James Sweeney and micro‐based attempts to make macro relevant

• Published date: 01 June 2023
• Author: Donald Chew
• Date: 01 June 2023
• DOI: http://doi.org/10.1111/jacf.12565

DOI: 10.1111/jacf.12565

ORIGINAL ARTICLE

James Sweeney and micro-based attempts to make macro relevant

Donald Chew

Journal of Applied Corporate Finance

Correspondence

Donald Chew

Email: don.chewnyc@gmail.com

This will appear as Chapter 11 in the author’sfor thcomingbook, The Making of Modern Corporate Finance (Columbia University Press, 2023).

INTRODUCTION

Westerners have long been impressed by China’s remarkable eco-

nomic growth, by its ability to report the largest, uninterrupted

series of increases in GDP during the past 30 years. But as we saw

in the last chapter, such growth has failed notably in providing

returns for those Western and Chinese investors willing to entrust

their savings to listed Chinese companies. And f‌iguring promi-

nently in that story, the gargantuan assets and suspiciously large

and consistent reported prof‌its of today’s Chinese state-owned

banks seem to be telltale signs of a kind of Ponzi scheme—one

designed to conceal a still rising mountain of bad debt, continu-

ously rolled over and backed by assets with small and disappearing

values (Think of Evergrande’s unf‌inished buildings, and all the

others that have been demolished without ever housing tenants.).1

But how could so many presumably smart and interested peo-

ple, including investors and the regulators appointed to protect

them, have fallen for such a scheme? A big part of the answer, as

we argue in this chapter, has to do with major limitations of the

macro statistics that are routinely compiled and released by gov-

ernment off‌icials everywhere, and received and reported by many

business economists (and most of the business press) as holy writ.

GDP AN UNRELIABLE GUIDE TO THE

WEALTH OF NATIONS

In a book published by Cornell University Press in 2018 called

Unrivalled: Why America Will Remain the World’s Sole Superpower,

political economist Michael Beckley begins by telling us what

any American who’s been to China is likely to be aware of—that

the United States continues to be “several times wealthier” than

China. But more surprising, and counter to the received (certainly

pre-Covid) wisdom is Beckley’s report of the progressive widening

1America’spublic debt, however large and growing, represents much less of a cost burden than

China’sto its current and future citizens and taxpayers. Thanks to a per capita income six times

that of China’s,the United States not only has more surplus wealth to pay down its debts, but

also enjoys lower interest rates from the dollar’s status as the world’s reserve currency, whose

estimated benef‌it to all US debtors is a $100 billion reduction in annual interest payments.

of the wealth gap between the U.S. and China since the onset of

the Global Financial Crisis in 2007, a gap that Beckley estimates

has been growing by “trillions of dollars every year.”2

But how, Beckley asks, can this wealth gap be growing when

China

has a bigger GDP, a higher investment rate, larger

trade f‌lows, and a faster economic growth rate than the

United States. How can China outproduce, outinvest,

and outtrade the United States—and own nearly $1.2

trillion in U.S. debt—yet still have substantially less

wealth?

The answer, in a nutshell, is that GDP and other standard

“macro measures” of national economic performance are unable

to capture the reality that China’s economy is “big but ineff‌i-

cient,” and that its vast output is produced at enormous expense.

As Beckley puts it,

Chinese businesses suffer from chronically high pro-

duction costs, and China’s 1.4 billion people impose

substantial welfare and security burdens. The United

States, by contrast, is big and eff‌icient. American busi-

nesses are among the most productive in the world, and

with four times fewer people than China, the United

States has much lower welfare and security costs.

Calculations of GDP effectively ignore such costs by, for exam-

ple, counting production costs as output. “Spending money,” as

Beckley goes to point out,

almost always increases GDP, even if the funds are

wasted on boondoggles. In fact, the most common

method of calculating GDP is called the “expenditure

method” and involves simply adding up all of the spend-

ing done by the government, consumers, and businesses

2Beckley, Michael. 2018. Unrivaled: Why America WillRemain the World’s Sole Superpower.

Ithaca, N.Y.:Cornell University Press.

J. Appl. Corp. Finance. 2023;35:57–62. © 2023 Cantillon & Mann.57wileyonlinelibrary.com/journal/jacf