Economy & Business

China’s and Europe’s Crises, and Our Complacency

(Les Cunliffe/Dreamstime)
The present is a moment to grasp, if we would only grasp it.

In 2015, the human race will create about $75 trillion in economic output, well more than half of which will be the product of the three largest economies: those of the United States ($18 trillion), the European Union ($16 trillion), and China ($11 trillion).

Two of those economies are in the midst of serious economic and political crises. The other is in the grip of something much more difficult to overcome: complacency.

Europe is being convulsed by a debt crisis in which Greece is, for the moment, the lead player, but which very well may grow much more intense if lingering weakness in Spanish, Portuguese, and Irish public finances should open up new fiscal craters in the eurozone. For the moment, the International Monetary Fund and the European Central Bank are engaged in a tussle over the terms of a Greek bailout, with the IMF arguing for a more liberal approach to debt forgiveness and the ECB inclined to screw-tightening. On both sides, negotiators are aware that they are not only setting policy for the Greek crisis that is currently on their plates, but also setting precedents for future European bailouts, should it come to that.

In China, the dual nature of the Chinese economy — one half industrial powerhouse, one half house of cards — has been dramatically revealed. China looms large in the minds of some Americans as this generation’s Asian economic superman — essentially what Japan was in the mind of Reagan-era autarkists — which often causes us to overlook some plain truths: China is so poor that it would need to add about 50 percent to its per-capita GDP to catch up with Mexico; it is a corrupt autocracy; its banking and financial systems are the stuff of nightmares; its political stability is far from assured.

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Official Communist-party newspapers had been singing hymns to the Chinese stock-market rally for months when shares went ass-over-teakettle and Beijing was obliged to undertake a series of ever more intrusive and implausible interventions: First, an old-fashioned Fed-style rate cut, then a ban on the issuance of new shares, next suspending trading activity entirely in shares of thousands of the most prominent companies, then a six-month moratorium on selling by major shareholders — and, finally, the usual thing, politburo thugs threatening to lock up short-sellers, because under capitalism with Chinese characteristics, stocks are a lot like American real estate: a magical commodity the price of which can only go up unless there is villainy.

All of this inevitably provides a subsidy to the United States. There is a whole lot of restless investment capital in the world, and it is always looking, if not for a home, then at least for a place to alight, profitably, for a period. This helps Washington put off doing difficult things by making the stock markets a little more bullish than they probably would be otherwise, the dollar a little stronger, investor appetite for U.S. government bonds a little keener.

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Money and creativity are always looking for a quiet, clean place in which to next together. The Nasdaq biotech index has doubled in the last two years, partly as a result of European firms’ stampeding to list in New York, well away from the European gloom of the moment. There is a certain perverse satisfaction in the fact that this is a bacon-saving development for Jerry Brown, the old-fashioned progressive governor of California, and Bill de Blasio, the Sandinista mayor of New York, as cosmopolitan capital takes its ease in California technology firms and Manhattan real estate.

Like the Eskimos’ extensive snow vocabulary, the notion that the Chinese word for “crisis” is a combination of the words meaning “danger” and “opportunity” is a linguistic myth, but it is such a good one that it probably will live forever, especially now that the popular anxiety that we’ll all be speaking Chinese in a generation or two may be subsiding. But there is nonetheless opportunity in the crisis, if we had the wit to avail ourselves of it. Washington, instead, gives every indication of staying on its usual course of action: Do nothing until there is no other choice.

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Maybe not nothing, exactly. In 2009, federal spending was about 25 percent of GDP, and in 2014 it was about 20 percent; for those of you wondering what the difference between Obama-Pelosi-Reid government and Obama-Boehner-McConnell government is, there’s a big piece of your answer. Federal tax receipts are estimated to be just over 19 percent of GDP over the next several years, meaning that — even with all the stupidity of the past several years, and even absent deep reform — a balanced budget is within reach, though the entitlement mess and the rest of it aren’t going away. That’s something.

But it isn’t enough.

We have been here before, most dramatically during the highly unusual period after the end of World War II, when the United States was practically alone among the major industrial powers in having escaped the devastation of the war. There was a window of opportunity during which our country, had it had more intelligent leadership in politics and business both, might have adopted policies that would have made us — and the world — almost inconceivably better off. The tragedy of the postwar boom is not that it ended but that we did so little with it.

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We’d got a little bit of a taste for Bismarckian welfare-statism during the run-up to the war, and our leadership class acquired a taste for central planning during the war itself. As a result, we took the rudimentary welfare state created during the Roosevelt years and added to it. The massive redirection of potentially productive capital from authentic economic uses to political uses (federal tax receipts went from 14 percent of GDP in 1950 to 19 percent in 1969), combined with the reemergence of the rest of the major economic powers, meant that by the early 1970s that window of opportunity had closed.

An extra 1 percent of GDP going toward real investments from 1950 forward would have radically changed our economic landscape, and, indeed, the world’s.

We got Medicare, Medicaid, and government housing projects. It is impossible to calculate (and nearly impossible to imagine) what the country would look like if in 1950 we’d had the foresight and imagination to instead create a retirement system based on the accumulation of real assets by individuals and families rather than transfer payments, an education system invigorated by choice and competition, a health-care system taking into account the understanding that insurance is a financial product rather than a medical product, an immigration system oriented toward the importation of wealth and creativity rather than the importation of poverty, a federal government that governed instead of acting as a favor bank (literally, Mr. Vice President) for politically connected business interests, a tax system that was an instrument of revenue rather than an instrument of politics, etc. An extra 1 percent of GDP going toward real investments from 1950 forward would have radically changed our economic landscape, and, indeed, the world’s.

We’re stuck in the welfare-state two-step: When times are good and the money is flowing freely, there’s no urgency for reform; when times are bad, reform is held to be cruel. We cannot cut spending during the booms or the busts. This moment, which is neither the one nor the other, is as opportune a time as any to begin the long and difficult project of raising our return on the advantages with which the world has once again presented us.

This may not feel like a moment of opportunity. But of course the ability to discern such moments is the difference between first-rate leadership and second-rate leadership.

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