The Great Leap Forward and the Cultural Revolution

A few weeks ago we talked about the big downward movement in Chinese real GDP in the late 1950s and 1960s.

While it is correct to de-emphasize the importance of business cycles because they are of secondary importance relative to growth, it is important to keep in mind that we are talking about real people who are hurt in real ways, not just dips on a graph.

In this case, these look like a depression-scale event in China.

Unfortunately, depressions aren’t caused by people and policies, while the downturn in China was in fact a policy that had effects that look like a depression.

To make matters worse, Chinese policies created a depression-scale event in a country full of people living at subsistence level. The result was starvation on a scale never seen before or since.

The Great Leap Forward was an agricultural reorganization policy of Mao Zedong that ended horribly. In part, it also led to a loss of some of Mao’s political power, who responded with the Cultural Revolution – a policy that amounted to getting rid of everyone who knew what they were doing. The bottom line is that depression-scale blip in Chinese real GDP corresponds to the deaths of millions under each policy – so we’re talking Hitler-scale.

Stockholm Syndrome

This was an obscure reference for a macroeconomics class that you can read up on here.

That post details a number of uses, to which I’d add that I’ve heard of it used as a reason for why employees sympathize with bad managers, or even why children often retain attachments to their parents favorite sports team or even religious faith, in spite of evidence that it isn’t working for them.

In our case it was mentioned that people in poorer countries often claim that they don’t need the wide array of products frequently purchased in developed countries. This is in spite of the fact that many people in developed countries aren’t particularly free to leave the influence of governments that aren’t acting in their best interest. Their typical response after emmigration to a richer country is to maintain this sympathy for old ways for a time (just as victims continue to sympathize with their kidnappers) before adjusting.

This was an interesting idea to bring to the debate about macroeconomics and well-being, because proponents of growth limitation in developed countries often use this perception of people in developing countries to discourage growth there. The fact that it changes with the local macroeconomy suggests this is a very problematic view.

Thorough Source on Historical GDP

Google Books has a scan of one of the definitive sources: Angus Maddison’s The World Economy: Historical Statistics.

It shows the oldest reasonable estimate of GDP: in England and Wales, in 1688, nominal GDP was about 54 million pounds.

To grow to the current nominal GDP of the U.K. (a modestly bigger country) of around 3 Trillion pounds would require an average growth rate for nominal GDP of 3.5% to be sustained for 321 years.

Good. Fast. Expensive. Pick two.

This is an old joke about what is possible on engineering projects.

Megan McArdle uses the concept to think through the planned stimulus package.

Good: It is very obvious, now that we have the stimulus plans, that the Democrats are using stimulus as an excuse to spend money on things they want to spend money on.

Fast: The problem is, that contra the Republicans, Democrats do care that money spent on these important projects is spent well.  And spending a lot of money well takes time.

Expensive: What we've got ... is basically one fact: America entered World War II in a depression, and emerged from World War II without one.  Hopefully, the relevant variable was the massive, massive amount of spending, rather than any of the other explanations one can plausibly build ...

New Productivity Data

Data on labor productivity came out Thursday morning: up by 3.2% in the 4th quarter.

Increased productivity is desirable, but by itself, this piece of data isn’t good or bad. It can reflect 3 things:

• Technological improvements
• The worst workers were fired first in the recession, making it easier for the remaining workers to post better productivity gains.
• The retained workers are covering their butts by working harder.

One way to interpret this is to compare it with compensation. Managers are inclined to retain workers whose productivity gains exceed the growth of their compensation. The difference is unit labor costs. Last quarter compensation was up by 4.7%, so unit labor costs were up by 1.5%. This isn’t good. (FWIW: FoxNews gets this backward by asserting that unit labor costs being less than productivity gains is good).

Another way to interpet it is to compare productivity gains to real GDP or some other measure of output. Again, productivity is outstripping our ability to buy it and consume it. This isn’t good.

So what we have here is a good thing – the productivity gain – that is bad at this time because the economy doesn’t seem to be able to “digest” it.

Wednesday’s New Data ??

Aaron brought this up in class, and we talked about it a bit.

In retrospect, I can’t dig out what Aaron was talking about; this is not to say Aaron was wrong, just that I couldn’t pick out what he was talking about from the ton of new data available (one possibility is initial unemployment insurance claims for last week, while another is change in unemployment for December). The numbers are similar.

I did make the mistake of asserting that perhaps the unemployment rate had gone up to 7.5% as expected. This data won’t be released until Friday morning, so that couldn’t be it either.

More GDP Growth Details

"Economy Dives as Goods Pile Up" from the February 1 issue of The Wall Street Journal goes over some finer details of 4th quarter performance.

In all quarters, some things get better and some get worse. In this one, the worst performers were business investment, consumer spending, and exports (basically, everyone else's business investment and consumer spending).

Interestingly, commercial and residential real estate were not off that much - perhaps they've fallen so far there isn't much place to go.

The only bright spot was imports - we're buying less of stuff produced by employees in other countries (although that is more than canceled by them not buying our stuff, and us not buying our stuff either).

The real problem area is inventories. These are goods that were produced but not sold. When they go up - as they did in the 4th quarter - it suggests that jobs will be cut more in the near future so that we don't make even more stuff that people aren't willing to buy.