Magazine March 7, 2011, Issue

Travails, Chinese and American

How the West Was Lost: Fifty Years of Economic Folly -- and the Stark Choices Ahead, by Dambisa Moyo (Farrar, Straus, 240 pp., $25)

It does not diminish the force and elegance of Dead Aid, the 2009 polemic against Western foreign-aid practices, to acknowledge that the book’s influence was less a product of what was between its covers than of who was on its cover: The author, Dambisa Moyo, is a Zambian, a woman, an economist trained at Oxford and Harvard, and a veteran of Goldman Sachs. Her argument in Dead Aid — that government-to-government aid from the West to Africa does more harm than good, by providing vast opportunity for corruption and blunting the edge of reform — is elementary public-choice economics, but the world of politics and policy is strangely sentimental, and the fact that this familiar observation was being made by an African woman lent it a moral authority that the policy solons find difficult to discover in, say, a Milton Friedman or a Gordon Tullock. In the marketplace of ideas, marketing matters, and it is a lucky thing for the world that such a clear-eyed view of foreign aid is being advanced by such a potent advocate.

Turning her attention to the Western world’s own economic unease in her latest book, How the West Was Lost, Ms. Moyo proceeds along two distinct lines of argument: Austrian and then Malthusian. Offering a short history of the U.S. housing bubble and the subsequent financial crisis, she composes variations on a theme from the Austrian school of economics, identifying a massive misallocation of capital caused by malinvestment in housing as the fundamental problem. From that jumping-off point, she launches into a curiously zero-sum account of the modern global economy, a Malthusian meditation on depleted resources and feral competition for them. Unhappily, we get less of Moyo the economic realist and more of Moyo the Goldman Sachs dealmaker, one who sees the past, present, and future as a grand global corporate-strategy exercise — the Great Game meets Let’s Make a Deal. She deploys this method of analysis in the service of the most voguish of contemporary phobias: the purported decline of the U.S. vis-à-vis China. Relying, it seems, more on her MBA than on her economics doctorate, she analyzes the relationship between the West and “the Rest” as though it were thoroughly a matter of balance sheets and personnel-development programs, of China Inc.’s good investments and America Inc.’s underperforming ones.

This approach leads her into error, most often in the form of gross and indefensible overstatement. To take her first important example, she views the World War II–era Lend-Lease initiative more as a shrewd business arrangement on the part of the U.S. than as part of a preemptive American campaign against the Nazis. Such a view is of course very much of a piece with her foreign-aid criticism: If that foreign aid is really less about furthering the interests of the world’s poor and more about sustaining a mutually beneficial relationship between self-interested Western financial institutions and corrupt Third World elites (and if you do not buy Ms. Moyo’s narrative, have a gander at the clear, empirical analysis of the subject offered by Prof. Mark Copelovitch of the University of Wisconsin, whose study The International Monetary Fund in the Global Economy: Banks, Bonds, and Bailouts documents an undeniable link between the concentration of Western financial interests in countries abroad and the size and conditionality of IMF loans offered to them), then it would be no surprise to discover a similar element of economic self-interest in Lend-Lease.

But even if we grant that political rascality shaped Lend-Lease, it does not follow that “America peaked economically after the war, in the 1950s, as a result” of the initiative, as Ms. Moyo claims. For one thing, it is simply not true that the U.S. peaked economically in the 1950s. For another, Lend-Lease amounted to about $50 billion, which was paid back over the course of 50 years. The Marshall Plan, combined with the immediate post-war aid that preceded it, saw a voluntary transfer of wealth from the U.S. to Europe of some $25 billion, or about half of what the U.S. was due in repayment under Lend-Lease. The $25 billion balance was a lot of money in 1948, but not the stuff of a national patrimony: It was equivalent only to about $220 billion in today’s dollars — or about the size of the deficit that the U.S. will run between New Year’s and Valentine’s Day this year. Not an unappreciable sum of money, to be sure, and not one without economic consequence. But in the context of the immediate post-war order — one that found practically all of the world’s major industrial powers save the U.S. bombed to cinders — it can hardly be said to have been the most significant factor. It is difficult to believe that an economist of Ms. Moyo’s sophistication believes the thing she has written.

#page#It is the failure to appreciate the uniqueness of the U.S.’s position in 1945 that underlies so much of the thoughtlessly alarmist narrative of American post-war decline, and Ms. Moyo is by no means unique in falling victim to this defect. In truth, the most meaningful measure of U.S. economic performance — the growth in real GDP per capita — is astonishingly regular, clicking along at about 2 percent a year as far back as the data go. There’s a little dip in the Great Depression, a little bump for World War II, a little dip after the war (when Moyo thinks the economy was peaking), and a little dip for the Great Recession.

During that same period, China has been through something very like going to hell and back: scourging by Japan, scourging by civil war, scourging by Mao, Communism, famine, and 20-odd years’ worth of reform efforts. China’s story, Ms. Moyo fails to appreciate, is not a new one. A very poor and largely agricultural society can be radically transformed through forced, rapid industrialization — a project for which a brutal police state is uniquely well suited. The most ready point of comparison is Russia under Lenin and Stalin: Just as the Tom Friedmans of the time mistook the Soviet industrialization project as evidence that a new model of centrally planned, scientifically administered economic development had been discovered, so too do eastward-turning analysts in our own time — be they Sinophiles or Sinophobes — mistake this easily understood phenomenon for the emergence of a “Beijing consensus,” a new economic model that marries the forms and dynamism of private enterprise to the strong hand of state intervention.

Ms. Moyo adds a new twist to this, placing her “the West vs. the Rest” competition in the context of acute resource scarcity of the neo-Malthusian variety. “The bottom line is this,” she writes: “Given where forecasts for resources are (energy, land, water) there is no way that one billion Chinese can live like 300 million Americans. Ceteris paribus, this is not possible; but it is exactly Western standards of living that the Chinese (never mind the hundreds of millions of people from other emerging states) are striving for.” Ms. Moyo, as though she were auditioning for a role in the Obama administration, writes admiringly of Chinese “investments” in access to raw materials, natural resources, and energy. The model again is corporate competition: The U.S. invested in residential real estate, which was a poor investment; China invests in airports and nifty trains, which she believes are good investments.

But how clever are these Chinese state investment managers? The evidence from Ms. Moyo’s own book suggests: not especially. “China has become a volume-maximizer with near absolute advantage, as opposed to profit-maximizers using comparative advantage, favored by classical Ricardian theory. What this in effect means is that China cares more about the number of Chinese it has in employment (a volume proposition) and less about the profit earned.” In layman’s terms, China is propping up marginal or unprofitable enterprises for the purpose of preventing the mass unemployment to which its politicized, centrally planned economy is naturally inclined. Occasionally, the authorities in Beijing will acknowledge as much, announcing plans to reduce overcapacity in this industrial sector or the other. (Practitioners of Obamanomics will be distressed to learn that “green energy” work, especially on wind power, is to come under the scalpel.)

#page#American consumer overconsumption is deeply and complexly linked with Chinese consumer-goods overproduction, and also with Beijing’s once-ravenous appetite, now abating, for dollar-denominated assets. The relationship obviously is unsustainable, but a radical disruption in that relationship means, for the U.S., a bit of consumer-price inflation, and probably higher interest rates for both public and private debt. For China, though, it means the possibility of mass unemployment, the exposure of a corrupt and crony-ridden banking system that makes Lehman Brothers look like a bar of solid gold, and the risk of scenes unfolding in Beijing rather like the ones that have unfolded lately in Cairo, Amman, Tunis, etc. The political tension that has accompanied the recent uptick in consumer-price inflation in China, a relatively mild phenomenon, suggests the outline of what troubles are in store. Remember, this is transpiring in a country that is about half as wealthy as Botswana and significantly poorer than Jamaica. As investment managers go, I’ll still take Warren Buffett.

As many a chagrined futures investor can attest, energy investments are a touchy thing: Timing matters, and conditions change in unpredictable ways. Ms. Moyo writes as though she expects China and the U.S. to come to blows, fighting tooth and talon over the last piece of coal and the last puddle of oil on God’s green earth. I predict that there will be massive investments in energy efficiency at just about the time that energy prices make such investments attractive. The neo-Malthusian resource-scarcity story does not seem much impressed by the fact that demand curves slope downward — i.e., that there is less demand for a product as prices rise. Alternative sources of energy are abundant and ready to be developed; they simply are not yet economically viable. At some future date, it is very likely that they will be — but it matters what that date is, whether ten years hence or one hundred. Neither the clever Americans who channeled the nation’s savings into an overripe housing market nor the clever Chinese who are keeping creaky state-run enterprises lubricated with great gushers of wasted money seem very likely to be the party that outsmarts the market when it comes to the very complex question of energy. I suspect that many of those writing about the “Beijing consensus” today, and China’s pending dominance of natural resources, will regret much of what they have predicted.

Which is not to say that the West is not in trouble. The U.S. and Europe have the worst kind of problems: ones that are easy to understand but difficult to solve. Our worst problem is that democratic governments lack the kind of robust fiscal controls that prevent the political class from pillaging the productive economy to feather the nests of its own members and their clients. (China has relatively strong fiscal limitations: a police state and poverty.) The West is in trouble not because Beijing is lending us money, but because of why we are borrowing it: At every level — federal, state, local, county, school district, sewage-treatment authority — we have disfigured our institutions such that they function principally as wealth-transfer mechanisms for the benefit of the political class. The word for this is “corruption,” and it is at least as much a moral problem as an economic one. We are our own disease.

It is natural that Americans would have mixed feelings about the rise of China. People of good will everywhere must celebrate that so many Chinese have been lifted out of poverty and lament that they continue to labor under the whip of the Communist party. People of good sense in the U.S. must acknowledge that Beijing means us no good, that its interests are narrow and parochial. China’s interest is in the Chinese economy and Chinese jobs –  and that, I suspect, is what so many in the West envy.

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