Quick Information

China is gonna blow.  Or so everyone keeps worrying.  This is probably correct, but probably just as early as the people who called the housing bubble.  Give it a few more years.

But prognostication was not my goal here.  I wanted to ask why China was going to have a recession; one of the things I have learned in thinking about macroeconomics over the last several years is that recession are really much less obvious than they seem.  China may be stimulating its economy by making a lot of bad loans building a whole bunch of shit that nobody wants, but so what?  If that's how it turns out down the road, you just write off the loans, close or re-tool the factories, and get back to work on something new.  Recession?  What recession?

I think there are two responses to this, and both of them have to do with information.  I have no idea how information fits into any sort of theoretical macroeconomic framework, but I also don't see how you can leave it out.  It seems to me that recession are caused by a lack of information gumming up the free market; they are a sort of information externality.

First, when boom turns to bust, you lose information about what you should get to work producing.  Booms seem to be focused on particular facets of the economy, whether this is technology, real estate, or export capacity.  It's not hard to figure out what to produce and how to make money in those circumstances.  Just run with the bulls.  But when the bust comes, resources lie idle because there is an information coordination problem.  We could all be working, but on what?  What do we need?  What do people want?  It's suddenly unclear.  A burst bubble causes unemployment where a boom does not because one is pushing on a strong where the other is pulling. 

Second, debt.  This may apply less in the case of China, because in general they have less debt in their economy, though frankly that might just be because the statistics are so bad we can't count it.  Debt introduces another information coordination problem, this one slightly more subtle.  We may owe one another lots of money for the dumb ass projects we floated during the boom.  Collectively, this is not a problem, as in a closed economy the net debt would still be zero.  Getting a loan form the martians is like squeezing blood from a stone.  But writing off this debt and going on our merry way making stuff may be difficult because of a lack of trust and a lack of accord on the distribution of wealth.  Debt to GDP is a number completely left out of standard economic theory because in the aggregate it can't matter.  Unfortunately, getting to the aggregate requires the little capitalist computer to be operating with all the available information, and that, I propose, is precisely what lacking in a recession. 

We will see if the Chinese model can overcome these flaws in the free market by centralizing information in technocratic hands.  I doubt it, but that may just be because I'm more scared of success here than I am of failure.