The Great Brick Wall of China's Economy

On June 30 I tweeted:

"With China's economy continuing to slow, I wouldn't be surprised to see a major financial crisis there in the next three months."

This morning Nobel Laureate Paul Krugman writes in The New York Times:

"Yet the signs are now unmistakable: China is in big trouble. We’re not talking about some minor setback along the way, but something more fundamental. The country’s whole way of doing business, the economic system that has driven three decades of incredible growth, has reached its limits. You could say that the Chinese model is about to hit its Great Wall, and the only question now is just how bad the crash will be."

While Krugman points the blame at China's lack of consumption (which is a factor that will keep it from easily righting any downturn), a contributing factor is the persistent and extraordinary growth China has experienced the last few decades. As a result of that growth many investments have seen persistent and extraordinary returns. This in turn spurs greater investment...which we've certainly seen in China.

The problem is that those returns have been so consistent and so extraordinary for so long, that many expect they will continue indefinitely. As a result, But history tells us that extraordinary investment returns do not continue indefinitely. Furthermore, not all investments generate the same returns. My concern is that, like we've seen in developed countries during boom periods, that investors believe that these extraordinary returns will continue leading to overconfidence and malinvestment. Eventually, malinvestment (poor investment choices) lead to lower, even negative, returns. If the investors are highly leveraged (which they are in China), then these declines in investment returns leads to a much more significant financial crisis.

It's certainly difficult to tell what is happening in China as the data is all suspect. But with China's government now reporting that their economy is slowing...a more dangerous economic crisis becomes even more plausible.s

Oklahoma's Unemployment Rate Up To 5.2% in June

The U.S. Bureau of Labor Statistics is reporting that Oklahoma's unemployment rate ticked up again slightly in June, to 5.2% from 5.1% in May. This is the second consecutive month that the state's unemployment rate has increased (it was 4.9% in April). Just as concerning is the non-farm payroll data which showed a decline of 2,500 jobs in June. Since February the state economy has lost 4,300 jobs.

Yet some state officials still think that the state economy "remains on solid footing going forward."

Clearly they are wrong.

Digging deeper into the data though, one finds something else that is interesting: 50% of the jobs lost in the state the last 5 months have been government jobs...and that number rose to 88% in June just as the sequester really started taking effect. In short, Congress and state officials have been intent on shrinking the size of government. And they are doing so. As a result though, they are pushing Oklahoma's unemployment rate higher.

Another Reason We Need Comprehensive Immigration Reform

From The New York Times:

"Angeles P. Barberena has always tried to follow the United States’ immigration laws. She dutifully filed her petition to become a resident, complied with the requirements and paid her taxes and fees. 

That was 17 years ago. Ms. Barberena, who is from Mexico, is still waiting. Her file is inching through a backlog, and she has several years to go before she will receive the green card that will make her a permanent resident."

Simply unacceptable. If you want to come here, play by the rules, and work hard...we should welcome you, we should celebrate you, we should make your immigration here as easy as possible. But we don't.

The U.S. Senate recently passed legislation that would solve this problem for Ms. Barberena and 4.4 million others like her...legislation that is now languishing in the U.S. House. Naturally, Oklahoma's two Senators opposed the bill.

Derived Demand: The Case of Law School Professors

DC's New Living Wage Law = Fewer Jobs For Poor Workers

In a move that will provide university economics professors with another example of poor public policy, the Washington, D.C. council approved last week a new "Living Wage" bill that will require certain large retail employers to pay $12.50/hour ($4.25 higher than the current D.C. minimum wage). Due to the exemptions in the bill, it appears that the only firm to be immediately impacted is Wal-Mart who had plans to open six new stores in D.C. in the coming years.

What was Wal-Mart's reaction? According to The Washington Post, Wal-Mart has warned district officials that if the bill becomes law (which still requires approval from the Mayor and a Congressional review) then the large retailer will take its stores, and the thousands of jobs and low prices they bring, elsewhere.

No surprise there. In fact, this is exactly what we tell our Principles of Microeconomics students happens when the government imposes a price floor above the equilibrium wage. In such cases, some employers (not all) will find that fewer jobs are financially viable. As a result, they are willing to hire less.

For many D.C. residents, this is bad news. While Wal-Marts are not universally popular (existing D.C. retailers and labor unions don't like them), it is undeniable that they provide immense benefits to the communities they serve. For consumers, Wal-Mart provides significant cost savings...effectively boosting real family income. For workers, Wal-Mart stores provide hundreds of jobs. Yes, the jobs are primarily (although not entirely) low-paying jobs, they are still jobs people want. After all, a low-paying job is better than no job.

In the end the D.C. council's action threatens to hurt some of the very people who most need their help. In recent years I've been very critical of the willingness of some on the right to ignore basic economics. The actions from the D.C. council last week show that the left is willing to ignore those basic principles sometimes too.

State Revenue Collections Indicate State Economy Remains Weak

"The sustained growth in income and sales tax collections is a key indicator that Oklahoma’s economy had another nice year and remains on solid footing going forward."--Oklahoma Secretary of Finance and Revenue Preston Doerflinger

Well, it wasn't that nice of a year.

The Oklahoma Office of Management and Enterprise Services released their latest state General Revenue report last week that showed the state collected just over $527 million in June. This is $61 million less than the estimated amount and $54 million less than the amount collected last year. More concerning are the collections from the two most important revenue sources--income and sales tax collections--which both fell below the estimate for the month.

Despite the claims from state officials, declines in state sales and income tax collections are not indicative of a growing economy.

As I've been saying for months now, state tax collections have been indicating for months that the state economy has been weaker than many are claiming. Sales tax collections--perhaps the best indicator of state economic health-- have been stagnant since peaking early last fall. Plus, as I mentioned a few weeks ago Oklahoma personal income in the first quarter fell at a rate that ranked among the nation's worst.

Oklahoma's economy may not be contracting, but it's far from strong. The latest state revenue report does little to change that.

Picture of the Day: Public Sector Payroll Jobs During Recent Presidencies

From Bill McBride