Politics & Policy

Red Scapegoat

The problems with the U.S. economy — and therefore the solutions — stem not from Beijing but from Washington, D.C.

During the 2008 campaign, Barack Obama’s most loyal and affectionate constituency was one that cannot legally vote in U.S. elections: foreigners. His campaign and subsequent election were celebrated in European, Asian, and African capitals. Stamps were issued, posters printed up. Hymns were sung. He was hailed as a bright new John F. Kennedy when he spoke in Berlin, and the Norwegians awarded him the Nobel Peace Prize just for showing up at work for the first couple of months. He visited 20 countries during his first year, a record number, and in China offhandedly declared that, after only a few months of his patented charm, he had “restored America’s standing in the world.”

America’s economic standing in the world has taken a beating since then, as have Obama’s political fortunes — and now, only two years after sending his hope-and-change pixie dust swirling around the planet like the grit from one of those monster Mongolian dust storms, Obama has decided that foreigners are the enemy. Suddenly, Obama’s world looks less like the United Federation of Planets and more like Mos Eisley, that “wretched hive of scum and villainy,” an exotic collection of gangsters and far-flung ne’er-do-wells, inscrutable enemies with inscrutable motives.

Obama is not much focused on the foreigners who want to saw our heads off on jihadi snuff videos, though he has continued fighting the drone wars with at least as much gusto as his predecessor. The foreigners who seem most severely to chap the presidential hide in anno Domini 2010 are those who want to sell us goods and services. And what an enemies list Obama has compiled: the entirely fictitious cabal of foreign financiers he blamed for the U.S. Chamber of Commerce’s criticism of his party’s fiscal incontinence, the “foreign corporations” he insists are bankrolling sundry other political enemies, and, most important, the go-to foreigners American politicians rely on when an exotic peril must be rustled up in the months before a difficult election: the Chinese.

Obama and the Sinophobe wing of the Democratic party have seized upon what is for them a nearly perfect issue: the valuation of China’s currency, the renminbi. The issue is complicated enough to accommodate the intellectual vanity of the president and his coterie while consigning most voters to a state of rational ignorance, and the narrative is flexible enough to be used to explain away a great many varieties of bad economic news. It’s the all-purpose phlogiston of the self-consciously cerebral policy set. Massive trade deficits? Blame the renminbi. Investment in decline? Blame the renminbi. The fact that Obama’s reckless State of the Union promise to double American exports is starting to look like the sort of thing a luckless gambler says to himself before putting his Greyhound-ticket money on the craps table in Vegas? Blame the renminbi. Persistent levels of historically high unemployment? Chinamen are stealing our jobs and using their artificially devalued currency to do it.

The administration has been stepping up the anti-China rhetoric for a year now, and Treasury secretary Timothy Geithner underwhelmed the G-20 meeting in Gyeongju, South Korea, in late October with non-credible demands that each country adopt policies to keep both trade surpluses and trade deficits “below a specified share” of GDP, with his preferred target being about 4 percent. The Indian delegation responded with whatever the Hindi is for “Get the hell out of here!” — or, as finance minister Pranab Mukherjee, New Delhi’s man at the G-20, put it, “Protectionist policies are not acceptable.” Japan’s representative called the plan “unrealistic,” apparently ignorant of the fact that “unrealistic” is the defining adjective of the Obama administration. The Germans denounced Geithner’s proposal as a move toward a “command economy,” demonstrating a fine Teutonic flair for the obvious. (Too protectionist for the Indians, too authoritarian for the Germans — that’s our economic policy.) Geithner did not mention China by name, and China returned the favor.

It is undeniable that Beijing plays games with China’s currency in order to bolster exports. To put it bluntly, China keeps its people artificially poor, their wages artificially low, and their savings diminished in value, in order to increase the profits flowing into the state enterprises run by Beijing’s power elite, a good deal of the returns being captured by the thriving entrepreneurs who make up the officers’ corps of the People’s Liberation Army. When one considers that China’s economic strategy is predicated on creating needless poverty for its people, it all seems a lot less clever, and Tom Friedman’s occasional orgasmic moans in the New York Times sound a bit nefarious, to say nothing of embarrassing.

The People’s Republic of China is a for-profit police state, and we should not be under any illusions about the chances of its reforming its ways and further liberalizing its economy and politics, or the possibility of its chauvinistic rulers’ acting with regard to anything other than the ruthless pursuit of their national interest, in whatever distorted way they define that. While Deng Xiaoping’s much-vaunted economic-liberalization program worked undeniable wonders, the thawing of the Chinese economy came to a halt years ago, and if there is any political progress in sight, it is not obvious. All of which really ought to be of interest only to full-on Sinologists, because, the Obama administration’s populist fist-shaking notwithstanding, China’s economic policy is not what ails America — any more than Japan’s economic policy was what ailed America during the Carter years, that awful interlude during which Honda and Toyota viciously conspired to dump affordable, reliable, fuel-efficient automobiles on unsuspecting Americans who really wanted to buy an AMC Gremlin but were duped into an upgrade by those inscrutable Orientals and their long-game industrial policies. China’s economic policy is what ails China. Fortunately, today as in the 1970s, most of what is troubling the U.S. economy is the result of decisions taken in the United States, not in faraway Asian capitals. The American problem is in Washington, not in Beijing.

The demonization/fetishization of the Asian economic superman relies on myths as death-defying as Keith Richards and just as addlepated, a fact that is played for maximum benefit both by our politicians and by the entrenched business interests that rely on them for patronage and protection. As long as we’re blaming China, we will not direct the blame where it belongs.

The overarching mythical narrative begins with the end of World War II, and it holds that any American man with sufficient self-respect could go down to the local factory and get himself a decent blue-collar job at a wage that would enable him to support his family in comfortable midcentury style, meaning ownership of a modest house and a car. But, the story goes, America got soft. Some combination of high taxes, regulation, union predation, corporate greed — choose your own favorite econo-political bogeyman — undermined our manufacturing economy, with all those good middle-class factory jobs going overseas to low-wage peons treated as pawns in the great industrial-strategy game being played by their rulers. First came the Japanese, then the Koreans, today the Chinese, tomorrow the Indians.

There is a tiny bit of truth to that story, and a lot of exaggeration. At the end of World War II, the United States did enjoy an unprecedentedly privileged place in the global economy: It was home to the greater part of the world’s extant nonmilitary manufacturing capacity. This was more a product of geography than of public policy: Germany and Japan, which had already developed sophisticated industrial economies, were smoking ruins, utterly destroyed by war, their work forces literally decimated or worse. Nazi occupation had done no good at all to the part of Europe that escaped Soviet occupation after the war. Communism wasn’t helping much. Spain escaped the main combat but had already destroyed itself through civil war. Of the major nations, only the United States and its neighbors, protected by their oceans (and by the late U.S. entry into the war), and India, then on the brink of independence, escaped the harrowing. India went socialist, Latin America mired itself in caudillos and revolutionaries — and the United States inherited the earth. That wasn’t smart politics, that was Yankee dumb luck.

But the world remained a blessed place of prelapsarian bliss, from the American point of view, for about 25 years.

That brief golden age was never destined to last. The Germans and the Japanese already knew how to build stuff and ship it around the world. The English knew a thing or two about trade, too, and fancied themselves to be quite sharp in the banking and finance game. Other nations in the Americas had resources, and Asian powers such as South Korea and Taiwan, once freed from the immediate threat of Marxist aggression, began to make it clear that they had no plans to remain poor forever. They were going to invest, build factories, create industries, and innovate — and the United States was not going to control the majority of the world’s manufacturing capacity until the end of time. The United States spent the second half of the 20th century thinking a lot about the Russians and their minions, but relatively little about what economic development in the rest of the world would mean, and what the inevitable erosion of our unusual postwar position would do to American society.

Within the broad American postwar economic myth are a great number of constituent submyths, beginning with the myth of the low-wage factory slaves who were deployed to steal American jobs. A quick perusal of the available evidence suggests that this is a gross simplification at best. American automobile manufacturing, for instance, has been undermined not by poor laborers in China or India, but by competition from innovators in high-wage Japan, Germany, and South Korea. When the U.S. steel industry went toes-up, it was not because of competition from low-wage producers in Latin America or the Third World, but because of competition from high-wage Japan (which itself was later challenged by hungry, highly productive competitors in China and India, among other places).

If low wages were all it took to bring industrial investment and manufacturing to a country, we would all be marveling at the economic titans in Haiti and Rwanda, and Lagos would look like Greenwich, Conn. But that is not how it works: Global capital has for decades flowed mostly to high-wage countries, with the United States, Canada, Japan, and Western Europe being home to the most profitable investments. China is, to a great extent, a Johnny-come-lately to the great globalization game, beginning with low-skill, low-wage industries such as textiles and low-value-added manufacturing — industries that years ago had already begun to migrate to places like Vietnam as China climbed the value-added ladder. Japan went through a similar phase in its postwar ascent; being an economically sophisticated people, the Japanese hardly lamented the loss of low-value-added manufacturing work, particularly in the garment industry, to Taiwan and Hong Kong, and then to China — they dismissed it as “wild geese flying,” the natural migration of labor-intensive businesses to countries with a comparative advantage in low-skill enterprise. Japan did not aspire to be a sweatshop nation.

Despite all the new competition, the United States remains a manufacturing powerhouse — in fact, the total value of manufacturing output in the United States today is far, far higher than it was in the 1950s. Measured by revenue, profit, or return on investment, U.S. manufacturing is unparalleled, and our factories’ output is more than twice China’s. But it is true that many manufacturing jobs have been “lost.” They were lost not because U.S. manufacturing can’t compete with that of feckless Third World rivals, but because U.S. manufacturing is, to use the technical economics term, awesome. The real productivity of U.S. businesses overall grew at an average rate of 1.5 percent a year from 1973 to 1995, which is a really robust number. But the productivity of U.S. manufacturing businesses grew by 2.5 percent in those same years, which is enormous. As Martin Wolf puts it in Why Globalization Works, that growth in productivity alone would have reduced significantly the number of manufacturing jobs in the United States. Add in the fact that people in affluent societies spend relatively less of their disposable income on manufactured goods and relatively more on services, and that reduction becomes even more dramatic. And so it was. There is an obvious parallel: In very poor societies, large numbers of people are employed in agriculture, and people spend most of their money on food. As they get richer, relatively few work in agriculture, and they spend proportionally little on food. Manufacturing, as Wolf sees it, is the new agriculture. In historical terms, it was not that long ago that 75 percent of the U.S. work force was engaged in farming. Now it’s less than 1 percent. But who laments the loss of good farming jobs? (Mostly people who have never worked on a farm, that’s who.)

The nefarious ChiComs had approximately nothing to do with that development.

What gets people all hot and bothered about the China story is not really China’s rapid economic expansion, but its rapid industrialization. One of the benefits of running a jackbooted totalitarian regime high on nationalism is that you can do things like enforce a substantial rate of saving and a low level of consumption, or conscript large armies of industrial workers out of the agricultural classes. This sort of transformation is hardly unprecedented in the Communist world: It is precisely what the Soviets accomplished in the decades after their revolution, and a lot of American nincompoops thought they were geniuses. Modern China, having the benefit of a highly globalized economy and sophisticated modern finance, did a decidedly better job of its transformation than did the U.S.S.R. — a lot more carrot, a lot less stick, post-Mao anyway — but, for its day, Soviet industrialization was every bit as impressive a show of force — which is precisely what it was and what China’s transformation is. For all the rhetoric about liberalization, China remains a hierarchical, centralized, command-and-control economy, one in which the military takes a very strong hand in many industrial enterprises. China is not the future model of capitalism, but the contemporary model of socialism. And like all socialist enterprises, it is hamstrung by the misallocation of economic resources, a fact that is ameliorated, but only in part, by its willingness to incorporate itself into the global economy and avail itself of the benefits of efficient capital markets.

Both China’s power as an exporter and its role in the U.S. consumer-goods market are grossly exaggerated. True, China exported about $1.2 trillion worth of goods in 2009 — and it imported about $1 trillion worth, leaving it with a trade surplus of only $196 billion, down sharply from $296 billion in 2008. China does not have a trade surplus with the world; it has a trade surplus with the United States. Like any poor country that cares at all about feeding its people, China is hugely dependent upon imports, both for sophisticated goods from the West and for food, energy, and basic commodities. According to World Bank figures, China’s imports in 2005 were 32 percent of GDP; America’s imports were exactly half that: 16 percent of GDP. Our politicians are befouling their Underoos over the cheap foreign goods allegedly inundating U.S. markets, but China imports considerably more than we do. As China’s economy has grown, imports have declined a bit as a percentage of GDP, but not that much: In 2008, imports were still 27 percent of China’s GDP, a much larger share than in the United States. After the financial crisis, China’s imports dropped sharply, to 21 percent: One of the upsides to the Chinese police state that American progressives so admire is that it can shut its people off from goods and services, lowering their standard of living to achieve its immediate policy goals.

True, China remains the world’s largest exporter. It is also the world’s second-largest importer. It runs substantial trade deficits with Japan, South Korea, Taiwan, Australia, and Malaysia — five of its ten biggest trading partners. It has smaller trade surpluses with Germany, Russia, and Singapore. (The National Bureau of Statistics of China, from which these 2008 figures come, still counts Hong Kong as a foreign trading partner, one with which the mainland runs a very large trade surplus.) China’s currency games make those imports significantly more expensive, and its trade barriers produce strange little bubbles of hyperinflation: Chinese housewives were shocked when the price of garlic increased 1,000 percent in the course of about two years. More serious bubbles exist in its real-estate and financial markets, the inevitable deflation of which probably will send waves of disruption through the global economy that will make the Wall Street debt tsunami of 2008 look like an afternoon splash in the kiddie pool. Beijing isn’t any better at economic central management than Washington is.

And worse for Beijing, China does not have much to fall back on: more than a billion restive souls in a sex-imbalanced society, one with an economy that is barely one-third the size of the U.S. economy and a per capita GDP that puts it right between Albania and Angola in the rankings — and well below such non-powerhouse economies as those of Jamaica, Tonga, and Kazakhstan. China’s per capita GDP is only about $2,500 a year more than the Republic of the Congo’s and is $40,000 a year less than that of the United States. Some superman.

As usual, the politicians rushing in to solve the problem are inserting themselves into a situation already in the process of sorting itself out: The share of Chinese exports going to the United States is declining, and the share of U.S. exports bound for China is growing. China’s famous appetite for U.S.-government debt, already much exaggerated, is abating, and Beijing is keen on diversifying its investments out of dollar-denominated instruments. At present, Chinese-government holdings account for about 7 percent of U.S.-government debt. Which means that China is not bankrupting the West with cheap goods and services, it is not America’s banker, and it is not positioning itself to overtake the United States as the world’s economic superpower. Nor is it even within spitting distance of securing for its people a standard of living comparable to the typical Latin American’s. If China doubled its per capita GDP tomorrow, it wouldn’t even catch up with Mexico. So what in the heck is China trying to do? We can get closer to the answer by asking: What is it that China is trying not to do? And the answer to that is: Become Japan.

Americans take a conspiratorial view of China, and the feeling is mutual. While the United States seems dead set on repeating every one of Japan’s mistakes leading to the Lost Decade(s), China is unkeen on doing so. In “The Japan Syndrome,” a very perceptive article published in September’s Foreign Policy, Ethan Devine explores the Chinese take on what went wrong in Japan. Understanding this helps to explain much of Beijing’s current behavior. Short version: Japan exported its way into postwar prosperity and found itself in a position in many ways similar to China’s today: politically sensitive trade surpluses with important allies, very high rates of savings and investment, key export sectors supported in part by policies that artificially depressed the real wages and purchasing power of Japanese workers — the familiar story. Japan, all the world’s wise men decided, needed to undergo a “rebalancing” — meaning a restructuring of its economy in such a way that it would rely less on exports for growth and more on domestic consumption. How to achieve that? Step 1: Allow the yen to appreciate, especially against the dollar. As Mr. Devine reports, the appreciating yen, combined with the low, low interest rates Japan’s central bankers created in order to stave off a possible recession and to stimulate domestic demand (familiar, yes?) and the ocean of liquidity remaining from decades of high savings, produced one of the most destructive asset bubbles in modern financial history. Ka-plooey went the Japanese economy, and things have never been quite right since. The Japanese are still trying to figure it out, presumably because they cannot afford a subscription to the New York Times to find out what Paul Krugman wants them to do.

How Japan went wrong is a big and complicated and contested story, and it is really beside the point: What most matters right now is what Beijing thinks happened to Japan. In the Chinese version, the United States forced Japan to allow the yen to appreciate, with Washington orchestrating the Japanese catastrophe with malice aforethought. So when Barack Obama comes around saying, in effect, “Pump up that renminbi — or else!” the guys in Beijing are pretty sure they’ve heard that story before, and they do not plan to be played for chumps the way they think the Japanese were. They drive tanks over people who don’t see the world the way they do, and they are not going to be bullied by Professor Obama.

So what should the United States “do” about China? Nothing. Nada. Sit on our national hands. Economists who have looked at the renminbi situation conclude that the currency is indeed undervalued, but that it could climb as much as 6 percent with basically no effect on the U.S.-China trade relationship. Even if the renminbi were allowed to climb the full 20 or 30 percent by which the most fearful China hawks believe it to be undervalued, it is extraordinarily unlikely that this would have the effect of causing manufacturing employment to shift from China to the United States. If that $5 plastic toy at Wal-Mart goes up to $6, is that suddenly going to make California, Ohio, or New Jersey more attractive to low-end manufacturers than China, India, or Bangladesh? Doubtful. In all likelihood, the result would simply be that the United States would pay more for its imports than it does today — meaning that our trade deficit would get worse, not better. Paying more money for the same amount of stuff would not make us any richer, nor would replacing Chinese imports with imports from Vietnam, Mexico, or Honduras.

As a matter of pure economic calculation, the costs of trying to force Beijing to act in accordance with Washington’s desires almost certainly are greater than the value we would derive from whatever marginal success we might have in the endeavor. For all the talk about our “competitiveness” vis-à-vis China, the complexities of the relationship, the differences in comparative advantage, and the fundamental unknowability of the future all make it difficult even to define “competitiveness” in this context, and more difficult to cultivate it intelligently — and much more difficult to cultivate it intelligently by pressuring Beijing to act in ways Beijing is not inclined to act.

Washington probably cannot get Beijing to change its ways, but Washington can change its own ways, which would be considerably more productive and a heck of a lot less likely to lead to a trade war — or a war war. We can start with acknowledging what has made our competitors stronger over the years: savings, investment, and innovation — the things that lead to productivity, the only economic measure that really matters, being as it is the factor that enables high levels of employment, high wages, and general prosperity. A recent report from the nonpartisan and excruciatingly sober-thinking Brookings Institution offered four main things the United States should do in response to the rise of China. Three of them were content-free: “Blah, blah, blah, be more assertive, elicit support of other emerging blah, blah, blah, high-level engagements.” But the first one was: “Get real on deficit reduction.”

Under Obama-Pelosi-Reid, we have been levying a heavy tax on the future to fund today’s spending. Republicans now have a chance to change that, and it is essential that they do, because everybody can do the math on this question: As the expatriate investor and Asia bull Jim Rogers put it in an interview with National Review earlier this year, “If you look at the huge creditor nations in the world, they’re all in Asia: China, Hong Kong, Singapore, India. Saudi Arabia, if you want to go that far west. This is where the money is — and you know where the debts are.” But taking the necessary steps would put President Obama at odds with his fellow Democrats and cause Professor Krugman and Robert Reich to keen like veiled women at a Levantine funeral procession. Obama would still rather be at odds with the Chinese, who don’t get to vote in 2012 and haven’t been big campaign donors since the Clinton administration.

— Kevin D. Williamson is deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, to be published in January.


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