Handing the baton to the next hyperpower

No blog has influenced me so much as that of Brad DeLong. I agree with DeLong with a frequency that is almost disturbing. I have often called myself a Brad DeLong sock puppet, mostly in jest.

However, for as long as I've been reading DeLong, I've believed that he is wrong about one big thing - the U.S.-China relationship. Brad thinks we need to do more to bend over backwards to convince the Chinese populace that we are their friend. I think we could not possibly do more than we have done.

Here's Brad's latest expression of the thesis:

In 1846 British Prime Minister Robert Peel accepted the U.S. proposal to draw the border between British Columbia and the Oregon Territory...As a result, when 1916 came, Americans perceived Britain as their friend. Americans perceived the British Empire as by and large a force for good in the world... 

The willingness of the United States to [fight for Britain in the World Wars was] powerfully motivated by America’s affinity with Britain...[Britain had] created a world in which the 20th century’s hyperpower would use its muscle to make the world comfortable for Britain to live in... 

Is the United States using its soft power now with the same skill and foresight? Not really... 

[A]t least one of India and China–perhaps both–will become late-twenty first century superpowers. And so we have an interest in building ties of affinity now: it is very important...that, fifty years from now, schoolchildren in India and China be taught that America is their friend that did all it could to help them become prosperous and free. It is very important that they not be taught that America wishes that they were still barefoot, powerless, and tyrannized, and has done all it can to keep them so.

Now actually, I think most of this is correct. It would be great if India and China thought that America was on their side, and had always been on their side.

And with India, I think there is a great chance that this will happen - in fact, it shows every sign of happening. The first major diplomatic step toward making the India-U.S. relationship similar to the U.S.-Britain relationship was the nuclear cooperation deal forged by the George Bush administration, which de facto legitimized India as a great (i.e. nuclear) power, and reversed decades of damage that the Clinton administration had done by trying to ostracize and punish India for its 1998 nuclear tests, and more decades of damage that previous administrations had done by trying to maintain a ludicrous false parity between India and the neighboring dysfunctional hostile failing state of Pakistan. So I think that, thanks in part to George W. Bush, but thanks more to the natural linguistic and institutional similarities between the two countries, and thanks even more to their shared geopolitical interests, we have a good chance of having a positive, enduring, mutually beneficial special relationship with India.

But then there's China.

Let's review a quick list of the ways that the U.S. has gone to bat for China over the last century or so.

First, through the Open Door policy, we prevented China from being colonized by various European and East Asian imperialist powers. U.S. power was the reason that China appears in light blue ("Partial European control or influence") on this map instead of in green ("Colonized or controlled by Europe"). Had the U.S. not done this, Europe might well have expended its energies carving up and dominating China instead of fighting World War 1.

Then, in the late 1930s and early 1940s, when Japan was conquering large portions of China, the U.S. put an oil embargo on Japan, simply for the purpose of saving China from conquest. This forced Japan to choose between halting their conquests and fighting the United States. It chose the second, and the resulting war cost the United States hundreds of thousands of lives. In other words, we got into the most costly international war in order to save China.

Then, in 1969, after the Sino-Soviet split, the USSR was considering a massive preemptive nuclear strike on China. The United States stopped this attack only by threatening to nuke Russia if they went through with the plan - which would have then resulted in a U.S.-Russia nuclear exchange that would have destroyed both countries. In other words, the U.S. threatened nuclear war, and risked its own total destruction, in order to save China.

Then, in the 1990s and 2000s, the U.S opened its markets to Chinese goods, first with Most Favored Nation trading status, and then by supporting China's accession to the WTO. The resulting competition from cheap Chinese goods contributed to vast inequality in the United States, reversing many of the employment gains of the 1990s and holding down U.S. wages. But this sacrifice on the part of 90% of the American populace enabled China to lift its enormous population out of abject poverty and become a middle-income country.

So again and again, the U.S. has gone to bat for China, harming our own workforce, risking our own death, and sacrificing hundreds of thousands of our young people in brutal combat. It is in part thanks to us that China is a hyperpower today, rather than A) a mishmash of European fiefdoms, B) a mismash of Japanese and Russian fiefdoms, C) a radioactive parking lot, or D) an insular, indigent economic backwater.

And has this caused China's government to teach its children that the U.S. is on its side, and supported its development every step of the way, as Brad would like? No. The government of China continues to teach its people that the West is their enemy. The state-controlled Chinese media continues to spout copious anti-Western rhetoric. The Chinese government continues to commit itself, in public and in private, to resisting Western ideas and culture.

Does this mean that the Chinese people despise the U.S.? No, they do not. They mostly like us. But the Chinese government, which holds the power and decides on geopolitical strategy, is implacably opposed to the United States.

So my question for Brad is: What else would he have us do in order to convince China's government that we are their buddy? What more could we do, in addition to the four aforementioned times that we saved China's bacon? Force Taiwan to join the mainland? Firebomb Yasukuni shrine? Recognize China's claim to the entire South China Sea?

Brad's parallel with the British cession of the Pacific Northwest is not an encouraging parallel. In the light of China's current territorial claims and aggressive actions toward its neighbors (including India), it seems to me to be an ominous parallel.

I counter-suggest that instead of trying to placate China's government by forcing our allies to make territorial concessions to China, that we take our case directly to the Chinese people, by increasing Chinese immigration, by building more cultural and academic links to China, and by continuing to have our leaders praise the Chinese people and culture in high-profile speeches. Will this be enough to make the Chinese government our buddy? No, it won't. But governments don't last forever.

Passive management vs. saving more

So, Eduardo Porter wrote an article, with large excerpts from John Bogle, telling people they should switch to passive management. Here's an excerpt:

On average, a typical working family in the anteroom of retirement — headed by somebody 55 to 64 years old — has only about $104,000 in retirement savings, according to the Federal Reserve’s Survey of Consumer Finances...The standard prescription is that Americans should put more money aside in investments. The recommendation, however, glosses over a critical driver of unpreparedness: Wall Street is bleeding savers dry [with fees for active management].

Ryan Decker does not like this. Bogle and Porter, he says, are "straightening the deck chairs on the Titanic". The real problem, he says, is not that people are paying too much in fees, but that they aren't saving enough in the first place. Ryan writes:

So people are approaching retirement with $104,000, and "a greater part of the problem is the failure of investors to earn their fair share of market returns."...Do Porter and Bogle really want us to believe that the main reason people are trying to retire on $100 grand is that they haven't made sufficient use of passive funds?... 

I'm as big a fan of passive management as anybody, but this is totally absurd...What would the average nest egg be if everyone had chosen the right fee structure and asset allocation? Whatever it is, it's not going to get anyone very far in retirement, particularly if they're accustomed to spending money at the kind of rates that lead to having such a small stash at that age... 

By all means, don't throw your money away on active management, and don't waste your time trying to pick stocks. That stuff matters at the margin. But that particular margin is insignificant compared to the problem of low savings rates.

Ryan is right, and he's also wrong.

Ryan is right that saving more of your income is capable of supporting a lot more retirement spending than saving money on management fees.

But Ryan is wrong to say that this makes Bogle and Porter's argument invalid. Actually, Bogle and Porter have a good argument. Here is why:

If you consume less today in order to consume more during retirement, you have to give something up (today's consumption). Thus, Bogle and Porter are recommending something that gets you more total consumption, while Ryan is recommending something whose main effect is just to move around your total consumption. Reducing fees is no substitute for saving more when it comes to increasing retirement consumption. But saving more is no substitute for reducing fees when it comes to increasing lifetime consumption.

Let's make that concrete. Suppose I save $1000 more when I'm 30 and consume $1000 more when I'm 65. And suppose my per-period utility is u(c_t), and the discount rate over 35 years is B. Then my utility gain from saving more is u(c_30 - 1000) - u(c_30) + B*u(c_65 + 1000) - B*u(c_65), where c_30 and c_65 were the amounts I would have consumed, before I decided to save more. The first part, u(c_30 - 1000) - u(c_30), is going to be negative. The second part, B*u(c_65 + 1000) - B*u(c_65), is going to be positive. In other words, the utility gain from saving more is only the utility gain from more consumption smoothing. And if people are already doing the optimal amount of consumption smoothing, that utility gain is zero.

Just for fun, let's think about that point a little more deeply. We should ask Ryan: Why do we think people aren't doing the optimal amount of consumption smoothing already? What sort of behavioral bias is keeping them from making the right choices for themselves? Do they have hyperbolic discounting? Do they have self-control problems? What's wrong with these people? If nothing is wrong, then saving more would actually be bad for them.

(The same, of course, could be true of active management. Maybe people are choosing active management, and paying the fees, because they get some utility out of doing so. It's certainly possible. Of course, if you take that position, you should then explain why more and more people are switching to passive management, just as Bogle has been urging. Preference shift? Seems unlikely.)

But anyway, the point is that you can't simply compare saving more with paying fewer fees in terms of the increased retirement spending the two are capable of supporting. That's like ridiculing people for picking up a $10 bill by pointing out that they could get a lot more than $10 if they sold their car.

Japan is not a collectivist society

As I prepare to get an Airbnb reservation for my upcoming trip to Japan, I am reminded of this article that came out about a week ago in the New York Times. The article is very good, the reporting is very good, but I did notice this bit from the Hofstede Center:

Dutch social psychologist...Geert Hofstede...developed a matrix of cultural dimensions by which one country could be viewed against another....[H]e came up with six measures...These include individualism versus collectivism, indulgence versus restraint, power distance (a group’s acceptance or rejection of hierarchy) and, perhaps most important for Airbnb, uncertainty avoidance...The center’s portrait describes Japan as a pragmatic culture that emphasizes collectivism and hierarchy and as “one of the most uncertainty-avoiding countries on earth.” (emphasis mine) 

Now, I wouldn't be surprised if the Hofstede Center makes good money dishing up this stuff to American businesses eager to "understand" Japan before they invest there. There's just one problem: this isn't what Japan is actually like.

Don't take my word for it. Go by the data. Grab a copy of David Matsumoto's 2007 book The New Japan, and skim through it - it'll take you maybe half an hour. Matsumoto, a Japanese-American social psychologist, rounds up data from a bunch of cross-cultural studies that use Hofstede's measure and others to measure individualism, collectivism, and a number of other cultural traits.

What they find, in short, is that Japan is not very collectivist. On the individualism-collectivism scale, Japan ranks about the same as the United States (which has consistently measured near the top of the individualism scale). Actually, Japan measures as slightly more individualistic than the U.S. Some of the studies also include Russia and South Korea. Russia is more collectivist than Japan or the U.S., and South Korea is the most collectivist of the four, at least when the studies were done (15-20 years ago).

Now, what's interesting is that this apparently used to not be true! Until the 1980s, Japan really did measure much higher than the U.S. on the collectivism scale. Then in the 80s, something changed, and Japan went individualist in a big way.

Now, Matsumoto is actually upset about this. He really likes traditional Japanese values, and he's actually sad that Japan has become more individualistic. The second part of the book is Matsumoto recommending policies that he thinks will restore Japan's old collectivist values. The policies are fairly silly, and this part of the book can be safely skipped.

Anyway, the data in Matsumoto's book shows two things:

1. Western stereotypes of Japan as a collectivist place are wrong, wrong, wrong.

2. Japan's culture probably underwent rapid change in the 80s, indicating that A) Japanese culture is not the eternal, unchanging thing that some people think, and B) economic changes really do have the power to cause big and sudden cultural changes. When countries get rich they become more individualistic. (I predict Korea measures much more individualistic now than in the 1980s. There's some evidence that China may be moving in the same direction as well.)

I don't expect the Western stereotype of "collectivist Japan" to die overnight. Stereotypes are actually more persistent than the cultures they claim to describe. But eventually, if you keep hitting a stereotype over the head with the hammer of data, it has to cry uncle.