A frequently cited anecdote about England’s economic decline in the ’70s is the irony of countless Rolls Royces moving through the streets of London. At the time, savings and investment were so heavily taxed that it made more sense to consume. Investment income was taxed at 98 percent, so while fancy autos sold very well, job-creating businesses were starved for capital.
The English experience is particularly relevant given Treasury Secretary John Snow’s tour through China last week in which he “extolled the virtues of the average Chinese buying ‘more stuff.’” Increasing consumerism was but one piece of questionable advice Snow gave to leaders and citizens on the mainland. Those interested in China’s continued economic success can only hope the people of that nation politely listened, but that they’ll also ignore the economic prescriptions offered up by our Treasury secretary.
Although he’s tempered his rhetoric, Snow is still gulled by the false notion that the Chinese “manipulate” their own fiat money in such a way that the yuan is 40 percent undervalued (as opposed to the way the U.S. Federal Reserve ultimately controls the value of the dollar concept through the use of the fed funds rate). To Snow’s way of thinking, the cheap yuan is a major cause of our trade “deficit” with China.
Though our trading past with Japan belies Snow’s reasoning, it’s also not the point. Not only would a 40 percent upward manipulation of the yuan be deflationary, it would also do nothing to change the real value of goods that the Chinese ship to our shores. Money is merely an easy medium that allows people to exchange their surpluses. Snow’s currency plan for China would only serve to decrease that nation’s economic growth, while the prices of Chinese goods here would eventually adjust to the very currency manipulations that Snow decries. Regardless of the yuan’s value vis-a-vis the dollar, Americans will continue to avail themselves of goods that are not in their economic interest to make.
What Snow also seems to forget is that while governments needlessly preoccupy themselves with trade balances, trade is in the end an enriching process by which people, regardless of country, mutually relieve their wants through the sale of what they don’t need. Countries that don’t eagerly allow in the goods of others aren’t just poorer for the inefficiencies that result from not taking advantage of the division of labor, they’re also poor for the simple fact that citizens of countries with unnatural trade barriers must pay more for much of what they desire. Snow would do well to consider this in light of explicit efforts to convince the Chinese to offer us less for sale.
On the domestic-policy front, Snow’s undersecretary for international affairs, Timothy Adams, notes the “enormous precautionary savings” in China due to the lack of national pension and healthcare programs. Given how Western Europe, Japan, and the U.S. have seen tax policy held hostage to enormous unfunded liabilities in terms of pensions and healthcare, the irony here is pretty impressive. It’s even more impressive considering the gallant efforts Snow’s boss has made over the last nine months to free Americans of a pension system that has grown unwieldy, and promises to bankrupt us if it’s not eventually dealt with responsibly.
Returning to Snow’s wish that the Chinese would save less, and instead consume “more stuff,” his prescription is ultimately inimical to the correction of the very trade imbalance that presently has him so worried. As opposed to the Keynesian notion that parsimony subtracts from economic growth, in fact it stimulates economies by virtue of capital being made available to entrepreneurs eager to create the innovations that continue to improve living conditions, and which do so irrespective of country borders.
While we still run a trade deficit with Japan, it is less menacing today as a result of Japan’s economy evolving in such a way that it can no longer profitably make as many of the prosaic goods that Americans want in abundance. China has ably filled in for Japan, and it will continue to do so until its economy reaches the advanced stage that will require it to similarly avail itself of comparative advantage.
Forced consumerism will only retard China’s economic evolution, whereby capital is consumed rather than offered up to tomorrow’s entrepreneurs. While trade balances are clearly irrelevant given the impossible supposition that people can buy without selling something first, our trade deficit with China will only expand unless the Chinese economy naturally moves up the food chain. Capital is what will make this possible.
In advising China, Snow should remember that contrary to the notion that Americans don’t save, we’re in truth great savers as evidenced by the exponential rise of our stock markets since 1982. By all measures, Americans have shared in these gains through thrift, and so too will the Chinese as that nation’s capital markets are liberalized. To advocate consumption over saving is to advocate China moving in a less prosperous path — one that will necessarily slow its economic development.
–John Tamny is a writer in Washington, D.C. He can be contacted at jtamny@yahoo.com.