by Gary North
Late in 2004 and early into 2005, the British Broadcasting Corporation paid for an extensive poll of public opinion regarding the economy. It was taken in 22 countries. About 23,000 people were interviewed. This is a large enough sample per country to insure reasonable accuracy. The polls were taken by GlobeScan and PIPA: the Program on International Policy Attitudes.
The poll was taken prior to the tsunami. In this respect, its results for Asia were probably overly optimistic, especially in Indonesia.
The results of this poll were not given much publicity. I think they should have been. Some of the results were counter-intuitive, most notably the high optimism of residents of South Africa and the extremely high pessimism of residents of South Korea.
There are other peculiarities of the results. People were asked about their optimism vs. pessimism regarding three units: the world economy, the domestic economy, and their own families. In a majority of countries, pessimism regarding the world economy was high. Yet pessimism regarding their own families was much less. As the author of the final report writes, the respondents seemed to be saying, "I'm OK, but the world isn't."
Microeconomics deals with the individual and the firm.
Macroeconomics deals with the region, nation, and world. There is no question that people's information is generally more accurate regarding their personal situation than regarding the world's situation. Unless some statistically improbable event bankrupts or makes rich the opinion-holder, he knows more about what is facing him than what is facing someone on the other side of the globe. His level of responsibility is higher. If he incorrectly assesses the macroeconomy, there is nothing lost, unless he is Alan Greenspan. If he misforecasts his own family's economic situation, it can cost him a lot, even if he is Alan Greenspan.
With respect to the world economy, Americans were in the camp of the pessimists, but at the top of the 14 pessimistic nations: 39% optimistic, 46% pessimistic. Contrast this with South Korea: 15% optimistic, 82% pessimistic. In Japan, pessimism reigned: 12% optimism, 45% pessimism. Also close to the bottom were Italy and France. Germany was evenly split: 45% to 45%.
With respect to their own countries' prospects, Americans were 45% optimistic, 51% pessimistic. Among Industrial nations, South Korea was the most pessimistic: 11% optimistic, 88% pessimistic. Only Lebanon was worse: 7% to 77%. But Italy and France were close behind.
Then we come to people's expectations about their families' prospects. Here, Americans were decidedly optimistic: 58% to 32%. South Koreans were low, but not at the bottom: 26% to 71%. Italy was at the bottom: 15% to 58%. Japan was second to last: 18% to 41%. South Korea was number 4.
Those polled in the U.S. were convinced that the world economy was heading downhill, and so was America's economy. But with respect to their own families, they were upbeat.
This reminds me of opinion regarding Congress. Voters think Congress is made up of self-seeking charlatans. But with respect to their own Congressman, who is seen as bringing money into the district, there is confidence. The same is true for attitudes toward the tax-funded schools. Yes, they are declining. Everyone knows this. But not the local school where Billy Joe and Peggy Sue attend. These schools are exceptions.
Here, macro opinion is correct and micro opinion is wrong. Unlike opinions regarding family economic prospects in a competitive local market, tax money is involved. People want to believe that they are wise enough to get their fair share of the tax money handed back to them after the bureaucrats skim off 50%. So, they believe in impossibilities. It's the Lake Wobegon phenomenon: every Congressman and every public school is above average on the micro level.
If someone is optimistic with respect to his family's economic situation and pessimistic regarding everyone else's, he is probably more willing to spend money to buy consumer goods than he is to invest. If you think the macroeconomy is sagging but your own situation is improving, it is wise to invest in yourself. If you don't want to invest in yourself — and most people don't — then you will spend on consumer goods.
Surveys of Chinese and Indians revealed considerable optimism. With respect to world economic conditions, China was 68/7. India was #2 at 55/30. With respect to the national economy, it was 88/4 for China. #2 was South Africa: 62/30. India was #7: 55/40. With respect to family conditions, China was 86/7. India was #2 at 77/14. South Africa was #5 at 65/26.
The advanced Asian countries, Japan and South Korea, were pessimistic across the board. In fact, their pessimism was close to the bottom among all 22 nations. Here we have two of the most productive societies on earth, yet their people don't see the immediate economic future as bright.
I want to suggest a possible explanation for this. If I'm correct, then you should apply my analysis to your own personal situation.
WE WEAR TWO HATS
Consumers can buy something only because they own something of value, either money or a good prospect of getting money, which serves as collateral for a loan. We consume because we have money to spend. How did we get this money? Because we have been producers, or the heirs of heirs of producers, or the robbers of producers.
As consumers, we survey the inside of a Wal-Mart and conclude: "I have more choices than money." The range of choices in a Wal-Mart is immense. There are also lots of other places to shop, lots of other product lines to buy.
The importance of a price reduction for a particular product is marginal in most cases. Most people aren't in the market for this product. Of those who are, most will find that it is a marginal expenditure in their overall wealth position. This may not be true of a home, but with interest rates low and down payment requirements low, even a reduction of several thousand dollars in the sales price is not a major event in any buyer's life.
For the seller, the reliability of personal income is more important than the aggregate price level. If a seller is forced by market conditions to cut the price by 10%, and he is selling a house, that may be a large hit to his equity. So, in our position as sellers, we are more threatened by a price cut than we are benefited by a general increase in the supply of goods and services. Also, there are all-or-nothing threats to a person's immediate income. "You're fired!" There are no comparable threats from the supply side of the market.
Economists call such relationships asymmetric. For example, members of a special-interest producers' group are far more alert to government regulations of their industry than a typical voter is. They are more alert to the profit or loss potential of a law related to their industry than a typical voter is. Conclusion: laws will tend to favor special-interest groups that contribute to politicians' re-election campaigns. Most voters don't care about laws relating to an industry. Members of that industry care a great deal.
A person looks at his employment situation and thinks: "Foreign competition threatens me." He looks at his situation as a consumer and concludes: "I am not threatened or benefited very much by imports over the next year." He is worried about imports in his role as a producer, but he is only marginally benefited by imports in his role as a consumer.
Producers in South Korea and Japan are facing tremendous competition from China, India, and Indonesia. In their role as consumers, imports help them, but not so much as they feel threatened as producers. So, residents in these two nations are pessimistic about the future. They see a potential threat to income from their jobs. Their benefits as consumers are marginal. A man who has just been laid off is thinking about replacing his income, not the opportunities for smart shopping.
Now consider a 22-year-old Chinese man who has just arrived in a city of two million people, which had 100,000 in 2000. He has left the farm. He is the first person in his family who has done so. He has no money, but he has great energy. The economy is booming. He hopes to buy a car in five years. He is poor on paper but rich mentally. This mental attitude affects his outlook. This is not simply a Chinese phenomenon. The BBC survey reports:
The young are far more inclined to perceive economic conditions as improving than are the old — especially in regard to their own conditions. Worldwide, a striking 59 percent of those 18 to 29 years old see their family's economic conditions as getting better, but only 49 percent of those 30 to 44 see this; 41 percent of those 45 to 59; and just 31 percent of those above 60. Where their country is concerned, 45 percent of the youngest group are optimistic, but only 37 percent of the oldest group; and for the world, 41 percent of those from 18 to 29 are positive, but just 28 percent of people sixty years and older.
In Europe, only in Great Britain and Germany were people optimistic about family wealth — Germany just barely: 41/35. France, Poland, Russia were negative.
Across the board, Mexicans were pessimistic. This bodes ill for border control. Despite an economic recovery, they have not readjusted mentally.
Low-income people were pessimistic. This is understandable. Then what of India and China, where most people are low-income farmers? The designers of the poll do not say. But at the very end of the BBC report on the poll, there is a brief reference to the fact that in 8 countries, the polls were taken only in urban areas. This probably explains why the polls revealed such optimism. The overwhelmingly poor people in rural areas were not asked.
Among the optimists are South Africans and Australians.
South Africans and Australians are among some of the most optimistic people surveyed. South Africans are remarkably optimistic about their family (65%) and their country (62%) and lean positive about the world (44%/33%). Australians are nearly as optimistic about their family (54%) and as optimistic about their country (61%), however they swing more negative about the world (31% getting better, 45% getting worse) compared to South Africans.
UNSORTING ALL THIS
It appears that growth-oriented nations are optimistic. South Korea and Japan are exceptions. What matters most is a combination of youth, an export market, and recent experience of economic growth.
This does not explain Australia. But Australia and South Africa are metals exporters, and metals have been doing well for four years. This may explain South Africa, too.
For young Americans who are in competition with China and India, they face a lifetime of competition from outsourcing. They are going to have to add value to whatever it is they are selling. It had better be service. Commodities are too easily imported from abroad.
For oldsters who are coming to their golden years, the pressure of imports from Asia are not a threat. Imports are a tremendous advantage. A billion new Asian producers are arriving to serve the world economy. Americans are beneficiaries in their role as consumers.
Because people worry most about their role as producers, on which so many plans depend, the competitive pressure from China and India are perceived as threats. For some occupations, they really are threats. But people are flexible, especially young people. Human labor is specific in the short run in a high division-of-labor economy, but non-specific in the long run.
At some point, America's current account deficit of $800 billion a year will end. The Asian central banks will no longer buy our debt at today's low interest rates. The dollar will fall. Long-term interest rates will rise. Lenders want some assurance that they will be repaid in a currency that will purchase a comparable basket of goods. The problem is, Americans are no longer producing baskets full of goods that Asians cannot buy cheaper from Asians. I think this realization will hit the international capital markets before the next Presidential election.
From the point of view of that Chinese newcomer from the farm, it makes no difference whether an American buys what he produces or another Asian. China's central bank is (or was until last August) buying American debt and creating fiat money to make the purchases. It could as easily buy any other form of debt.
What threatens that Chinese youth is the fiat-money-induced economic boom fostered by the central bank. Also a threat are domestic price controls, which are masking the rise in prices by means of controls-induced shortages.
The boom in China will turn into a bust soon enough. I think this will happen before or shortly after the 2008 Olympics in China. It could happen sooner.
Public opinion can turn around within a few months. But youth still has the advantage. Youth is flexible. It also has time to adjust. Its plans are not fixed. Plans are non-specific, like its labor.
We oldsters are running out of time and flexibility. Our plans, which in theory remain adjustable, are more expensive to change. If you have to make a short-term change, you must pay a premium price. That is the reality of the time-money trade-off.
For Americans who have higher education, decades of experience, a willingness to change, and a willingness to seek out new ways to serve the consumer, the future will be tough but not disastrous, unless their health fails. Most Americans stay healthy longer than ever before.
But for the person who is not flexible, who is dependent on Social Security or a pension from a company as shaky as General Motors, the future is far more problematical. Economic growth will help. A rising tide raises all ships. But it raises the ships that are positioned to take advantage of the tide first. There is no question that China and India are better positioned than we are. South Koreans see this. The Japanese see it. When the terms of trade reverse in the current accounts budget, Americans will see it.
The greatest threat to our economic health as a nation is a trade war. If the politicians start passing tariffs and quotas in response to voters' demands, the world economy could tank for many years. If the voters become persuaded that low tariffs are responsible for the effects of Asian central bankers' unwillingness to buy more Federal debt or American corporate debt, then the economic gains we have seen for the last generation could end. They could even be reversed.
Economic freedom did not get us into this high-risk mess. Asian central bank policies did. Too many of these central bankers studied in the best American universities. They have a na´ve Keynesian faith in the productivity of central bank inflation. This faith is going to be tested soon enough by the Austrian theory of the trade cycle. Let us pray that it is not then tested by Jude Wanniski's theory of worldwide depression through tariff hikes.
July 20, 2005
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