China's Empty Cities and the Law of Supply and Demand

Why Beijing needs to keep on building, snarky bloggers be damned.

An old friend of my mother had a saying about cooking for guests: "If there isn't too much food, then there isn't enough." Most mathematically inclined people would agree that the chance of guessing exactly the right amount of food to leave everyone at a dinner party full and happy -- that is, on a continuous spectrum ranging from no food to infinite food -- is virtually zero. But the analysis of economic growth, and China's urban planning in particular, has not always heeded this simple insight.

On March 16, the Chinese government released a seven-year plan for the continuing urbanization of its population. So far, the process has been an important engine of China's growth, making workers more productive by giving them better access to capital, services, and economies of scale. There have been plenty of bumps in the road, though, with huge urban districts built under government orders still waiting for their first inhabitants.

This is where the adage about cooking comes in. How likely was Beijing to guess exactly the right size and number of cities to house its enormous population? Just like having food left over at the end of a meal, the risk-averse strategy was to build a little extra, in case the technocrats didn't guess correctly the first time.

This situation repeats itself millions of times every day around the world, and it's not unique to planned economies. Almost any industry, let alone the economy of an entire country, involves myriad decisions about how much to invest, produce, sell, pay, or save. It's inevitable that some of those decisions are wrong, and a few are inevitably wrong in a big way.

As the Great Recession took hold in the United States, thousands of new homes were left vacant or abandoned -- notably in Florida, but in many other states as well. Spain today also has hundreds of thousands of empty properties, as jobs are much scarcer than newly built apartments. And booming Australia may have as many as 125,000 unneeded houses.

Whatever the economic system, whatever the point in the economic cycle, the market for newly constructed buildings does not always clear. Developers make bets based on expectations that turn out to be incorrect. Sometimes, they might not even expect the market to clear right away; they might want to build property while construction is cheap, even if the right time to sell might be a few years away. But other developers may simply overestimate demand. Indeed, it would be astonishing if all of their forecasts for demand were correct, all the time.

And yet that's what pundits seem to expect. The results of overbuilding are easily visible, and just as easy to poke fun at. But if China's overbuilding is the worst planning mistake in its past quarter-century of economic development, I call that not too bad at all. Moreover, it's not as though those empty buildings will have zero value for eternity. Just consider what happened with fiber optic cable.

During the previous recession in the United States, after the bursting of the dotcom bubble in 2000, the fiber optic cable industry suffered almost as much ridicule as China's ghost towns. Firms like Global Crossing built enormous fiber networks on the "if you build it, they will come" theory, but not enough people came. That has started to change. Last June, fiber accounted for almost 8 percent of broadband connections in the United States, after growing 12 percent in the previous 12 months, far outpacing the overall increase in broadband penetration of less than 4 percent. Today, major cities are posing like contestants in a beauty contest in hopes that Google will choose them to launch its ultra-high-speed fiber hook-up.

By the same token, Chinese people may yet move into some of those empty districts, especially if the relaxing of the one-child policy and increased immigration lead to higher population growth. Changes to China's strict internal migration rules, which are likely to occur as part of the agenda released this week, will help as well. In the grand sweep of China's post-reform growth, any waste associated with overbuilding will probably end up as a footnote -- just like those vacant condos in South Florida and the Great Recession.

Of course, being out of phase with demand is not the only reason why an industry might suffer a gap between investment and revenue. Sometimes the pace of innovation is out of step with consumers' preferences, necessary infrastructure, or the economy's absorptive capacity. In recent times, these factors combined to create decades-long delays between the invention and mainstream adoption of personal computers, mobile phones, and electric cars, to name a few.

But innovation can also lag behind the economy's wants and needs. We don't have good synthetic substitutes for copper and rare earth metals, so their availability can be a constraint on the size of electric grids and the production of electronics. Supply can fall short of demand in traditional markets, too, where innovation is hardly an issue. For instance, as incomes rose in the last global boom, people wanted to buy more food. Harvests couldn't just expand instantaneously, though, and the slow response of supply to higher demand led to higher commodity prices and shortages.

These are normal growing pains in a world economy that is complex and full of frictions. In the short term, they can result in odd mismatches of supply and demand. In the long term, however, they tend to smooth themselves out. The critical question is whether it's worse to have too much of something or too little.

In the case of Chinese housing, the answer is clearly too little. Empty cities might spawn a thousand jokey articles in the Western media, but they don't spawn many riots or rebellions at home. Millions of homeless Chinese, who can find jobs but not a place to sleep, might be another story. So get back into that kitchen -- the guests will be here ... eventually.

WANG ZHAO/AFP/Getty Images


Getting to No

Why ensuring nuclear material doesn't end up in terrorists' hands should still be at the very top of President Obama's agenda.

With Ukraine melting down and the confrontation between Russia and the West heating up, both partisan critics and impartial observers can be excused for asking why U.S. President Barack Obama is going to The Hague this Sunday, March 23, for the third Nuclear Security Summit. Given all the other urgent demands, should nuclear security be at the top of the agenda at this time, and even if it should be, can this gathering do anything about it?

The answer to both questions is yes. To understand why, consider the sequence: 52, 38, 25, X. (And no, it has nothing to do with your March Madness bracket.) If you can identify the question to which this series is the answer, you'll know how the Nuclear Security Summit will actually allow the rest of us to sleep more soundly in our beds.

But more on that later. For now, consider three questions: What is the challenge for the leaders who will assemble in The Hague? What is the response that they are seeking to motivate? And what specifically can be accomplished at this meeting to make the rest of us safer?

The challenge is nuclear terrorism: to put it bluntly, 9/11 with the Bomb. Many observers find incredible the notion that with President Bashar al-Assad gaining ground in Syria and with Russian President Vladimir Putin's army invading Crimea, Obama and his counterparts would devote so much time to a threat that seems so distant. The possibility that terrorists would explode a nuclear bomb devastating the heart of one of our great cities, some say, is unimaginable.

Analysts of international security, however, understand that farsighted leaders act in advance of catastrophes -- to prevent them from happening. (Would that they had the foresight to address what might come of the protests in Ukraine before the situation became a crisis.) These analysts know that when we say something is inconceivable, this is a statement not about what is possible in the world -- only about what our limited minds can conceive. Before the 9/11 attacks, who could have imagined terrorists hijacking airliners, converting them into guided cruise missiles, and toppling the World Trade Center? As the commission that investigated the 9/11 attacks concluded, the single greatest failure of governments prior to 9/11 was a "failure of imagination."

An appropriate response to a threat of such magnitude must obviously be complex and multilayered. At the core of the strategy, however, are three no's: no fissile material, no mushroom cloud, no nuclear terrorism. If the international community can deny terrorists the means to achieve their deadliest ambitions, it can prevent a nuclear 9/11.

To that end, the Nuclear Security Summit is part of a global effort that seeks to eliminate nuclear weapons–usable material, namely highly enriched uranium and separated plutonium, wherever possible. Where material cannot be eliminated, this effort seeks to ensure that it is locked up to a gold standard -- beyond the reach of thieves or terrorists. Were all nuclear weapons–usable material secured as good as gold in Fort Knox, there could be no nuclear terrorism.

By focusing the minds of leaders on this threat and the steps they can take to address it, the Nuclear Security Summit creates an action-forcing process: The agenda, the meeting, the deadlines, and the necessity to stand up and speak up move governments to act. The success of this process has largely gone unnoticed -- but it is truly remarkable and worthy of reflection. The fact that we have been spared a successful nuclear terrorist attack is in no small part thanks to this effort.

That brings us back to the math problem up top. In 1991, when the Soviet Union collapsed, 52 states had nuclear weapons–usable material. By 2009, that number had shrunk to 38. In just the past five years since Obama came to office, 13 additional states -- including Ukraine -- have eliminated all nuclear weapons–usable material, leaving only 25 states today with material that could be used in a terrorist's nuclear bomb. And at next week's meeting, we can expect that the leaders of several additional countries will be able to stand up and assure others that if a nuclear terrorist attack occurred, their nation could not have been the source of the material that fueled the bomb.

And getting more members to join this club is something that's surely worth a trip to The Hague.

Photo: Freek van den Bergh/AFP/Getty Images