China in the World Order

With China it’s unsettling enough that for the first time since the end of World War II our worldwide hegemony is under challenge.  However that’s just the beginning.  As we’ll see, that change is coupled with technological and economic factors that magnify both risks and upsides.

We need first to be clear that the challenge of China is real.  We have had other challenges in the past, most notably from the USSR, but none have had the economic might to back them up. This time we’re talking about an economy that by some measures is already larger than ours.  Those others look puny in retrospect, although the Russian collapse is dangerously seductive.  According to Bob Woodward, the Trump people were convinced that China was just like Russia, and the trade wars would cause a complete collapse in the same way.  When Xi said that the US is the barrier to Chinese national success, he was just restating Trump’s declaration that he would destroy the Chinese economy.  That of course didn’t happen, and the result was a policy that ultimately produced nothing.  Whether we like it or not, we simply don’t have that power.  The Chinese are not going away as an economic, technological, and military force.

At the same time it is equally important not to get hysterical about Chinese competition.  It’s strange how we periodically become obsessed with the idea that some centrally-organized economic system is going to leapfrog us by running things in a way that we can’t.  That happened in the fifties with the USSR (hard to imagine now) and in the eighties with Japan.  In reality the US economy succeeded by reinventing itself many times over, in a way that others did not.   For China, it is historical fact that state-run enterprises have been corrupt disasters, and the current economic miracle got its impetus from an unintended burst of local free enterprise.  Xi’s consolidation of control is no miracle cure.  China is a competitor with strengths and weaknesses. As one recent paper put it, China is not ten feet tall.

If we play to our own strengths, the worry is not that we’re going to be outcompeted by the Chinese (or undermined by Chinese stealing our secrets). It’s that we won’t succeed in creating a workable framework for international competition, and we’ll all lose.

Risks

We begin with the most basic of risks.  We’ve now had many years of Pax Americana, and people forget that history shows that world-power peace is the exception—not the rule.

The reason we’ve had peace is not human progress, international institutions, or even the rise of democracy.  It’s the threat of mutually-assured destruction.  And however much we may want to believe that all-out war is obsolete, that’s in fact a technology issue.

We can be specific.  Much has been written recently about hypersonic missiles, that would fly low at many times the speed of sound and be virtually impossible to detect by radar.  That sounds like a whole new arms race, but there’s actually no point to it so long as the balance of terror remains intact.  That we’re talking about it at all means we’re not so sure.  Reagan’s old “star wars” anti-missile shield was never more than an electoral fantasy, but now there’s plenty of current technology that’s relevant:  networks of satellites for detection, AI for decision-making, precision targeting for lasers.  China already has a nominally-defensive, satellite-linked system that enables ballistic missiles to be used against moving targets (e.g. US carriers in the South China Sea).  

A missile shield would be enormously destabilizing—North Korea could defeat the US in minutes.  (It’s interesting that as long as the system was going to be ours, we never thought seriously about what it meant!)  Who knows when or if something similar could be real.  However the world has been surprised many times by revolutionary changes in the technology of war.

We can’t assume peace; we can’t dictate the world order; we can’t wish away the image of a world trapped in a ruinous and deadly competition for dominance.  An encouraging fact is that everyone is much better off not living in such a world.  However for now we’ve chosen to divide the world into no-holds-barred competing camps.  Avoiding that division requires an act of creation—establishing a workable framework for cooperation and competition.  There are many examples of countries that failed such a challenge with disastrous consequences.   That’s our challenge here.

Making Progress

The first step to progress is to recognize that just as the risks today are higher than one might think, the potential rewards are also.  There’s actually quite a lot to say about the upside, although in the last decades it has been hard to see.

Why is that?   To repeat the obvious, the working classes in the West have been hit by two simultaneous body blows:  globalization and technology.  The result was dramatic, as shown by the following chart

Globalization has been going on forever, but China’s sudden economic development produced a major hit.  For technology the effects have been not only dramatic but accelerating.  Thomas Philippon’s recent book has a chart comparing highest valuation companies over the past six decades.  For the decade of the 1970’s the five highest valuation companies collectively were responsible for 2.4% of total employment.  For the decade of the 2010 the corresponding figure was down to .4%.  The bedrock upwardly-mobile manufacturing jobs are going away, as we continue toward a world where highly-skilled product development is the issue, and production is not.  That’s true for obvious software enterprises like Facebook, but also for pharmaceuticals, integrated circuits, and many other areas. And it’s getting worse.  AI puts a whole new class of jobs at risk, and electric cars (for example) will be much simpler in both manufacturing and maintenance. 

Thus far it has been convenient to blame everything on China, with the consequence that both political parties are promising to bring back the good old days once we stare down the evil Chinese.  (On the left  a 2018 paper by Susan Houseman is cited everywhere to support this position, though it’s actually about weakness in the US manufacturing sector!)  That mindset is dangerous on two grounds:  it’s a kind of scapegoating that gets in the way of rational action, and it obscures other serious problems that need to be addressed.  To get past that we need to discuss national prosperity and population welfare as separate issues.

National Prosperity

For prosperity the key point is that China has actually turned a corner in its effect on the rest of the world.  Although in aggregate terms China remains a very poor country (number 108 in per capita income, far below Mexico for example), the country is so large that its new middle class now buys enough to be a positive driver for the rest of the world economy.  Even with the current market access restrictions, China is the largest national market for Mercedes-Benz and a major market for film industries from everywhere.  The balance of payments deficit was reduced by half under Obama.  For the EU, more export-oriented than we are, the effect is even more pronounced.  (Intellectual property theft was also down under Obama.)

What this means is that, as opposed to the situation in the past, China has the potential for transforming itself from a drain on the world economy—producing more than it consumes—to the opposite.  Raising the living standards for a billion people is an enterprise with potentially many benefits for everyone concerned.  Nothing says that’s going to happen, but the difference is real.  The current situation is no longer dictated by the poverty of China, it is instead an expression of the relationship with China as it stands.  How do we make things better?  Well, if we want China to play by the rules, we need better rules.  As for motivation, growth in the West means growth for them (and, whether we like it or not, success for the ruling party).

The precondition for progress is establishing appropriate conditions for trade, that is to say a notion of fair trade which is comprehensive and up-to-date.  The comprehensive part means we need to cover many items that are not currently included, including labor conditions, environmental issues, international standards for taxation.  There is the potential for trade policy to become a vehicle for raising living standards worldwide.  Stated simply, we’ve had globalization for the rich; we need globalization for everyone else

There are of course no guarantees.  Some elements, such as environmental issues, may be clear areas of common interest.  Labor conditions will be more difficult.  Details of market access will need to be worked out.  It’s important to have everything on the table.  It is particularly important that these are not rules imposed by us on others but norms of behavior for everyone in a common enterprise.

That difference is important in any kind of negotiation, but it is of particular importance for China.  We don’t talk much about it, but China experienced some of the worst of Western imperialism extending well into the 20th century.  That shared history makes Xi’s nationalism easy.  If we want to get what we want, the last thing we should be doing is pretending it’s still true.

What Trade Rules Won’t Fix

Just as China wasn’t responsible for all problems, fixing China (even in the best case) won’t fix everything.  Two points in particular should be emphasized.  First, the kind of national prosperity we’ve been discussing thus far says little about personal welfare.  People are still going to lose jobs both from ever-accelerating technology changes as well as remaining international competition—regardless of fairness.  We’ll still be stuck with the prevailing inequality in society.   We’ll still have all of the dislocations that will result from the economic transformations with climate change.  Those are our domestic problems to solve. 

Blaming China has made it possible to ignore that reality.  Until recently in fact the prevailing ideology was that there is no additional problem of population welfare—the private sector would do it all.  So for loss of good jobs the only issue was globalization, and the only means to address it were tariffs and tax cuts.  Four years of a deficit-funded bubble with huge tax cuts to business did almost nothing for real wages or upward mobility.

Currently there are outlines of a solution.  Particularly with the transitions required by climate change, there is no shortage of work.  With the increases in corporate profit margins and high-end incomes there is no shortage of money—but workable taxation is a big issue.  The public sector needs to put all that together:  to see that the necessary work gets done and the population is supported with a national infrastructure that includes education at all levels, healthcare, so forth.  It’s a work in progress.

The second point to make is that we have tacitly assumed we will maintain our national competitiveness.  While we can see what has been successful in the past, there is no guarantee it will continue in the future.   That isn’t theory.  We just spent four years fighting science, demonizing foreigners, and favoring existing companies over new entrants.  All of that hurts.  It’s our job to play to our strengths.

Parallels with Climate Change

With that we return to the first issue—national prosperity.  For that we want to stress parallels with what’s happening for climate change.

With climate change we’re also presented with a very strong common interest, but a non-trivial task in breaking that down according to individual national interests.  As a country we haven’t thought much about that, since the national dialog has been primarily about getting our own act together, with the assumption that all the others just have to do their jobs too.  However the reality of the situation is that we in the US have twice the per capita CO2 production of any other major emitter in the world,

and we in the West are almost 100% responsible for the level of CO2 currently in the atmosphere.  The vast portion of humanity is going to have to sacrifice for our benefit, and it’s non-trivial to define acceptable justice.

Nonetheless the Paris agreement shows that with good will it’s possible to make progress.  It will require continuing work, with more commitment from the developed world, and also with a mechanism for follow-through on commitments (in the absence of any such system today).  But thus far the strength of common interest seems motivation enough to keep it going.  It’s worth noting that the Montreal Protocol to ban CFC’s (and preserve the Ozone Layer)—one of the most successful efforts at international cooperation ever—also proceeded as a series of successively more demanding steps:

So it’s no surprise—and no cause for panic—that the current Paris goals don’t yet get as far as we need to go.

The parallel with China is precise.  To keep the world economy sane and growing, everyone needs a stake in the game.  In practice it needs to be negotiated between the West and China with at least some account taken of the interests of the rest of the world.  But the issue is less a resolution of differing national interests than a recognition of the magnitude of common interest.  One can even argue that the climate discussions are a necessary prelude to the broader economic discussions that need to take place.

The WTO seems the appropriate vehicle for negotiations, although its capabilities need to be extended to deal with the broader definition of fair trade. Before Trump’s election all parties expected such discussions would begin—including of China’s continuing special status as a developing country.  Instead we got a repudiation of all international rules, in favor of an imagined omnipotent USA.  We’re now going back to the game with the doubled leverage of allies beside us, but with an adversary who views us (particularly after January 6) as weaker and less reliable.  What’s more we’ve spent four years strengthening the militant anti-western side of the Chinese Communist Party.  Certainly there’s a job to do.

It may seem strange to put such emphasis on the WTO since “Bill Clinton let China in the WTO and there was nothing we could do about the Chinese assault on American jobs.”   That truism is actually an example (among others) of what you might call bipartisan revisionist history (the left and right united against the center).  In fact the main issue raised with China’s behavior has always been currency manipulation, which was in no way permitted under WTO rules.  And as the job loss chart (from earlier) makes clear, the loss of American jobs was a phenomenon of the George W. Bush presidency—when we were too busy with the Iraq war and the financial crisis to press our case about anything else.  The WTO is what we make of it; the vast majority of US WTO cases have in fact succeeded.  For now it’s the best game in town.

Issues for Today

As a last topic, we want to be clear that we are in no way minimizing the seriousness of the immediate issues that divide the US and China.  One short list makes that clear:

– Taiwan

– Uighurs

– Hong Kong

– Islands in the South China Sea

– Regime-incited nationalism

The first point deserves special comment, because it shows how high the stakes can be.  On one side it is a matter of Chinese national pride, instilled by state propaganda for every school child.   On the other it is not only a matter of US national commitment, it’s also critically strategic.  As one example, Taiwan is the home of TSMC—the worldwide leader in IC manufacturing technology.  Every new iPhone has an TSMC processor.  (This example also shows we can’t solve global supply chain issues by just assuming we’ll bring it all home!)

Other articles have talked about scenarios for de-escalating this complicated situation.  We’re not going to go through those here, but it is nonetheless worth saying a few words about how each of the issues fits with the strategies we’ve just discussed.

The Uighurs and Hong Kong are issues that the Chinese view as internal matters.  Outside of China we can attempt to exert pressure by economic threats, but we’re in no position to change that point of view.  Four years’ worth of dictates have instead made it worse–a matter of sovereignty versus capitulation.  Ideally by bringing China into a broader realm of international standards for behavior, we can attempt to make both—and particularly the Uighurs—a different class of issue:  what it means to belong to the international order.  Hong Kong is the harder issue, because the threat to the national control is bigger.  However it’s easier to think about compromise once the sovereignty isn’t the main story.

The South China Sea is a national security question.  More than two-thirds of Chinese trade comes via the South China Sea.  China, like us, wants complete control of its immediate strategic environment.  We after all have the Monroe Doctrine.  Thus far we’ve taken the worst possible approach, asserting US control of the seas for any purpose we choose.  That’s going to be hard to walk back, but the only way to do it is by making freedom of the seas a matter outside of national whim, perhaps linked to some kind of regional agreement.  It won’t be easy, but we can at least dial down some of the immediate pressure.

Regime-incited nationalism is the usual face of fascism.  We heighten it by continuing to act as an imperialist power—asserting that it is our decision whether to continue to allow Chinese economic development.  We have limited ability to change the issue, as it is a tool the regime uses to maintain its power.  However, the more contacts there are and the less rabid our own vocabulary, the better the chance to cool it.  It’s worth noting that in the Nazi era, most Germans justified Nazi aggression by a belief that Germany had been purposely shoved aside.

Finally we return to Taiwan.  The only thing you can say is that it’s clear how much the issue means for both sides.  If cooperation is necessary for continued prosperity, then both sides need to find a way to save face.  That’s what we were doing for decades.  Trump and Pompeo were part of the change, but it was probably happening on Chinese side anyway.  The only way out is to strengthen the motivation for sanity.  For that, common interest (with a united West) is always better than military threats.  Even today, the impediment to invasion is more economic than military.  International institutions strengthen both the carrot and the stick—you’re giving up more and making retaliation more comprehensive and certain.

All that being said, we end by again emphasizing the parallel with climate change.  Climate change is a pending catastrophe that is forcing the world to come together in a more closely-coordinated way than ever before.  As with climate change, the China-US relationship constitutes a critical issue that can only be resolved by strengthening international frameworks for both cooperation and competition.   The world can be a better place, or we’ll all face the consequences.

How We Won the Cold War

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“File:Map-Flag of the Soviet Union.svg” by NuclearVacuum is licensed under CC BY-SA 3.0

We hear every day how we need to get tough for our new cold war with China.  The unstated subtext is that threats and bluster are the “getting tough” that’s going to win. In fact we know exactly what won the last Cold War.  It’s worth paying attention to what that was.

The dynamism of our economy won the last cold war.   Our technological base reinvented itself many times over, and the top down economy of the USSR just couldn’t match it.  There were many individual factors behind the collapse—low growth, corrupt state enterprises, spending on defense, oil price collapse, Chernobyl.  But what it all came down to is that the Soviet economy collapsed because it just couldn’t find the resources to keep up.

Many factors made the difference—the historical strengths of the United States:

– A free market for new technologies.  A venture capital industry supported by anti-trust enforcement to protect new companies from powerful old ones.

– The US as world’s best destination for entrepreneurs from everywhere to realize their dreams.

– Openness to ideas from everywhere and active participation in international organizations of all kinds.

– Government support for pure research–to be on the forefront as new developments translated to opportunities.

– Expanding equality of opportunity, so ideas can come from everywhere.

The USSR had a well-trained population of elite engineers and scientists, but ultimately they couldn’t compete with the ability of the US model to reinvent itself and grow.

What can we say about the current situation with China?  There are three points:

  1. The rise of China actually followed the US model.

One part of this is familiar—China invested in its people:  education, infrastructure, health care, etc.  The regime tolerated no disagreements, but it put money (as we used to) into the environment necessary for success.

However the bigger part is less-discussed—what kicked off the Chinese miracle was an accidental surge of free enterprise.  As a weakening of collective economic control, Chinese municipalities were freed to carry out their own businesses once obligations to the state had been met.  That minor bit of freedom took over the economy.  Independent municipal businesses became dominant to the point that they dwarfed the hugely-corrupt state-run enterprises.  Municipal businesses grew into the independent private sector.

  1. Under Xi, China is abandoning that approach in favor of a return to central planning and control.

Xi is a princeling—a child of former revolutionaries brought up to believe he was born to rule.  All of his recent actions have been directed at crushing independent forces in the Chinese economy.  Appointments have been based on loyalty above all.

China is back to the old Soviet and Chinese world of massive state enterprises and a dictated economy.   That won’t change the immediate future, but we have no reason to despair of our ability to compete.

  1. Under Trump we are similarly abandoning our strengths.

Trump, like Xi, is an autocrat who view himself as the all-encompassing genius who needs to run everything.  He picks winners and losers with tariffs.  He awards exceptions to supporters.  He ignores real problems (such as Covid) that he doesn’t want to deal with.  Job appointments are based on loyalty over competence.  Every one of the listed US strengths is at risk:

– New enterprises are sacrificed to the existing powers that be.

– Xenophobia and nativism are pushing entrepreneurs elsewhere.

– Global participation is discouraged.

– Science is discredited and only mainstream technologies (e.g. AI) or Trump whims are funded. Climate change can’t even be mentioned.

– A political strategy of divisiveness means we’re fighting internally rather than drawing on everyone for progress.

 

We didn’t beat the Russians by mimicking their authoritarian control and top-down economy.  We won because they couldn’t compete with our ability to reinvent ourselves over and over again.  We have that opportunity today, but we’re losing it to the false god of dictatorship.

Democracy is not a nicety but the core of our success.

Dictatorships lose.  All-powerful leaders make disastrous mistakes that cannot be remedied.  They can ignore the well-being of the population.  They create massive corruption that cannot be contained.  All these tendencies are visible today (Covid alone shows several), and the effect is—as always—accelerating.

We still like to talk about the power of democracy and free markets, but both are slipping away.  Voter suppression is an openly-discussed goal.  Anti-trust enforcement has effectively ceased to exist.  The power of corporate lobbyists has starved the public sector (including infrastructure of all kinds) and defended the economic status quo against all comers.

Our problems today are not weaknesses of democracy but an indication of how far we’ve strayed from it.  There’s no reason to despair for our competition with China—or for the country generally.  It’s just a sign we have to get back to doing what we’ve always done best.

The Coronavirus and the Limits of Capitalism

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“Lankenau Hospital” by Montgomery County Planning Commission licensed under CC BY-SA 2.0

It’s easy to look at the coronavirus as a one of a kind.  After all, who expected this cataclysm that came from nowhere?   How could anyone have predicted it?

In fact the world is full of low-probability events that you have to care about.   The coronavirus is on a par with airplane crashes and oil-rig explosions.  Capitalism is not good at dealing with any of them.

There’s a myth about that sort of thing.  Of course we don’t need airline or aircraft regulation, because the companies in question know what a disaster would mean and will take care that such things don’t happen.  That’s a nice story, but it’s false.   People don’t get promoted because of events that didn’t happen.  They do get promoted by saving money wasted on something that’s never going to occur.

If you’re going to stop that sort of thing from happening, you need a different mindset.  Government has to spend money on regulation and public health and safe, comprehensive infrastructure.   No one else is going to do it.  We now know unequivocally that we decided we didn’t have to care about the CDC.  It has come back to haunt us.  There’s more where that came from.

In fact there’s a whole bunch of other things we’ve decided we don’t have to care about.  After all, “I don’t have to care” has been the liberating elixir of our age.  Many of these we’ve talked about before, but it’s worth recalling some here:

Climate change

Avoiding a depression (clearly relevant now)

Nuclear proliferation

Losing our edge in science and technology

We’ve washed our hands of all of this, blithely punting to a private sector that is no more prepared than for the coronavirus.

The message from the coronavirus is that bad things really can happen, no matter how much we may want to avoid thinking about them.

The coronavirus is the canary in the mine.   We’ll get over it somehow, but we’ve had our warning.

The Crisis of our State of the Union

Trump’s State of the Union deserves a full response.

It was bad enough to sit through the deceptions and lies in the description of the national economy—where very small actual gains (smallest annual reduction in unemployment in any three-year period since the 2008 crash; worst real wage growth at low unemployment in at least 40 years) were bought at enormously high cost (1.4T tax cut that went directly to Wall Street through artificial earnings and stock buybacks; nothing for infrastructure, education, opioid epidemic, etc.).

unemployment_and_wages

However, all of that is just the beginning.  Many commentators have made that point (although many talking-head economists have done the country a disservice by exaggerating the benefits and ignoring the costs).

The real issue is that you would never guess that we live in crucial times for this country and the world.  You might expect that now I’m going to talk about climate change.   But even that is only a piece of it.  Only in the “I don’t have to care” world of today’s Republican Party is the State of the Union grounds for applause.

We are presiding over the demise of America’s promise in irresponsibility, incompetence, and simple vanity.  Let’s go down a list.

  1. Climate change

On climate change there can be no question of the urgency and magnitude of the challenge.  Science has given us a carbon budget we have to meet. The administration denies all of it and works systematically to undermine world progress.  As we’ve noted before, if we act today we have the elements of victory—but we also have ample evidence it’s a near thing.

Inaction on this subject is a grave risk to ourselves, our children, and the rest of humanity.

  1. World economic order

The elephant hiding in plain sight is the growth of the Chinese economy.  We are in the process of being supplanted as the world’s largest economy, and the room for growth there is enormous—China is already our equal by some measures, but their per-capita income still ranks only as 108th!  The world is preparing a new international order, and we’re in danger of missing the boat.

We have a chance to define notions of trade that open markets everywhere and embrace standards for wages and working conditions, environmental concerns (including climate change), and human rights.  In some sense this is a necessary complement to what’s needed for climate change.  However we are losing leverage for that enterprise every day.

We’ve taken the position (without exaggeration) that God has chosen us to rule, so we should abolish all international norms that might constrain our behavior.  With the growth of China that’s a losing game.  Even today we were unable to dictate to China in our trade war, and it’s China—not us—that’s the biggest foreign market for European cars.  We’re not going to be calling the shots forever, and without rules it’s their game.  In this Trump is not defending the US interest against the Chinese, he’s defending his personal dictatorial power against the interest of the country.  We have a very limited window to take back the promise.

  1. Technology

There will always be changes in technology, but the pace of change has reached the point where we have to keep up or lose.  This affects all aspects of our success as a country:  our national income, the jobs of our workers, the strength of our military.

Instead of recognizing that reality we’ve got our head in the sand.  Some examples:

– We’ve done everything possible to discredit scientists and science generally, and for climate change and environment protection in particular.

– We’ve disbanded scientific advisory councils in government.

– We’ve had multiple State of the Union addresses where the only mention of education was vocational.

– We’ve killed net neutrality, thereby sacrificing new enterprises to the interests of the phone companies.

– On 5G and AI the government has come late to the party, without real plans.  For 5G in particular we’re actually asking our allies just to wait until we’ve figured out some alternative to Huawei.  This is worse than a failure of planning—5G applications are what’s most important, and waiting is punting that stage of technology back to the Chinese.

– More generally there’s simply no understanding of the importance of government in funding exploratory research—for technologies before the stage where private companies can run with them.  The tax cuts included a targeted punishment for major research universities.

– Finally the current rampant xenophobia flies in the face of the past and current contributions of foreigners to our technological strength.  We must continue to be the destination of choice for entrepreneurs looking to realize their visions.

We are simply ignoring the technological challenges and what has made us successful.  God only helps those who help themselves.

  1. Nuclear proliferation

This may seem a more limited issue, but that’s only because it hasn’t hit yet.  There are still only a limited number of players, largely under control.  But we’re doing everything possible to change that.

We’ve not only presented the world with the contrast in our treatments of North Korea and Iran, we’ve argued specifically for nations to do what it takes for their own defense.  We’ve eschewed the sort of international cooperation necessary to prevent new entrants.  And we’ve given Saudi Arabia nuclear material and technology without asking any questions at all.

The only reason we were less worried about this in the past was that world leaders had all recognized the nature of the threat.   We’re no longer keeping our eyes on the ball.  Nuclear technology gets ever easier.  As more entrants join the nuclear club, it gets harder to control their behavior and prevent the further sale of nuclear technology to third-parties of whatever ilk.  The North Koreans have done it before.

The clock is ticking.

  1. National ideals

It’s shocking how shallow the support for democracy has turned out to be.  In Sinclair Lewis’ “It Can’t Happen Here” many people had to die for the dictators to take over.  The reality was much easier.

Democracy is not a luxury.  It is key to what made this country what it is.  We were never perfect, but we were much more a country “of the people, by the people, for the people” than had ever existed before.

We’re losing all of that right down the line:

– We’ve reversed our progress in expanding suffrage, and are now looking for reasons to block people from voting.  The Citizens United ruling put rich people and corporations in control of elections.  Deliberate voter suppression by state governments is stated Republican policy.

– Support for public education is declining, and funding is still below 2008 levels.

– Upward mobility is now below that of most other developed countries.

– The religious right is in charge of what happens to women’s bodies.

– We’ve lost the social cohesion needed for big national efforts.  The President no longer even pretends to represent the nation—he’s a warlord who delivers spoils for his supporters.

There are plenty of historical examples of how hard it is to reclaim democracy once it’s gone.  If we’re going to have the strength of a country by and for the people, things had better change fast.

 

We live in a crucial time.  On one hand we could even see massive destruction of humanity; on the other we could see an unprecedented level of international cooperation as a precursor to a very prosperous and peaceful world.

One thing we can’t do is ignore the reality of our time.  We can’t afford the “I don’t have to care” puffery of this criminally fictitious State of the Union.

We Just Lost the Trade War with China

With all the carefully-hedged language around Trump’s Phase 1 deal with China, it’s not surprising people are unclear about what it means.  Even in this blog we haven’t been explicit enough.  It’s time to remedy that.  There is no ambiguity about what happened.  We just lost the trade war with China.

We start with the agreement itself.   There are two parts:

  1.  The $200 B plan to buy US products is the more publicized but murkier part.  The purchases are spread over two years and are allowed only in specific, politically-advantageous sectors.  Since there is no notion of market reform, it is unclear who is doing the buying, or how the sector targets can work.  What’s more, given the arbitrary level of the targets and the fact that either party to the agreement can just opt out, there is little actual skin in the game.  In fact, as has been noted, it gives the Chinese new leverage over the US in that they can threaten to terminate the now-vaunted purchases any time they want.  Nothing will be known about real progress until after the election. Overall the $200B figure is highly inflated at best; at worst this is an electoral stunt for Trump voters in the designated sectors.
  2. The rest is a collection of statements of principle with no language for enforcement. Whether the Chinese will or won’t comply will be on their terms not ours.  This is entirely parallel to what we got on denuclearization from the North Koreans.  There is no substantive progress on any of the issues targeted by the trade war.

These conclusions have appeared in the press, but they tend to get drowned out in the general relief that accompanies a truce.  So it’s easy to think something important has happened.  In fact Trump needed a deal for the election, so he declared victory—by dialing down his own hostilities.  And the Chinese were happy to punt all substantive trade questions at least a year or two down the road (more on that in a minute).  That’s all that has happened with Phase 1.

But the main scam is the term “Phase 1” itself.

“Phase 1” implies we’re in a continuing process to get to our objectives in the trade wars.   That is out-and-out false.  We took a shot at winning a trade war, and we didn’t win it.  Our leverage is diminishing with each passing day.

The premise of the trade war, as Trump himself said, was that we had the power to destroy the Chinese economy, so we could dictate the terms of the peace.  That’s why the trade war was going to be “easy”.  In fact we represented 18% of Chinese exports, and exports represented 20% of Chinese GDP (see chart below).  We don’t own them.  This is just one more example of the danger in our blind belief in overwhelming US power.  It didn’t work.

What’s more both of those percentage numbers are going the wrong way.  Chinese exports are recovering overall since the hit at the start of our tariffs—but with the US now a smaller part.

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Further the Chinese have been working systematically to increase domestic consumption and thereby reduce the dependence on exports.  Here is the picture (2019 figures are down further but not finalized yet):

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The Phase 1 deal demonstrates that we don’t have the leverage to win today.  For the future we’ve just seen the decreasing financial leverage.  To that gets added the decreased dependence on US technology, fueled in part by the threats to deny it. (It’s hard to imagine anything less productive than making them mistrust our operating systems.)  The trade war has ended constraints on what it takes to fight back.  Chinese hardliners have taken control of the relationship, and the uptick in intellectual property theft is one result.  Despite the rhetoric, prospects will not be better next year.  There’s no Phase 2 triumph coming for this trade war.

 

When you start a war there are consequences, even if you quit.  Your opponent is going to continue to treat you as an enemy unless something pretty dramatic changes.  The Chinese have made it clear that they want to be as insulated from the US as possible. Since they are rapidly becoming both the world’s largest market and the world’s largest proving ground for new ideas, that’s not a great situation.  There are other possible consequences as well:  a new cold war, lower world economic growth, an uncontrolled and expensive arms race, no leverage on Chinese behavior, even increased chance of war.

The rejoinder to all this is of course “We have to do it.  We have to get tough.  We can’t just cave in as in the past.”  On that subject the press has done us all a great disservice.  There are several points:

  1. We didn’t get tough, we got weak. We abandoned our allies to get ourselves an exclusive deal. We lost half our leverage, and suffered the consequences.  That’s what happens when you just assume overwhelming power.
  2. We didn’t cave in before, we got results instead of pain and bluster. Under Obama both the balance of payments deficit and intellectual property theft were reduced significantly—instead of the opposite. We also made important progress (some since reversed) with climate change.  The job wasn’t finished, but for all the chest-beating, we’ve gone backward since.   It should also be noted that essentially 100% of the job loss from Chinese competition occurred under George Bush or as a direct result of his 2008 crash.   Nothing prevented action on currency manipulation other than the distraction of our then-current war.

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  1. The rise of China is not something in our power to stop. They’re not just cheating; they’re doing a number of things right, some of which we’ve forgotten how to do. It is counterproductive to think we can make it all go away.  You can’t win just by being a bully; you have to play the game.
  2. Finally, we had every opportunity to make real progress with the Chinese. They expected to renegotiate China’s status as a developing country for the WTO, and they certainly expected to face a unified front in the West. There is actually a common interest in intellectual property—especially when it’s not used as a weapon against them.  It’s also worth noting that government subsidies to private companies aren’t so black and white here either.  There was an agreement to be had for labor, environment, and world-wide prosperity.  We lost it by going gung-ho for our very own holy war.

There may still be opportunities for full leverage and common interest, but considerable damage has already been done.

The result of the trade war can be summarized in very few words:  we botched it, got nothing, and hurt ourselves badly in the process.

Trump the Firebug in China Phase 1

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A year and a half ago I had a piece about Trump’s firebug behavior, where he whips up a crisis which he then resolves by dialing down what he did himself.   Such behavior is not only deceptive, but frequently also damaging—stopping the fire doesn’t necessary bring everything back to zero.  North Korea was the prime example in that earlier piece.  In that case, even after we turned down the fire we had legitimized the regime, encouraged nuclear proliferation, and basically stopped caring about the dangers they represent.  It remains shockingly easy to get the press to fall for these firebug scenarios.

At the time I worried that the same was going to happen with China:  “there should be no problem getting the kind of PR-oriented agreement we got from Kim.  Market access can be as murky as denuclearization.”

It took longer than I expected (he didn’t do it for the midterms, he did it for the presidential election), but that’s what we’ve got.  The Phase 1 Agreement dials down Trump’s own trade war with a declaration of victory that lets everyone celebrate the peace.  In exchange for Trump’s toning down the trade war, the agreement combines one-shot questionable purchases with a number unenforced statements of principle (think denuclearization).  There is no substantive progress on any of the issues that started the trade war.  And for subsequent phases, as noted before, our leverage is diminishing every day.

We’ve been sold another firebug triumph—and in this case the damage is serious.  The trade war delivered nothing and fractured the world in the process.  This is a failure of policy with real consequences.  It is horrifying that the press coverage can’t get beyond speculation about what might be good or bad in the vacuous agreement itself.  China is too important for this.  The issue is not the fire-ending nonsense; it is the damage done.

On that subject I summarized my feelings this morning in a comment to David Leonhardt’s article in today’s NY Times: “What Americans Don’t Understand About China’s Power”:

This is a good piece, but it understates the problems with our China policy.

We have issues with China, but a unilateral trade war is not going to resolve any of them. Our recent phase one agreement is a case in point—like our agreement with the North Koreans it does little more than tone down the belligerence we created:  questionable one-shot purchases and unenforceable statements of principle.

The trade war itself, however, has lasting consequences. Trump’s threats to destroy the Chinese economy legitimized Chinese hardliners’ position that the West was still colonialist and not to be trusted. Complete independence and self sufficiency were imperative.  Intellectual property theft went way up.

Our current Chinese policy is nothing more than unproductive grandstanding.  It is not “finally getting tough with the cheats”. Obama actually reduced intellectual property theft and the balance of payments deficit, rather than the opposite. Same for Chinese behavior on climate change.

If we actually want to make progress, it needs to be together with our allies (to double leverage) and in the context of international rules of fair trade—rather than what we think we can shove down their throats to maintain our dominance.  [Rules of trade have more credibility when we’re willing to apply them to ourselves!]

The trade war does not resolve issues, does lead to a fracturing of the world (with reduced security, prosperity, and US influence), and—as Leonhardt says—distracts us from the things we really need to do.

Irrelevance

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“P1040738” by frederique.baggio is licensed under CC BY-NC-SA 2.0

I find I can’t watch British TV series anymore without a post-Brexit shudder.

Those programs are no longer studies in quirkiness from a historically-great country that is almost us.  That country is gone.   It can’t even keep its own pieces together.  The solid core of the country has evaporated.  All that’s left are the quirks, and many of those are rather sordid.

Britain is a land possessed by dreams of lost empire, unwilling to accept either the now-visible reality of that imperial past or the self-evident fact that it is gone.  Ready to slap the face of anyone who reminds them of either.  What could be more preposterous?

We’re in the running.

We had our own years of empire.  By virtue of geography we were the last country left standing at the end of World War II, so we put together the world afterward.  And we ran it.  And we got comfortable with the idea that was the only way the world could be.  God chose the United States of America to rule the world.  The Brits had the same idea.

Those were the good old days.  Not only did America rule the world, but American products reigned supreme.  And notions of common effort left from the war drove broad-based prosperity through measures like the GI Bill.

Things aren’t quite the same anymore.  The rest of the world grew up.  We can’t just order everyone else around, and our products don’t automatically win everywhere.  And we seem to have forgotten those notions of common effort, with sad consequences for the spread of wealth in the population.

Unfortunately, like Britain, we haven’t forgotten empire.  That’s what we have to get back.  Rule the world.  Same population.  Blacks under control.  Winning everything.  Pot of gold for everyone.  God said so.

We have even more to lose than the Brits.

The United States is a prosperous country, in many respects the richest in the world.  We’ve messed up our social contract, but that’s ours to fix.  In the same way, there are no insurmountable problems in making worldwide growth good for everyone.  Even climate change, a monumental problem, has the technological basis for a solution.

We stand ready to sacrifice all of that to a fantasy of empire as vaporous as the British one.  It’s scary as hell that we seem ready to repeat history.  Their Brexit vote presaged Trump—what does the Boris Johnson vote say now?

Symbolism to the contrary, we have a better chance.  In Britain the vagaries of their electoral system prevented a legitimate revote on Brexit.  Regardless of who gets the Democratic nomination, we will get a chance a to vote on the future of the country and the planet.  History doesn’t repeat, people do.

But history will certainly judge.

Random Thoughts to Start 2020

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“Happy New Year” by nigelhowe is licensed under CC BY-NC 2.0

The True History of Trickle Down

As many have pointed out, it’s hard to understand how trickle-down economics continues to persist in the absence of any demonstrable success.  Money is of course an answer, but actually there’s a genealogy to it.

I recently came across a book that helped make the point.  It wasn’t an economics book, it was a novel—The Wooden Shepherdess by Richard Hughes.   Hughes was a comfortably upper-class Oxford graduate who spent much of his life in his castle in Wales.   The Wooden Shepherdess is a fictionalized account of the Prohibition era in the US and of England and Germany as Nazism was growing in the thirties.  Interesting times.

What’s most striking about the book, though, is its attitude toward class.  The author is perfectly clear about the grotesque inequality of the time and even sympathetic to the poor.  But he has an out:  that’s just the way it has to be.  It’s either this or chaos, so you’ve got to have this.  The speaking voice has no crisis of conscience, no concern about moral issues, no need to think much about it at all.  It just has to be.

At first that attitude seems strange—until you realize that trickle-down is only a repackaging of the same thing.  Sure there’s inequality, sure it’s growing, sure the minimum wage is ridiculous, sure 44% of the work force is in low-wage, dead-end jobs.  It all doesn’t matter. We need the Gods at the top, or it all collapses. It just has to be.

I once wrote a piece called “Sacrifices to the Gods of Jobs”.  There’s something in humans that wants to solve all problems by placating the heavenly or earthly powers that be.  That’s why it’s so tough to fight trickle-down.  And those Gods will ride it for all they can get.

 

Policy Issues for Iran Apply Also to China

Paul Krugman had a well-expressed comment about how we as a country often misunderstand the effects of foreign policy.  As he put it, we frequently don’t want to acknowledge that “we’re not the only country whose citizens would rather pay a heavy price, in money and even in blood, than make what they see as humiliating concessions.”  His piece was largely about Iran, but the blindness is even greater for China.

After Trump declared he was going to destroy their economy and there was nothing they could do about it, their behavior got worse. It was not surprising that hard liners advocating complete self-sufficiency were proven right, and that intellectual property theft became a national imperative.  It’s precisely the blindness Krugman mentions to expect anything else.

Nonetheless, both the left-wing and the right-wing have signed onto the economic war with fervor.  The press doesn’t dare talk about anything else.  A weird aspect of it is that we seem to believe we’re defending the Chinese population against the totalitarian government—whereas the population has in fact reacted as Krugman described.  That’s one reason we’ve lost essentially all leverage on Hong Kong and the Uighurs.

We are correct in defending our interests with China, but the point here is that an economic war is a poor way to do it.  In actual results (IP theft and trade imbalance) we’re doing much worse than before Trump. What’s more, both countries need to be able to work together on areas of common interest—such as climate change, where things have gone badly backwards.  Our economic crusade is about as useful as the Medieval ones.

 

Squandering the Future

Now that Iraqis have decided they’ve had enough of the American presence, it’s a good time to look at the legacy of the Iraq war and other ways we’ve squandered our national wealth.  We’re not the first country to impoverish ourselves through war and other profligacy, but—by the silence of the press—we seem to be among the most thoroughly unaware.

In Iraq we fought a $3T war whose primary beneficiary was Iran.  The war was financed off-budget, without any real supervision of financial consequences.  Looking at the current state of the Middle East, it’s hard to see any US benefit but easy to find costs in bad will.  For the Iraqis it was an ongoing disaster from which they are still trying to recover.  For Iran it solidified, even institutionalized, their influence in Iraq.

Because of that war we ran huge deficits in good times.   That, combined with the later Republican “balanced budget” hypocrisy, has left the country in a persistent state of public-sector poverty.  Education and infrastructure funding are inadequate at all levels, and we just can’t come up with the money to fix it.  Nonetheless, after delivering both the war and the 2008 crash, George W. Bush has been rehabilitated to the point of canonization, and the Republican party has succeeded in removing all trace of his failures from public memory.

That’s convenient, because they went and did it again.  Trump’s tax cuts were a $1.5T ongoing present to businesses, who have chosen not to invest it in our future.  Instead they effectively passed it through to their rich investors via stock buybacks.  No investment in the businesses, and no money available for public infrastructure of any kind.  The money is gone.  And, as far as press coverage is concerned, without a trace.

That’s $4.5T in lost opportunities. It has consequences we see every day.  The American Society of Civil Engineers keeps a web site with a breakdown of national infrastructure requirements.   We currently rate a D+.  We’ve got parents desperate to get their kids in top private colleges, because we won’t support enough first-class public institutions.  And that’s not even talking about what’s necessary to combat climate change—which of course can’t be mentioned.

We don’t actually have a great economy.   We’re living on credit off the achievements of the past—with more than a little help from the hated immigrants.   We can talk about the evil Chinese all we want, but if we fall behind in that contest, it will be because we refuse to invest in the country and continue to give away the store.