China Is Let Down by Central Planning — Again

M any newspapers, including the Wall Street Journal, are reporting the news that, contrary to previous projections by the Japan Center for Economic Research (JCER), China’s GDP will not surpass U.S. GDP by 2035.

This may come as a surprise and a relief, but some of us were always skeptical of the notion that China would achieve great economic success after having reversed its move toward market liberalization in 2012 and returned to central planning for its industrial policy. Based on experience, but also fundamental economic principles, such policies meant that the communist regime would be incapable not only of growing as fast as predicted, but also of sustaining whatever growth it had managed to achieve until then. China wasn’t destined, therefore, to overtake the U.S. economy unless the U.S. irresponsibly adopted similar, statist policies.

The idea that a country can become rich through central planning is a myth. Central planners can temporarily create the illusion of success, in the same way that China’s zero-Covid policy once created the illusion of having defeated the virus. As Dominic Pino and Adam Thierer have explained, malinvestment, economic distortion, and politically driven policies replete with special-interest-driven handouts, all of which are characteristic features of central planning, eventually inflict a sizeable economic toll that’s impossible to hide. When this happens, the economy slows, companies collapse, and the luster of state direction of economic affairs disappears for all save the most ideologically blinkered (at least until the next time this occurs).

None of this reasoning, however, appears in the JCER’s projections. Instead, as the Wall Street Journal reports, you get this:

“The Xi Jinping regime in its unprecedented third term, the zero-COVID policy, and the U.S.-China decoupling that prevents access to advanced technologies become a heavy burden on the Chinese economy,” JCER economists write in a report issued last week.

Much of this is true, of course, but it doesn’t express the fundamental problem. Beijing has been pursuing bad economic policies long before Covid. It’s baffling that so many American and Japanese pundits, including a few economists, have fallen for the tale of Beijing as a central-planning miracle worker. It doesn’t seem to matter that we have a deep historical record that shows repeatedly that state direction of economic activity impoverishes rather than enriches. Many people in America today — on the left and right — still have faith that central planning can work economic marvels, and that we should therefore emulate China’s policies.

There’s yet another reason why predictions such as those of the JCER should always be taken with a grain of salt: Macroeconomic models are notoriously bad at making long-term predictions. We should have always been skeptical of a prediction about what will happen in China and the U.S. by 2035. And the same is true of revised predictions. As an example, take a look at the Fed, an organization of 23,000 employees and with a $5.3 billion budget, whose models don’t even seem capable of predicting economic trends under its own nose, let alone years into the future.

At the end of 2021, the Fed projected that the federal-funds rate would stand at 1.6 percent in early 2023. Three months later, that rate projection had almost doubled. By September 2022, it had increased to 4.5 percent and is now supposed to reach 5.1 percent. To put it in technical terms, the Fed sucks at making projections. Most other macroeconomic models were wrong during 2021 and 2022, too, and you can be confident that they will be wrong about 2023. In fact, the market itself isn’t great at setting accurate long-term-inflation expectations. And the Congressional Budget Office is often wrong in its projections of economic growth.

The further out projections are, the more likely they are to be wrong. Trying to predict what millions of people, investors, suppliers, and retailers will do, how hundreds of different factors will change, and which outcomes those changes will produce is bound to be a mere guess. In addition, the path of our $25 trillion domestic economy is intimately intertwined with a $94 trillion global economy, which makes that guess even less reliable. This doesn’t mean that models are completely useless, but it does mean that we shouldn’t rush to believe everything they predict, especially if it is more than a year into the future.

I doubt that we will learn from our mistakes and start adopting a healthy dose of skepticism regarding long-term projections. Too many politicians, economists, and pundits are invested in the illusion that — equipped with models that can ostensibly predict the future — they can design clever plans to organize the economy. Worse, this intellectual hubris stokes the arrogant belief that being able to plan and organize our lives makes it imperative that they do so.