One thing you should always remember about GDP is that it is a measure of economic activity first and foremost. Therefore, it is generally a sound indicator of economic health. However, its main weakness is that it includes all economic activity, even that which replaces existing assets destroyed by natural disaster. Hence the bizarre idea that the economy booms following a disaster like Hurricane Katrina or the Japanese Tsunami.
There is increasing evidence that much of China's astounding GDP growth originates from government-ordered destruction and replacement of assets, or the construction of unwanted (not necessarily unneeded) new assets. The swanky new high-rise apartments, for instance, cost more than most people can afford, and the terms (50% down, balance paid off in 36 months) makes today's tightened post-crisis mortgage credit look like subprime liar loans. This report from Australia's version of Dateline sums up what is happening very well:
The issue isn't just in real estate. It appears that China's much-vaunted infrastructure development is also unwanted. The country's ultra-fast passenger rail system, for instance, has virtually no passengers.
This cannot go on. China is riding those bullet trains straight off the edge of a cliff (there's a good article on this at Slate). Once the government-ordered bubble bursts, there will be huge deflationary pressures. Those overpriced apartments will tumble in price, and reach their real value. The only question is whether anyone will still have the income to pay for them.
Leftists often talk about market failure. What is happening in China now may be, in economic terms, the biggest example of government failure in history. It should be a salutary lesson for those who claim we can spend our way out of recession.
Tom Friedman, call your office.