“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.

Foreign policy these days has been drifting along.  Negotiations with China have gone up and down for many months.  Nothing is happening with North Korea.  (Kim has given some kind of threat for the end of the year, and we’re wondering if we care.)   It’s easy to assume all is sort of okay while we’re working on it.

That’s false.  With trade wars as with other wars, if you’re not winning you’re losing.  That’s true in spades today.

Let’s start with China.

As we (and Nancy Pelosi) have pointed out for some time, we began the trade war by giving up a good chunk of our leverage.  We and the EU each represent 18% of Chinese exports, so we gave up half the leverage for a Trump-style exclusive deal.

That was bad enough.  What’s worse is that the leverage goes down every day.  That involves both Chinese imports from the US and Chinese exports overall.

On the import side, China has been forced by the trade war to develop new sources for strategic products, since the US can no longer be considered a reliable supplier.  The last Huawei phone, for example, has replaced all US components.  Additionally, China has developed alternate sources for products that it restricted in retaliation for the US tariffs.   It’s now sourcing soybeans from Brazil and Argentina, relationships that are expected to survive any US trade agreement with China.  In other words our leverage as a strategic supplier to China is decreasing dramatically.  What’s more, this gives a pessimistic picture of what is to be expected of US exports to China even after a deal!

For Chinese exports, there’s no question that the Chinese economy took a hit from the  US tariffs.  However they have looked to beef-up exports elsewhere and also to stimulate their own domestic market.  After the initial hit their balance of payments has shown resilience:

Another round of US tariffs would hurt again (at the expense to us of a very visible and regressive tariff tax), but there is no sign that the Chinese are going away.  As they continue to work on replacing the US market, time is on their side.

With North Korea, even with the continued sanctions, production of nuclear weapons and missiles is continuing unabated.  The threat posed to the US by those weapons should not be taken lightly.  The destructive power of nuclear weapons is such that only a few are necessary to assure victory.  Japan was defeated by two, small-grade weapons and a faked threat of more.  In theory a successful cyber attack combined with a nuclear threat could defeat anyone.  North Korea is a world leader in cyber attacks.

What’s more, the strategic value of those weapons is going up all the time.  As we threaten to withdraw support from Japan and South Korea, the regional status of North Korea grows.  Do we really think Kim will give it all up?  (And can we deny that other countries will want to follow his example?)   It’s not what Kim might or might not announce in December that’s the issue, it’s what has been going on all along—while he’s been Trump’s buddy.

So in neither case are we working quietly toward a solution.  We’re just plain losing.

“DSC_0844” by Studio5Graphics is licensed under CC BY-NC-ND 2.0

Relations with China are important.  By some measures the Chinese economy is already the biggest in the world and still growing rapidly.  The Chinese military is the most comprehensive challenge to US hegemony since the heydays of the USSR.  Chinese technology has evolved rapidly to near parity with ours.   The Chinese political system could not be more diametrically opposed to ours.

With such a significant adversary, it goes without saying that we need to manage the relationship carefully.  At the moment, though, all we’ve got is war-mongering.  The Trump people have always been big on scapegoats, and the Chinese are just as convenient as the immigrants.  A difference is that immigrants have some defenders—Trump can’t get away with just calling them all animals.  But by playing patriot, Trump has gotten away with pretty well anything about the evil Chinese.

A couple of comments:

– Since the Chinese were major allies in recovering from the 2008 crash—and the Republican Party was not—there’s a strong case that Republicans (deliberately) caused more pain to the US economy than the Chinese did.  In any case the Chinese did not pillage the US economy as frequently claimed.

– The Chinese intellectual property theft we keep hearing about had been diminishing until Trump ignited his trade war, and Chinese hardliners felt empowered to fight back.

Competition with China is a fact of life.  No amount of trade war is going to make them go away.   So “getting tough with the Chinese” is publicity not policy.  What matters is how to get results, as we’ll discuss.  Further, it should be recognized that we actually have quite a lot of influence on the form our relationship will take.

We’ll start with some background.

1. Political and economic systems.

China is very unfree.  There is extreme control of information available internally, and consequences for speaking outside the party line can be very severe.  Recently deployed surveillance systems add another dimension of party control.

Before we get too far up on our high horse, though, we should recognize that support for the regime in the population is now very strong, perhaps stronger than ever.  The regime has delivered unimaginable economic success for a very wide swath of the population.  Just to be clear this wasn’t stolen from us—US trade is a small part of the overall Chinese economy—it is a legitimate success.  And it created a sense of pride in China that had been lost for centuries.

There were two primary factors for that success, one intentional and the other not.  The intentional part was government investment in the population (e.g. education) and national infrastructure.  That prepared the country for technological achievements that would have been impossible otherwise.  In that, China was very much like the US in the fifties—when the government sent the GI’s to college and built the interstate highway system.  Public investments we’ve forgotten how to do.

The other success factor—strangely enough—was an accidental surge of free enterprise.  As a minor 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.  Municipal businesses became dominant to the point that they dwarfed the (corrupt) state-run enterprises.  Municipalities ended up devoting all attention to their own businesses, to the point that they were meeting their obligations to the state with products purchased by free-market profits!

So China’s success was as a mixed market economy.  Where Xi’s new stress on state enterprises will take them remains to be seen, but it certainly raises questions.  In many ways Xi’s push to consolidate power in the state is just as radical as Trump’s push to turn everything in the US over to the private sector.  Both are abandoning past recipes for success to cults of personality and personal ideological visions.

2. History, nationalism, and negotiation

Western imperialism in China was terrible and recent.  The Opium Wars were fought for the profits from addicting the population, and it took Mao’s hell to drag the country out of the consequences.  While the Europeans were primary players, we had a role in it too.  We have conveniently forgotten all of that, but the Chinese most emphatically have not.  Not just their leaders but the population as a whole has reason to see their current place in the sun as hard-won against forces that have done their best to keep them down.

That’s a dangerous situation.  It sounds like Germany in the 1930’s (eerily, that’s also the only other example that comes to mind of such a dramatic economic recovery).  From that example we know what doesn’t work: neither draconian efforts to keep them down nor appeasement after the fact is going to be successful.

In that context our unilateral trade wars have several bad effects:

– They complicate negotiations by mixing fair trade with measures to retain dominance.  In that the trade wars are counterproductive even domestically, by encouraging the false belief that we can “defeat” Chinese competition.

– They make negotiation a matter of pride not just interest.  Worse, they produce broader nationalist reactions in both countries.

– They lead to more destructive isolation of countries from each other, always a bad idea.

The only path that works is to make them part of the world economic order.  That such approaches work is the primary lesson from the changed world order after the second world war.  The point was discussed recently in a piece by former leaders of ten disparate countries.  The WTO is the means by which rules can be established for free trade as well as conditions of labor and environmental concerns.   As such, it is a much more effective instrument of national policy than the pot shots we’re taking now.

Let’s be very clear that this is not about being nice—it is the path of maximum leverage.  The reason why our current discussions with China are getting nowhere is because we have chosen weakness—replacing leverage by bombast for public consumption.  Under Obama, with far less economic leverage than we have today, both the balance of payments deficit and incidents of intellectual property theft declined markedly.   Both have increased under Trump.

3. Morality, Chinese minorities, and Hong Kong

There’s a lot we don’t like about the way the current Chinese government does business.  In addition to repression of the population, there is the imprisonment of Uighurs in concentration camps and the heavy-handed suppression of democracy in Hong Kong.

Let’s start with repression of the population.  An important question is why the population is enthusiastically ready to accept that Xi’s model over ours.  Part of it as noted is the economic success and rise in stature of China.  However, another part of it is that—correctly or not—they don’t see the current version of the US as a good argument for our ideals.

The Chinese government may be repressive, but at least they have a proven commitment to improving the economic well-being of the population.  Seen from the outside the US is run for corporations—who can buy elections with impunity—and those corporations have no commitment to anything beyond return for their investors.   Government sees no reason to intervene for the well-being of the population, and the all-pervasive corporate influence leads to a relentless consumerism that dominates daily life.

Where we see in Xi a return to discredited socialist control of the economy, they see in Trump the triumph of corporate power.  It’s up to us to prove them wrong.

Until that happens, our support for the Uighurs is hypocrisy from a country that puts immigrant children in cages and demonizes its own citizens.  Support for political liberalism is strange from a regime than calls the press “enemies of the people”.   And support for democracy in Hong Kong is nothing more than the nth Western effort to keep China down.

That doesn’t mean there’s nothing we can do, but we shouldn’t delude ourselves about the power we really have.  Our actions on Crimea were ultimately little more than symbolic, and we could do nothing at all about Tiananmen Square.  For Hong Kong, the Chinese have already branded the unrest as a Western plot, so overt pressure can be counterproductive.  Just like the US, China is less likely to cave in to coercive power than to international outrage.  For that we need allies and behavior that matches our rhetoric.

Where does all that lead?  Here’s one list of conclusions:

– We must bring China into the world economic system with updated rules reflecting today’s reality.  That’s why the WTO exists.  This would have started before now with any other President.  We have a major responsibility to make it happen.

– There are other areas, climate change is an obvious example, where we have a strong need to work together.

– There are also compelling reasons for vigilance, particularly with the military.  But even there we have a large interest in agreements (with Russia too of course) wherever possible.   In particular we all need to avoid arms races and military instability.

– Economic competition with China is inevitable and will be intense.  There is no reason either we or they will be sole winners, as the differences between the societies will lead to different strengths.  That should be good for worldwide prosperity.  The most important thing for us is to recognize and play to our strengths.

– We should (at least for now) view both Xi and Trump as anomalies.  Both are roadblocks to domestic and international progress, and there is no way to know how long they will last.  But they do not define their countries or the possibilities for the future.

– Finally if we’re worried about the decline of our ideals in the world, then we should accept the challenge of living up to them!