early 2000s were grave mistakes. But the triumph of despotism is still far from inevitable. Autocracies can fail, just as democracies can thrive. China confronts huge economic challenges. Meanwhile, democracies must learn from their mistakes and focus on renewing their politics and policies.

Lagging behind

Italy’s slump reflects trouble both at home and abroad

The weak economy complicates a fraught fiscal position

ITALY BOASTS no glittering economic record. GDP growth has trailed the euro-area average every year since 1999. Despite a decent showing in 2016-17, the economy has yet to regain fully the output lost during the global crisis a decade ago and a domestic banking scare a few years later.

Now even its modest recovery seems to have gone into reverse. Figures published on January 31st showed that Italy slipped into recession in the second half of 2018. The economy shrank by 0.2% in the final quarter of 2018, its second consecutive contraction (see chart). The causes are both domestic and external. They seem likely to depress the economy this year, too, and to worsen an already fraught fiscal position.

The euro zone—notably Germany—has lost momentum as global trade has slowed. Italy has not been immune. Exports rose by nearly 6% in 2017, but Loredana Federico of UniCredit, a bank, reckons they probably grew by just 1% last year. Giada Giani of Citigroup, another lender, argues that the fate of Italy’s economy is tied to that of Germany’s, in part because of integrated manufacturing supply chains. Declining industrial production in Germany is likely to have spread south. (Germany’s GDP fell more sharply than Italy’s in the third quarter of 2018, though some of that dip was caused by a temporary halt to car production because of new emissions standards.)

Italy’s recession is also partly home-grown. In September 2018 its populist government unveiled budget plans for 2019 that defied the European Union’s fiscal rules. As the row with Brussels worsened, government borrowing costs rose sharply. Tensions were eventually defused in December, when the government agreed to run a smaller deficit, largely by dint of postponing its plans to increase spending. Though the spread between Italy’s government-bond yields and those of safe-haven Germany has fallen from its peak, it is still higher than it was a year ago.

The instability has had an economic cost. A survey of lenders by the European Central Bank (ECB) found that in the fourth quarter of 2018 Italian banks became more fussy about whom they lent to, even as credit standards in other large euro-zone countries eased. That could reflect rising funding costs. The Bank of Italy, the national central bank, expects that rises in sovereign-bond yields will push Italian companies’ borrowing costs up by a percentage point over the next three years. Olivier Blanchard and Jeromin Zettelmeyer of the Peterson Institute for International Economics, a think-tank, estimated in October that such financial-market effects would probably offset the boost from the government’s fiscal measures.

These domestic and external forces have similar economic effects, notes Nicola Nobile of Oxford Economics, a consultancy. They shake businesses’ and households’ confidence, leading them to delay spending. Measures of sentiment have weakened. The Bank of Italy notes that the share of firms expecting to increase investment in 2019 has fallen. Economists have marked down their forecasts for GDP growth in 2019. The IMF expects growth of 0.6% in 2019, down from its forecast of 1% in October. Mr Nobile and Ms Giani have plumped for a more gloomy 0.2-0.3%.

ECB-watchers think that the bank may extend its targeted long-term refinancing operations. The scheme, which offers banks cheap funding in return for lending to firms and households, could help ease credit conditions in Italy. Beyond that, policy options are limited. The ECB will inject further stimulus only in the event of a wider slowdown, rather than one confined to Italy. And anyway, any easing might be too little to counter Italy’s deeper slump.

Italy’s government now finds itself hemmed in. Economic weakness worsens its fiscal position. Public debt, already 132% of GDP, could rise further. The budget deficit will probably exceed the government’s target of 2% of GDP. That worse fiscal position could, in turn, make it harder for the government to stimulate the economy. If the European Commission decides Italy has broken its fiscal rules, any further spending will cause another row. And last year’s episode showed that big spending plans can be self-defeating if financial markets are spooked. Italy’s government would need to convince both Brussels and investors that extra spending would help the economy grow. Until then Italy will stagger on.

No Longer The Luckiest Generation: Boomer Finances Start To Roll Over

by John Rubino

We Baby Boomers timed it perfectly. We came of age during in an era of plentiful jobs and relatively high wages. Public pensions were generous. Stock, bond and home prices were low, and have since risen strongly, enriching anyone who managed to save regularly. College was (by current standards) insanely cheap, allowing us to upgrade our skills with minimal sacrifice.

The result was a generation with high average net worth and, at first glance, a great shot at a comfortable retirement.

But that’s an illusion, for several reasons.
First, the “average net worth” stat masks the fact that many Boomers didn’t actually do much saving.

All those outrageous wealth inequality charts include retirees, which by definition means that most Boomers have been harvested by the 1% along with their kids and grandkids.

wealth inequality boomer finances

Second, public sector pensions (as just about everyone knows by now) don’t have anything like the resources needed to actually pay current and future retirees what they’ve been promised. When those plans start imploding in the next recession, benefits will be cut dramatically. See here, here and here for the grisly details.

And this morning the Wall Street Journal added to the list with a feature on how (of all things) Boomer student loan balances are exploding:
Over 60, and Crushed by Student Loan Debt
One generation of Americans owed $86 billion in student loan debt at last count. Its members are all 60 years old or more. 
Many of these seniors took out loans to help pay for their children’s college tuition and are still paying them off. Others took out student loans for themselves in the wake of the last recession, as they went back to school to boost their own employment prospects. 
On average, student loan borrowers in their 60s owed $33,800 in 2017, up 44% from 2010, according to data compiled for The Wall Street Journal by credit-reporting firm TransUnion. Total student loan debt rose 161% for people aged 60 and older from 2010 to 2017—the biggest increase for any age group, according to the latest data available from TransUnion. 

Some are having funds garnished from their Social Security checks. The federal government, which is the largest student loan lender in the country, garnished the Social Security benefits, tax refunds or other federal payments of more than 40,000 people aged 65 and older in fiscal year 2015 because they defaulted on student or parent loan debt. That’s up 362% from a decade prior, according to the latest data from the Government Accountability Office. 
Student debt is one of the biggest contributors to the overall increasing debt burden held by seniors. U.S. consumers who are 60 or older owed around $615 billion in credit cards, auto loans, personal loans and student loans as of 2017. That is up 84% since 2010—the biggest increase of any age group, according to the TransUnion data. 
The borrowing buildup has upended the traditional arc of adult life for many Americans. Average debt levels traditionally peak for families headed by people aged 45 to 54 years old, according to the Employee Benefit Research Institute based on data from the Federal Reserve’s Survey of Consumer Finances. But between 2010 and 2017 people in their 60s, like most other age groups, accelerated their borrowing in nearly every category, according to the TransUnion data. 
Seniors are finding they have to work longer, holding onto positions younger adults might otherwise receive. They’re relying on credit cards and personal loans to pay for basic expenses. People 65 and older account for a growing share of U.S. bankruptcy filers, according to the Consumer Bankruptcy Project; unlike most consumer loans, student debt is rarely dischargeable in bankruptcy. 
Perhaps the most surprising element of this surge is the rapid run-up in student loans, an issue that used to be mostly concentrated among young adults. Changes made in the wake of the last recession help explain the shift. 
In the years after 2008 banks and other private student lenders began tightening underwriting standards for their loans, requiring more parents to sign on to student loans along with the student borrower. Cosigning makes the parents equally responsible for paying back the loan, resulting in a lower credit score and crimping their ability to borrow if they or their child miss a payment. 
In recent years, private lenders including SLM Corp., better known as Sallie Mae, and Citizens Financial Group Inc., have increased their focus on parents. They’ve rolled out student loans that are just for parents who want to pay for their kids’ college education.  
The loans’ main pitch includes the possibility of a lower interest rate for parents who have high credit scores than what the federal government charges on its own parent loans; it also allows parents to spare their children the burden of debt by taking it on themselves.  
Another problem: The federal government caps the dollar amount of loans that undergraduate students can borrow for college, but no caps exist for the aggregate amount that parents can take on. That has contributed to parents increasingly borrowing to cover the gap between tuition costs and the amount of free aid and loans their children receive. 
The federal government disbursed $12.7 billion in new “Parent Plus” loans during the 2017-18 academic year, up from $7.7 billion a decade prior and $3.3 billion in 1999-2000, according to an analysis of Education Department data by Mark Kantrowitz, publisher of Its underwriting standards are generally looser than banks and other private lenders, making it easier for more applicants to qualify. Parents on average owed an estimated $35,600 in these loans at the time of their children’s college graduation last spring, according to Mr. Kantrowitz. They owed nearly $6,400 on average (not adjusted for inflation) in the spring of 1993.

There’s so much to hate about this situation: The fact that the government and private sector lenders are “targeting” seniors for student loans; the fact that soaring senior debt has “upended the traditional arc of adult life” for so many; and last but definitely not least, the fact that this is happening during a long economic expansion. In the coming recession, retiree borrowing will soar, along with the attendant stress and anger. We Boomers might find ourselves back where we started during the Vietnam War, in the streets protesting an outrageously predatory government.

Free, Easy and Legal: How to Stream Great TV and Movies Without Spending a Dime

In a world where Netflix, Hulu and HBO subscriptions start to add up, ad-supported streaming TV and movie services don’t cost anything

By David Pierce

Tubi is the closest thing to a free Netflix you’ll find, with a large library of TV shows and movies. There’s even a section called Not on Netflix, just to rub it in a little.
Tubi is the closest thing to a free Netflix you’ll find, with a large library of TV shows and movies. There’s even a section called Not on Netflix, just to rub it in a little. Photo: Emily Prapuolenis/The Wall Street Journal 

Back when I had cable, I paid for something like 600 channels. I only wanted like six.

My wish list included live sports, “The Walking Dead,” and all the reality singing shows I could get my mitts on. But I spent most of my time watching... other stuff: old action movies on TNT, cable news, anything and everything HGTV.

As we’ve moved to streaming and swapped those 600 channels for Netflix or Hulu or Amazon Prime, a lot of that other stuff has gone away. HBO, Netflix, Hulu and the rest are competing for high-end, glamorous “peak TV”—which is whatever viewers tend to shell out money to keep watching.

But what about the reruns, classic films and late-night cartoons? More important: What if I actually don’t want to pay for streaming TV?
Not every streaming service costs $10 a month. Plenty of them offer wide selections of TV shows and movies and don’t charge a dime. Just be prepared to watch a few ads
Not every streaming service costs $10 a month. Plenty of them offer wide selections of TV shows and movies and don’t charge a dime. Just be prepared to watch a few ads Photo: Emily Prapuolenis/The Wall Street Journal

There’s a whole set of streaming services designed for exactly this purpose that don’t get talked about enough. They rarely have the latest and greatest, but they have huge libraries where you can poke around—I bet they’ll have something you like. They’re the internet’s version of basic cable, offering all the channel-surfing you’ve been missing. And yes, they’re completely free, as long as you don’t mind watching a few ads.

When I say free, I mean it. For the purposes of my testing, a service didn’t qualify as free if you have to pay for something else, like an over-the-air antenna or a cable-TV login. The services on this list don’t cost a nickel, as long as you already have a phone or laptop, or a smart TV or streaming media player such as Roku or Amazon Fire TV. (I’m betting you have one or more of those.) Some don’t even make you set up an account before you start. Just open the app and click Play.

There are lots of services worth checking out. Yahoo View has a large collection of currently-airing TV shows. YouTube and Vudu, which mostly offer movies to rent or buy, also have a rotating selection of free titles. Freedive, a new service from Amazon-owned IMDb, has both TV and movies. You can watch anime on Crunchyroll, documentaries on Snagfilms and local news on Stirr.

If you have a library card, you might be able to watch movies through a service like Kanopy or Hoopla, both of which have solid selections. If your library doesn’t already support such a service, you should request it.

The list keeps going, down virtually every interest and genre. But I found four services in particular that have become part of my usual TV-watching circuit:
Like most other free streaming apps, Tubi TV works on smartphones, in web browsers and on the most popular streaming platforms. You don’t need to log in to use it, but if you create an account you can do things like sync watchlists.
Like most other free streaming apps, Tubi TV works on smartphones, in web browsers and on the most popular streaming platforms. You don’t need to log in to use it, but if you create an account you can do things like sync watchlists. Photo: Emily Prapuolenis/The Wall Street Journal

Tubi TV. It’s a clearinghouse of every kind of TV and movie, and the closest a free service can come to being Netflix. (There’s even a section called Not on Netflix, which is a pretty good burn.) It scores better in movie selection than TV shows, and offers virtually nothing from the past few years, but its library is enormous. I particularly like the “Weekly Watchlist” section, which shows off some of the service’s best stuff.

My picks: “Up in the Air,” “Memento,” “The Manchurian Candidate,” “Reservoir Dogs,” “Tucker & Dale vs. Evil”

Pluto TV is all about live, linear TV; it packages shows and movies by genre or topic, giving you a never-ending channel of stuff to watch.
Pluto TV is all about live, linear TV; it packages shows and movies by genre or topic, giving you a never-ending channel of stuff to watch. Photo: Emily Prapuolenis/The Wall Street Journal

Pluto TV. This is live, linear TV for the internet. It’s organized mostly by subject, so you can go to the Action Movies channel and there’s always something on. The on-demand library is fairly anemic, but it’s excellent for mindless channel flipping, and the closest thing you’ll find to the cable experience of our ancestors.

My picks: “Dog the Bounty Hunter,” “Speed Racer,” “Hell’s Kitchen,” “Storage Wars,” “Layer Cake”

Sony’s Crackle service offers more A-list content than you might expect, plus a library of original shows such as ‘Rob Riggle’s Ski Master Academy.
Sony’s Crackle service offers more A-list content than you might expect, plus a library of original shows such as ‘Rob Riggle’s Ski Master Academy. Photo: Sony Crackle

Crackle. Sony ’sfree streaming service goes heavy on the fast-paced drama and high-stakes epics; it also has more A-list content than any other service I tried. It even has “Seinfeld”! (A few episodes, anyway.) There’s a decent set of original shows in here, too. Of all the services, Crackle was the one that had me clicking Play most often.

My picks: “Superbad,” “Alien,” “The Bourne Ultimatum,” “Whiplash,” “Community”

The Roku Channel is a useful library of free stuff, aggregating content from various services. And you don’t even need a Roku player to use it.
The Roku Channel is a useful library of free stuff, aggregating content from various services. And you don’t even need a Roku player to use it. Photo: Emily Prapuolenis/The Wall Street Journal 

The Roku Channel. Roku’s own offering is really a meta-service, a collection of free content from lots of other channels and services, all playing inside one simple interface. It’s really helpful and—here’s the interesting part—it doesn’t require a Roku box to work. All you need is a web browser or the free Roku app.

My picks: “Paddington,” “Dawson’s Creek,” “Gattaca,” “This is Spinal Tap,” “Walker, Texas Ranger”

One thing most of these services share? Ads. Some services will show you an ad before a show or movie starts, others will take breaks throughout to tempt you with homebuying services and toilet paper. Crackle went to commercial the most in my tests, along with YouTube’s free movie section; both had nine breaks in a two-hour movie. After years of ad-free Netflix binges, the interruptions felt a bit jarring, but it’s nothing compared to cable… and you pay for cable!

What do free streaming services have in common? Ads. You won’t see as many as you did on cable, but prepare for a few minutes of every hour to be spent in commercials.
What do free streaming services have in common? Ads. You won’t see as many as you did on cable, but prepare for a few minutes of every hour to be spent in commercials. Photo: Emily Prapuolenis/The Wall Street Journal 

Tom Ryan, chief executive at Pluto TV, said that because digital ads can be personalized and more effectively targeted, companies don’t need to run as many ads to make money. They are also collecting data on what you like and watch, to improve their personalized recommendations and to serve you more targeted ads. In many cases, companies share that data with studios and producers. It’s good to be aware that even if you don’t sign up for an account, these services are collecting—and sharing—a lot of information about you. 
Ultimately, I suspect our streaming life will include a mix of ad-supported and subscription-based services. After all, every time another streaming option appears, the chance I’ll pay for yet another $10-a-month subscription actually goes down.
“The average American household is not going to subscribe to Netflix and HBO and Amazon Prime and Hulu and Disney+ and ESPN+ and YouTube Red and God knows how many other services,” said Farhad Massoudi, Tubi’s chief executive.

A recent study from set-top box maker TiVo found that the average household subscribes to 2.75 services. That number has gone up over time, but it won’t rise forever: The same study found that more than 80% of people who canceled cable did so because of price. But a free service? Free is a nice Price.