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We’re Wrong About Divisions

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The most important division in American society is not between Republicans and Democrats.  It’s within the Democratic Party itself.

As an indication of what I’m talking about, I think about an episode of the program Peaky Blinders.  In that episode the hero Thomas Shelby’s sister’s boyfriend is a communist, and the hero has to figure out how to keep him alive.  When the subject comes up with the police, the answer is “Normally we don’t have to worry about those people.  They’re so busy killing each other that they’re just not a problem.”

The Republicans can say amen to that for our tamer version of the left:

  • We’re still living down “defund the police”
  • We’ve had an endless supply of articles about how privileged, racist whites just have to get used to taking a well-deserved hit, including for education.
  • Virtually any statement made about “neo-liberals” is a whitewashing of Republican failures so that chosen Democrats can be blamed instead. One hopes George W. Bush is duly grateful.
  • We had a chance to pass a Biden agenda, but the Democratic Party spent so much time posturing and pretending that Manchin and Sinema didn’t exist that when they finally got around to voting it was too late–inflation was THE issue and it was easy for Manchin to hide. The left wing of the party is gleefully blaming Biden, without any alternative policy or blame for Republicans.
  • Democrats are actually fighting over whether Biden will be the nominee in 2024—when the real issue is the 2022 midterm election.  The only result of this fight is weaking the remaining days of the Biden administration and undermining the Democrats’ message for 2022.

With friends like this who needs enemies.  As in the Peaky Blinders quote, they hate each other so much that it trumps any desire to do anything good for anybody. It’s hard even to count the self-inflicted wounds.

Just think about it.  That Democrats can do anything good at all—given this nonsense—means that they could perhaps do something really big if they could get organized and stop the knife stabbing. If they stopped providing amunition to Republicans, they might just be able bridge the other divisions we hear so much about.

What Matters for Climate Change

/ ontheoutside / 6 Comments

Last year this blog had an overview of the major factors involved in fighting climate change.  Most of that is still current, but it has also become clear that there is a lot of confusion—even in the climate movement—about consequences.  So this piece is not about the basics; it’s about the reality of what it takes to combat climate change.

To start with, Here is a list (off the top of my head) of widely-believed nonsense.  There is probably something to annoy everyone.  You can see if I’ve made a case for it by the end.

– Conservation is a primary issue

– It’s important to get solar cells on rooftops everywhere

– Recycling is important

– Local initiatives are important

– State initiatives are important

– The main game is getting our house in order

– We don’t need to do anything, since technologists will solve it by themselves

– We’re ready for electric cars to take over the transportation sector

– Current solar and wind are ready to take over everything

– Winning is simple, we just have to stop the oil companies and start deploying the good stuff.

– For climate change employment, we need local communities to decide what they really need

– The private sector is doing it all by itself

– Carbon pricing is optional

– Carbon pricing is all it takes

– We need to get a better deal than the Paris Agreement

– We’re in control of our own destiny

– We all need to change our lifestyles

– Fighting climate change will tank the economy

– Economic dislocation means taking care of miners

– Since poor people get hurt worse, climate action is a matter of charity—for social justice

– Same thing for racial justice

– Same thing for regional justice

– Internationally, this is a matter of everyone taking care of their own

– With China and India, the important thing is to stand tough to get what we want

– We have to insist that any new technology developed here gets manufactured here

 

Let’s start this off with item #1—conservation.  From within the US it’s easy to believe the fight against climate change is all about conservation.  After all, we’re up against a hard limit on tolerable levels of carbon dioxide in the atmosphere, so we’ve just got to cut down on burning in all ways.  And we’ve got to learn to behave differently in the future.

However that logic breaks down quickly.  What about all the people in China and India?  Our conservation is a blip compared with them, but we share the same atmosphere.  Do they just have to get used to the idea that cars and air conditioning aren’t for them?  They should accept permanent sacrifice for the good of mankind?  Even in the US, no amount of conservation will move people to electric cars or eliminate the CO2 production from heavy industry.

So even for the near-term we have to recognize that the fight against climate change is not primarily about conservation but about alternative energy sources.  Worldwide, we need to evolve energy sources, so that there will be enough to take care of people everywhere.  As noted in the prior piece, there is in fact no reason to fear we will ultimately lack for power.  This isn’t about learning to live with energy scarcity—it’s about creating a future for all people, all countries, and all life styles.

For that reason we need to focus on the transition to alternative sources of power.  There are two quite different types of problems to be solved:

– Generating and distributing power

The first thing to recognize is that (despite some obfuscation from the oil companies) the future is electric.  That’s the common currency for the energy to be used everywhere, in factories, in homes, in cars.  It’s what all the renewables produce today, and what will be produced by all future candidate technologies.  Electricity is easily transmitted over long distances, and can be stored for later use (although there is much still to be done for high-volume, in-network storage).

So this work includes the electrical network, the sources of energy, and the means to store it.  Since everything will move to the electrical grid, its capacity will need to grow significantly and fast.  This is a huge project, but this is ultimately just a matter of national will.  That makes it the easier part.

– Adapting applications to use it

For that you need to work through the major sectors of energy usage.  Here is the chart for the United States.

consumption-by-source-and-sector

This is a larger and more complex undertaking, requiring careful planning for each sector.  Carbon pricing is one of the few actions that can be done across the board.   As we noted previously, assuming the atmosphere is free amounts to an annual subsidy of $1 T to the US fossil fuel industry.  Even low-level initial pricing (as with CCL) sends a message for corporate planning.  However, it is naïve to believe that carbon pricing will just take care of all sectors in time to avert disaster.  Note also, for priorities, that the residential and commercial sector is the smallest by far.

We also have to think about this problem not just for the US but for the rest of the world as well.  The US Energy Information Agency has released a document that helps in thinking about that task.  (A short summary of conclusions is available here.)  It has projections of energy use throughout the world going out to 2050.  With that it includes variants of the US energy use chart (just given) for other countries.  A significant fact is that many developing countries have a proportionally much larger industrial segment than we do, as high as 70%.

The report shows some influence of climate concerns, particularly in the US and China, but overall it describes the dimensions of a disaster.  The following chart taken from the report shows a continuing growth of CO2 emissions for the entire period.   While the report itself doesn’t explicitly call out the bottom line, the numbers from the report imply that the world will hit a point of no return already by 2035—with a CO2 concentration of 482 ppm and a temperature rise of 1.6 degrees C.

eia1

In the EIA scenarios, the world does a pretty good job of migrating electric grids to renewables (or to some extent gas)—but a terrible job of moving applications to electricity.  In developed countries this translates to business as usual, but in the developing world it’s much worse.  India, for example, is seen as growing exponentially with much of the increase powered by coal.  This isn’t just a question of forcing them to meet our standards.  Heavy industry is a particular problem everywhere.

So the application area is a big job with many industry-specific issues.  The world desperately needs focused research efforts with results that can be applied large-scale worldwide.  This can’t be a matter of everyone guarding discoveries for national advantage.  Cooperative international arrangements will be key to meaningful progress.

 

Even at this high level there are a number of conclusions to be drawn:

– There is no do-nothing alternative.

Technology will deliver a viable future, but we’ll have to work to get there.  There’s no silver bullet that makes it all go away.

– Technology development is important and has to be figured into any planning, but technology concerns are not the barrier to success.

It is perfectly possible to put together a plan to get the US where it needs to be by 2030.  That’s not saying all technology problems have been solved (after all electric cars are still much too expensive), but we can see a path to success.  We shouldn’t trivialize the effort and sophistication required, but based on where we are, and given financing, it appears that the technical side can get done.  The next point is less clear.

– Changes are huge and have to be dealt-with politically.

This isn’t just a matter of coal-miners losing their jobs.  Electric cars alone will have pervasive consequences.  We have to understand that worries about change are rational, so an important part of domestic climate policy has to be an assurance everyone will be made whole.  Otherwise we will continue to face the push back seen most recently in the Australian election.

In the US there is every reason for the less advantaged to distrust the political powers that be.  In the developing world it’s even worse—you’re talking about giving up on the benefits of development for some unknown duration.  The situation is necessarily difficult.   It’s only going to work if wealthy people and wealthy countries realize it’s in their own interest to come up with the goods.  No one will escape the consequences otherwise.

– The international side is unavoidable.

There is only one atmosphere.   Every country in the world has to cooperate, or we all lose.  When the US opts out, everyone loses faith in the future—as was evident in the recent Madrid meeting.  We have to restore international unity in order to make progress.  And that will only come when every country sees a just role for itself individually.  As for the terms of the Paris Agreement—it is only a first step and actually better for rich countries than will ultimately be workable.

We cannot go into this with the attitude that the objective is to come out a winner at the expense of everyone else.  If everyone doesn’t win, we all lose.

– This is not a matter for incrementalism.

We’re not going to get there with well-meaning people insulating their houses or businesses putting solar cells on the roof.

It’s worth putting some numbers on this.  With current technology, the power output of a solar cell is 20 watts per square foot.  From that you can calculate how many solar cells would be needed to meet current US electrical demand.  The answer is about 2500 square miles, assuming they’re all in brilliantly-lit, weather-free Arizona.  (And there are serious problems in managing that one too.)  All of it gets an order of magnitude worse if we decide to go piecemeal in random, less promising locations–and that’s just for today’s electrical grid, not where we have to get to.

That’s not to say that Arizona is necessarily the solution.  The point is that there has to be a rational national policy that will actually get the job done.

 

Greta Thunberg is right—there is no substitute for major political action.  Anything less is delusion, regardless of who says it.  The 2020 election is the single, deciding climate issue today.

Perhaps we need the right metaphor.  The fight against climate change is a war.  We’re all in it together—losing is losing for everyone.  The countries of the world are allies in the sense that each of them is necessary for success.  National economies will be affected, but through national climate efforts with no shortage of jobs.

Right now we’re like the US in mid 1941.  We can see and understand the enemy, but we’re not convinced we really have to be involved.  That situation only got resolved when the Japanese attacked Pearl Harbor, and it was clear there was no other choice.  You can make a case we were lucky that it wasn’t too late.  Without the Nazi’s disdain for “Jewish physics”, they might even have gotten the bomb.

For climate, if we act today we have the elements of victory.   We also have ample evidence it’s a near thing.  A climate Pearl Harbor may well be too late—and beyond anything we want to live to see.

Reasons For Pragmatism

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“COD Volunteers Give Back to the Community During COD Cares: Roll Up Your Sleeves Service Day 103” by COD Newsroom is licensed under CC BY 2.0

Ideology can be inspiring, but it’s never the same as a plan to get a job done.  For now it’s getting in the way on many issues.  Here are a few examples:

  • Healthcare

ACA is an imperfect compromise with known issues—in part because it was a non-final version enacted in the wake of Scott Brown’s Koch-funded victory for Ted Kennedy’s Senate seat.  All attempts since then to improve ACA have been blocked by anti-healthcare Republicans.

That being said ACA has enabled tens of millions of people to be covered for the first time, and it is supported by a non-regressive tax—the ACA surcharge.  It also attempts to get around some of the worst problems private insurance by covering pre-existing conditions and regulating how much of premiums must be paid out in benefits.  In fact insurance profit margins in healthcare are well-below margins in every other insurance category.

The most critical issues today are to improve coverage, pricing, and the range of offerings for ACA plans.  Some of this is just a matter of rolling back Trump efforts to destroy ACA.  The rest is more complicated, but nonetheless well-studied.  This needs to happen independent of long-term plans.

“Medicare of All” is an ideological choice—to get healthcare away from the insurance companies.  It’s a good slogan but something of a misnomer, because the changes from Medicare are decidedly non-trivial.  The Sanders bill optimistically assumes all private insurance will be gone in four years, but without a real plan to make it happen.  While virtually all developed countries have some form of universal healthcare, the systems are dramatically different from country to country, and many keep some form of private insurance.  Even current Medicare has many roles for private insurance.

Focusing on Medicare for All does nothing for current problems, and puts us in an ideological battle for the future.  As Krugman recently pointed out “Not many people love their insurance companies, but that doesn’t mean that they’re eager to trade the coverage they know for a new system they don’t.”  Additionally—for current Medicare recipients—Medicare for All is easily posed as a threat to Medicare itself.  That worked (using ACA) in the Scott Brown election and could well work again.

The long-term objective is affordable, universal coverage.  And the first steps start now.

  • Climate Change

If anything should ever be non-ideological it’s climate change.  Facts are facts, and the solutions are primarily matters for science and engineering.  The main political issues are how much money to spend and who is going to pay for it.

Both sides, however, have turned this into a culture war.  That the Kochs have dishonestly challenged the basic science is by now almost beside the point.  “Bad science” is just an epithet thrown out in the culture war.

We need to stop the culture war and make sure we take care of the people who will be hurt as the economy goes off fossil fuels.  Green New Deal makes some things better and some things worse.  There’s so much political deal-making thrown into it, that it can’t possibly be viewed as anything other than a left-wing grab bag.  Maybe that helps in defeating Trump—which is of course necessary for any progress—but there are too many distractions from the climate change goal.

We need to make sure that everyone realizes that the new post-climate-change world is a good world for all—even people who want to drive AV’s and Chevy Suburbans.  And we need to commit to protect everyone—coal miners, car mechanics, people hit by carbon pricing—who might otherwise be hurt in the process.  That’s the objective.  We can refuse to play the Koch’s culture war game.

We have to get away from the notion that we need to create a kind of “socialist new man” of conservation.  We’re not repealing the industrial revolution.  We just changing the technological underpinning of how things work.  That’s not to say there aren’t other environmental issues, but they’re not the same.  We shouldn’t expect fixing climate change will put the EPA out of business.

  • Jobs

This whole area is filled with so many wrong and misleading ideologies that we can start with a catalog of wrong ideas.

Manufacturing is the basis of economic strength.

The Chinese have gutted manufacturing in the US.

Balance of payments is a good measure of economic strength.

A strong private sector will provide everything necessary for economic success.

Tariffs protect and strengthen the domestic economy.

Low business tax rates build national competitiveness.

Taxing businesses hurts everyone.

Strong unions and strong anti-trust enforcement will preserve the middle class.

Public sector jobs aren’t real jobs, they just pull money out of the private sector.

In the future there just won’t be jobs for everyone.

From the list it’s clear this isn’t a matter of left versus right (even if you discount the lunatic fringe running things today).  The world is moving into new territory (more and more companies with 0 cost of production, tighter and more automated international links).  So the challenge is to see things as they actually are.

Ideologies can get in the way of understanding.  No candidates seem willing to talk about the transition from a manufacturing to a service economy.  Unions and antitrust enforcement are still good ideas, but they buy less than they used to.   As the last of the points indicates, futurists tend to provide more ideology than reality, so nothing beats experience and pragmatism.

For ourselves we see government challenges as:

Supporting education and research to keep ahead of technology change.

Managing the continuing transition from a manufacturing to a service economy.

Taxing and regulating dynamic international corporations with monopoly power.

Building and maintaining a bigger public sector to provide necessary services the private sector won’t.

Maintaining quality of life for all who live here.

Consciously working at creating and managing the international institutions that make the world work.  We used to recognize this responsibility (and avenue to exercise power), and no one else is stepping into the gap.

Overall we need to recognize the problems we do have—not the ones of the 1930’s—and look what will actually be effective to fix them.

There are many other areas where the same kind of story plays out—where an ideological war masks a more tractable, practical problem.  I’d even put immigration in that category.

It’s hard, given the daily atrocities of the Trump era, to focus on anything less than epic changes.  But if we’re going to put the pieces back together afterwards, it’s pragmatism that will get the job done.

Thinking About Manufacturing

/ ontheoutside / 4 Comments

There seems to be a lot of confusion about manufacturing.

We’ll start with a few slogans that pass for generally-accepted truth:

  • Manufacturing is the core of the US economic base.
  • Restoring manufacturing is key to the viability of the US working class.
  • The Chinese have gutted manufacturing in the US.
  • The continuing decline of manufacturing is another indication of the failure of Trump’s economic policies.

One indication that something might be fundamentally wrong in all of that comes from looking at trends in the service and manufacturing sectors over the past twenty years:

mfg_in_gdp_wbsvcs_in_gdp_wb

To say the least, it looks like there is something more fundamental going on than politics or even globalization.   Manufacturing has been declining relative to services for many years and in a big way.  It’s not just because of China, and it’s not even just in the US:

mfg_in_gnp

The US has been undergoing a massive migration from a manufacturing-oriented economy to a services economy. One problem is that we don’t really have a good vocabulary to talk about that situation.  The term “services” goes from McDonald’s to Google.  But in any case manufacturing is no longer the core of national economic success.  Think about television.  The sets have become so cheap that only huge volumes can cover the low margins.  But every major company you can think of wants to get into content to run on those sets.  There are hardly even any DVD’s manufactured for that stuff anymore!

We’ve talked here before about software.  All of the leading high tech companies (including Apple) are software companies.  Software companies produce product without manufacturing.  And that’s only one of the reasons such companies can be very profitable:

– They typically sit on top of the value chain (or even, like Facebook, have only software as output)

– They tend to have monopoly power (because dominant players can afford to spend more on R&D)

– They tend to have high barriers to entry and effective customer lock-in

The world economy today has increasingly many highly-profitable dominant software companies.  Some like Google produce software; others like Apple rely on a world-wide agglomeration of highly-competitive businesses producing to their specs.  Our current national success is that we have lots of them.  Our military strength depends on their technology.  The Chinese are sensible enough to understand that’s where they want to be too.  Even in biotech—where there has to be manufacturing—you’re still talking about largely high-skilled operations in companies with a large emphasis on R&D.

 

It’s a little strong to say it, but it’s closer to reality than most of what we hear:  mass employment in manufacturing is like mass employment in agriculture—it has had its day.  The migration is as extreme as what happened a hundred years ago.  And we’re better off thinking about the consequences than blaming it all on the Chinese or trying to outdo each other with promises to make it go away.

That point of view is widely held (based on the figures), but somehow it hasn’t managed to penetrate public discussion.  That’s not surprising for the Trump people, since they’ve been making it all up from the beginning.  For the left it’s different.  Traditional socialism has always had an industrial flavor that is hard to give up.  Unions and trust-busting are good, but they won’t bring back the past.  Forcing businesses that take federal research money to do manufacturing here will help some but not enough to reverse the trends.

(For the left, one particular paper has been frequently cited to show manufacturing job loss is reversible.   That paper concluded that the large manufacturing job losses from 2000 to 2010 were not due to automation here.  However, for its purposes it only examined companies that remained here and checked how many robots they had.  Nothing was said about the reasons any single company had left.)

The question then is what we should do.  The key is to start considering what we see around us as reality:

  • A long-term trend of decline in manufacturing
  • Very profitable, highly technical, non-manufacturing monopolies
  • Complete neglect of domestic services for the public good

We’ve talked about those trends here before.  As we’ve noted, some of the monopoly power is structural, so it’s not clear how far we’ll get with breaking them up.  However, monopoly power means companies are far from cost-sensitive, so the last thing we need to give them is more tax breaks.  On the contrary what’s crucial is learning to tax them, and we’ve got Apple as proof of how tough that can be.

In this picture the public sector has two important roles:

  1. Preparing the country for success in the world economy. That means infrastructure of all kinds, including education and child care as much as roads and bridges. The private sector won’t do it.  But—with an appreciation for the role of government derived from the second world war—we used to do a better job of it ourselves.
  2. Making sure the wealth of the monopolies gets translated into benefits for the population. This is another case where the private sector can’t act for its own good. Henry Ford famously wanted his employees to be able to buy his cars, but that’s certainly not the ethos of today. This doesn’t mean free money, it means employing people for the unfilled tasks needed for the public good.

We need the public sector to be the means of addressing the country’s unmet needs with resources from gilded-age inequality.

It’s worth pointing out that we have been wasting resources on a spectacular scale.  Under George W. Bush we fought a $3T war with no identifiable benefit and underwent a privatization effort (including tax cuts) that ultimately produced a near-depression.   Under Obama the Republican Congress shut down government, retarding recovery and preventing the public sector from doing any of the jobs just described.  Under Trump the primary achievement has been another $2T of tax cuts, with a jump in inequality and a deficit big enough to prevent any of the infrastructure work from getting done.  That the tax cuts went straight into stock buybacks is a clear indication of irrelevance.

It is instructive to think back to the time when the country underwent the last such a drastic economic change, when we went from an agrarian to an industrial society.   People had a hard time then thinking about it.  They got tied up in an irrelevancy—the silver monetary standard—and it took a long time before the real problems of corporate power and inequality were addressed.  A contemporary Henry Demarest Lloyd expressed his frustration this way: “The free silver movement is a fake. Free silver is the cow-bird of the reform movement. It waited until the nest had been built by the sacrifices and labor of others, and then it lay its own eggs in it, pushing out the others which lie smashed on the ground.”

We have something of that problem today.  The long-standing decline in manufacturing is a continuing but unacknowledged reality.  Instead we spend our time blaming it on the immigrants, or the Chinese, or the elites, or some combination of everyone else.  Until the blame game stops we can’t begin to decide how our economy really needs to work in the world we’ve got.  For climate actions we worry about coal miners, but there are many others in the same boat.  There is an international aspect too:  we’re too busy looking for villains to spend time on making the system work for global prosperity.

For our part we think it’s time for the public sector to come in from the cold.   In any case it’s time to stop talking about free silver.

 

 

 

Fixing Capitalism

/ ontheoutside / 4 Comments

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California Bank” by waltarrrrr is licensed under CC BY-NC-ND 2.0

There’s a lot of talk these days about fixing capitalism.   However, there’s a problem with much of it—there are so many things to fix that it all becomes a daunting task.  The point of view here is simpler.  There are a great many things that aren’t happening, because capitalism just doesn’t do them—and we can start by making sure those get done.

At its source this problem comes from our being force-fed the wildly radical idea that the private sector—capitalism—will solve all problems by itself.  So even when we realize that capitalism needs to be fixed, we tend to be overly concerned with all the patches.

However, even Adam Smith had no delusions about the limitations of capitalism.  As he pointed out:

  1. The private sector will not police itself.

On the contrary it will do everything possible to corrupt the free market with monopolies and government influence: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”  We’re used to hearing “private sector” and “free market” used almost as synonyms.   In fact, as Smith recognized, the free market is an ideal that can only be achieved when government holds the private sector accountable.

  1. The private sector will not provide the environment for its own success.

Smith even advocated a government program of universal literacy, quite a stretch for the eighteenth century and a pointer for us today.  This is a serious matter, because it shows how dangerous it is for the economy to punt everything to the private sector.

  1. Much of what is needed for a successful society is simply out of scope for the private sector.

Capitalism will not provide any service where there is no competitive advantage in doing it.  Public health and welfare, environmental questions, basic science, etc. are all out of scope.

Fixing capitalism strictly speaking deals only with the first category.  No amount of fixing is going to make capitalism deal with the rest.  Those issues are ours to solve.

It’s instructive to think about needs in each category.

  1. Policing the private sector

Monopolies are still with us and have become an increasing problem due to technology changes and weakened anti-trust enforcement.  The same is also true of corruption due to business influence on government.  These days no one even apologizes for it.

This is particularly true in the financial sector where banking, for example, has evolved into speculative gambling with losses covered by the FDIC.  You can even argue that the financial sector overall has evolved in directions that make it predatory on productive business.  After decades of Republican-inspired hands-off attitudes toward business, there is no shortage of serious issues.  However fixing all of them makes progress look far away.

Taking a step back, there is a single biggest problem:  legal tax evasion.  This is a gating item for so much progress that it just has to be dealt with.  Even before Trump’s tax cuts (and despite nominal tax rates), American companies paid the lowest effective taxes as a percent of income of any developed country.  That was largely a result of multinationals’ ability to move income to tax shelter countries—reducing rates or hiding income entirely.  Apple is only one egregious case.  The recent tax cuts made matters worse with drastically-reduced business rates, arcane rule changes for overseas income, and the new pass-through income treatment.  That pumped up the deficit—thereby hobbling government’s ability to respond to the serious sins of omission in categories 2 & 3.

What’s more, despite the insistent propaganda, taxes are actually not a primary issue for American competitiveness:

– Many studies have shown that in most industries today business profit levels reflect monopoly power to set prices well above historic levels of margin.  That’s a trend we can expect to continue.  In other words, businesses have considerable financial room to pay taxes.

– Further, as frequently noted, the savings from the tax cuts went primarily into stock buybacks.  That is companies decided the best thing to do with the tax cut money was to give it back to their investors in higher stock prices.

Conclusion:   Get the private sector (particularly large multinationals) and its investors to pay taxes.  Then work through all the rest.

  1. Providing the environment for economic success

If taxes aren’t the issue for American competitiveness, what is?  As we’ve noted here before, what makes for success is the technological advantage that has kept us in many areas on top of the heap.  That supports both our standard of living and our military strength.

Our technical dominance is based on three factors:

i. The dynamism of our economic system in generating new products and technologies.

ii. Broadly-based government support of research and education

iii. Remaining the preferred destination for entrepreneurs and other ambitious people from everywhere to realize their dreams

Let’s look at the current status of all three:

i. Unchallenged influence of big companies on government has favored established companies over new entrants. In part this is an anti-trust enforcement issue, but it has many other aspects.  The demise of net neutrality is one highly-visible example.

On this issue the interest of big business is strongly opposed to what makes for long-term national success.

ii. The administration is actively hostile toward science, government-sponsored research, and broad-based education. This is shown in purging of scientists from government agencies and restricting their influence on public policy.  One obvious example is in climate change.  Also the new tax law punished major research universities with a targeted tax.

Public investment in research had a major role in the prosperity of the 1950’s and 60’s and kicked off the opportunities of internet today.  The same kind of public investment has remade China as a technology powerhouse.  But our dedication to research has eroded over time:

R_D_spending

Instead we’re waiting for the private sector to do the job, which by definition means catch-up.

The story for education is similar.   In the 1950’s and 60’s we were expanding educational opportunities to whole classes of people who had never before had the chance.   Now we rank far down on the list for upward mobility.  Student loan debt tells the same story, and that’s only about the people DID go to college, not about the ones who were deterred by cost and DIDN’T.  Finally, educational funding in the states has never recovered from the 2008 crash.

It’s worth mentioning in passing that the value of research is not only for international competitiveness.  Basic research is part of the global project of raising human standards of living. Even when one worries about national competitiveness, progress is generally so international that openness is the ante for remaining at the forefront of progress.  Current policy to restrict international participation of US scientists weakens the country in the name of national security.

iii.  As a final point we need to emphasize the critical role that foreigners and their children are playing in maintaining our national strengths.  Many studies have shown their role both in starting new companies and in supplying the technical underpinning that makes for success.  As Steve Bannon noted (for his own purposes) such people represent more than half of Silicon Valley activity.  Google (cofounded by a foreigner) and Apple (by the son of a foreigner) are only the most obvious examples.

The current xenophobic backlash is wildly off-target.  Particularly with the weakened support for research and education, those are the people keeping our place in the sun.  (To be clear, an immigration plan that only accepts people with degrees is no counterweight to the nationalist, nativist rhetoric.)

Conclusions:

– This area has got to be fixed or we risk losing our standard of living and dominant role.  These are traditional US values and as important as ever for US success.   It we’re worried about competing with Chinese, this is where the battle will be lost or won.

– If we can get our act together, items i and iii should remain as our advantages going forward.  So we shouldn’t be defeatist about a future that is in our hands.

  1. Spending for the common good

This has been a bastard child for so many decades now, that there is much that needs to be caught up.  Here is one short list:

– Infrastructure (Much discussed, but with more sides to it than you might think.  See here for a good overview.)

– Climate change (Evidence has become incontrovertible, but we still need a real plan.)

– Universal health care (Needed not only as a benefit but also as an enabler for equal opportunity.)

– Opioid crisis (Much discussed, but with radically inadequate funding)

– Environmental protection (Not a luxury)

– Transitional assistance (Helping people through changes—from technology, globalization, etc.)

There is enough essential work here to pose a major challenge for government.  We need to confront the unmet needs of the society, then we need concrete plans, and finally we need to manage major operations with competence and integrity.  Despite the propaganda there is nothing unusual about effective, government-sponsored work.  However as with any other enterprises, this needs to be scrupulously well-run.  Just because good people are running it doesn’t mean there is less risk of corruption.  We have to get serious about public enterprise.

That means we have to get past the idea that there is something intrinsically wrong about working for the public good.  That’s after all nothing more than the other side of the “private sector will solve everything” coin.  We live with the continued juxtaposition of vast under-employment (3.7% unemployment doesn’t change the good union jobs replaced by Walmart) together with vast unmet needs that the private sector won’t address.  We’ve got to take the initiative to match one with the other.  This is not “make work”.  It’s essential work that isn’t getting done, because the private sector won’t do it.

Until we take that initiative, it’s hard to assess where we are as a society.  Public enterprise helps in many ways.  It helps with inequality and the middle class.  It helps with leverage for workers and standards for employment.  Many public sector jobs of their nature will be hard to outsource.  It makes no sense to talk about abstractions such as Universal Basic Income until we see how things shake out in a fully-functional economy.  The future may be less strange or scary than it seems.  (This isn’t just about public sector employment; work done by the public sector helps other trends as well.  Even in Silicon Valley each job in tech creates 4.3 other jobs as well.)

Conclusion:   We need to create the full-scale machinery for government service to do what the private sector won’t.

It’s always hard to foresee the future.  I remember when I was in high school, Prince Philip gave a commencement address at UCLA in which he spoke (as world expert!) about leisure.  Already then he was thinking that machines would take over work, leaving as us all to spend the rest of our lives at the beach.

That’s certainly not what happened, but there’s still something to be said for the positive spin.  Historically technology and even globalization have been good for living standards, except where societies have chosen to deny the benefits to large segments of their populations.  Both domestically and internationally we have every opportunity to do this right.  We can either organize our economy–and the world order–so that all can benefit, or we can go down in flames of our own making.

More To Say About China

/ ontheoutside / 1 Comment

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This piece is a little broader in scope that our past posts about China.  That seems useful, since war-mongering in press coverage of China has put us all in blinders.  We’re not claiming here that the Chinese are angels, but there is a lot more to the story that needs to be discussed.

We start with a couple of basic points, of interest regardless of whether we consider China friend or foe:

  1. China is now the world’s biggest economy and is continuing to grow rapidly. Further its population is more than four times the US.  That has many consequences worth thinking about.
  2. China has built itself up from nothing to a world class challenger in many areas. This is not just—or even primarily—a case of “stealing from us”. It is imperative that we understand their example and what we can learn from it.

On the first point, it should be noted to begin with that while the Chinese economy is the biggest in the world, the country is so big that its per capita income is well-below Mexico.  A rising standard of living in China could drive growth in the rest of the world for quite some time.

That is a dramatic turnaround in what China means to the rest of the world.  It is also the reason why virtually everyone expects China’s trade relations to be renegotiated.  Opening China has moved from a largely theoretical matter (because there just wasn’t that much to be sold) to become the primary issue.

This is the time for negotiation, but it’s also a window of opportunity we can easily miss.  In this, as we’ve noted before, a unilateral trade war is actually counter-productive. We’re defending protectionism, when the primary issue is open access to the Chinese market!  Further by insisting on a bilateral deal, we’re substantially reducing the leverage needed to make the deal a success.  The Business Roundtable of corporate CEO’s said as much prior to the start of current negotiations.  This isn’t about trade deficits; it’s about worldwide rules of fair trade going forward.

Trade negotiation, however, is not the only issue here.  US businesses have long had the luxury of focusing on the domestic market.   Economies of scale will now demand a less parochial view.  An obvious example is loosening of fuel economy standards.  That’s a concession to our automobile industry for the domestic market that will hurt international competitiveness.  Another example is 5G mobile equipment.  US vendors are behind the curve, because the domestic market has been fractured and slow-moving.

We are not doing our economy a favor by granting special favors (including tariffs) to domestic businesses.  That’s just perpetuating the idea that winning here is all it takes.  (Tariffs are also an unreliable and inefficient way of producing jobs.)

As for what we can learn from China, we give a few examples

– Government-sponsored R&D pays big benefits.  That is the single biggest contributor to the Chinese success.   They have created a world-class technological empire out of almost nothing.  Even the much-lamented Chinese technology theft is a non-trivial (if nefarious) accomplishment.  How many companies do a good job managing transitions of responsibility even for their own software?

We used to care about the government role in research too.  It was assumed in the good old days of the 50’s and 60’s. Now we have not only cut back on government R&D (Trump’s latest budget is a recent example), but with the current anti-science nostalgia we’re not even sure we want much to do with scientific progress.

– Education is an imperative.  It’s people who make for national success and we need them to be prepared for the jobs that will defend our national standard of living.  China has been ready to spend the money to make it happen.

– We should want to drive up the value chain.  Despite past history, the Chinese understand perfectly that price-competitive businesses are not the way to go.   Real wealth comes from dominant industries with the power to sell on content instead of price.  That’s what technology can deliver.  It’s simply not in the cards to believe past successes will just revive.

– All businesses need to embrace technology for success.  Even in the cost-sensitive outsourcing business, ease of interworking was an important factor in Chinese success.

– Finally (and paradoxically) a dynamic, decentralized economy is a real plus.  This may seem surprising in a list of lessons from China, but it’s strangely true.  The major impetus that kicked off the Chinese economic miracle was an accidental liberalization.  As a small opening, Chinese municipalities were allowed to run independent businesses once they reached their nationally-set production goals.  As it happened, these independent businesses took off and eventually marginalized the state-run enterprises.  Many morphed into successful private companies.  (Xi is now attempting to put that genie back in the bottle, with reemphasized state enterprises.)

We should never underestimate the value of the dynamism of the US economy.  But we had better be careful to understand what has really worked for us.  There has always been an important government role, and diversity mattered too.  In the Chinese example, success was only possible because government provided the environment, particularly education and infrastructure, for the businesses to grow.  That’s precisely what worked for us establish US dominance in the post-war years.   In general, prosperity requires both the environment and the opportunity to achieve success.

 

All that being said, what can we say about dealing with China?  A few guidelines:

We are misled if we think “enemy” is all we need to know.  China is an important factor for both good and bad in the world economy.  They were an important help in the efforts that prevented a depression in 2008.  They can be a major locomotive in the world economy going forward.  They contribute to the worldwide development of science and technology—which makes us all richer.  They recognize the importance of climate change.  It is our task to make that all work for us.

To get there we need to treat the Chinese like any other adversary—we should deal with them from strength and look for mutual advantages.

It is not productive simply to dictate, with the idea that we can shut them down by denying them access to our market.  We represent 18% of their export market and much less of their total economy.  That’s plenty to cause trouble, but not enough to dictate, and in any case real pain would hurt us as well.  Further, if we want success in their market, there has to be ongoing mutual self-interest—no signed document will do it.   And there’s a historical side of this as well:  China endured some of the worst of western imperialism in the nineteenth and early twentieth centuries.  That memory lingers, and we are not served by recalling it with our behavior.  Mutual advantage is much better than antagonistic isolation.

We need to extend the rules for fairness in international commerce through the WTO.  As noted earlier all parties recognize this has to happen, and we have historically led such initiatives.  We have twice the leverage in cooperating with the EU (also 18% of Chinese exports), and we avoid the hypocrisy of endorsing protectionism in the argument for opening of their markets.

Matters such as intellectual property protection and theft should be solvable problems, in part because the Chinese now have much to defend as well.  It’s not for nothing that Huawei is well ahead of the curve in 5G development.   Chinese universities are now high on the list of international institutions (even though Western ones still have cachet in China!), and the Chinese are acquiring patents like everyone else.  It’s also true, if seldom noted, that Chinese computer hacking decreased significantly by the end of the Obama years and went way up when Trump declared economic war.

The military installations in the South China Sea are a serious problem, but the fact is that the great majority of Chinese imports and exports pass that way—so it’s not surprising they’re worried about it.  We make that worry all the greater by declaring that it is legitimate to use all resources at our disposal to get the Chinese to do what we want.  The only real solution is some kind of freedom of the seas regional agreement that all parties can have confidence in.

Human rights violations are also important, and we have to keep those issues alive.  It’s hard to know how far we’ll be able to get.  The one thing you can say is that we shouldn’t be too quick to use Xi a stand-in for China as a whole.  We’ve already noted Xi is a throw-back (a “princeling” heir to the Maoist past), so perhaps there is hope for better later.  There are many conclusions to be drawn about us if you take Trump as a stand-in for everything American.

In the end the point is to treat China like any other independent nation.  China as “enemy” has real roots, but also large doses of domestic politics (China has been a convenient excuse for our own misdeeds) and “yellow peril” racism.  China needs to work properly in the international system of trade and ideally also in international security agreements.  Any efforts to avoid a new set of arms races will have to involve them.

Vigilance is fine, but there is at least the potential of much to build on.

Prosperity in Today’s Economy

/ ontheoutside / 8 Comments

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The title of this article sounds rather ordinary, but in fact there’s more to say than you might expect.   There aren’t a lot of new facts here, but we bring together several strands of argument that don’t tend to be followed to conclusion.  It’s useful to think step-by-step about prosperity today and going forward.

  1. Our national standing today is largely determined by technology.

There are many aspects to this.  The most obvious one is the role of high-tech companies in the economy.  The NYTimes had an article a few months ago (on the occasion of Apple’s becoming the first $1 T company) with graphic displays showing the size of Apple (as well as Google, Microsoft, Amazon, and many others) in the US economy.  The dominance of high-tech is unmistakable. That’s what supports our standard of living and always has. Railroads, steel, automobiles were all high-tech in their day.  (Note this is not saying that Google or Facebook are angels, it’s our national strength in technology that matters.)

It is only because we are on top of that heap that we have the money that supports the rest of the economy.  That includes much of small business and service industries.  It is from the strength of our competitive economic position that we can pay for the non-competitive industries we choose to support.  The aluminum and steel tariffs are being paid by us from the industries that don’t need them.  To state this somewhat differently—we are not going to build a dominant economy by selling each other stuff anyone can make at artificially high prices.

It’s also worth pointing out, given all the discussions of the military budget, that the technology argument applies in spades for the military.  Building new aircraft carriers is not going to make us safe.  One only has to think, theoretically of course, about the effect of a North Korean virus disabling the military’s command and control.  From the chart below, it is obvious that our level of military spending ought to quash everyone else hands down if money were the only object.  But it’s not doing the job, because that’s not the game anymore.  And it’s not just AI, it’s across the board.

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What all this means is that the people who support our technology position are critical resources who matter to all of us.

This is a lot less elitist than it sounds, because it’s not saying we shouldn’t care about or value everyone else (more on that later).   The point is that we shouldn’t be spending our time worrying about who is or isn’t supplanting whom.  Our success depends on nurturing and exploiting the best and the brightest—at least for these skills—and we had better spend our time trying to find them and encourage them, regardless of race, gender, or sexual orientation.  And if foreigners choose to come here and establish successful startup companies—mostly in high tech—we should be happy they do.  It is a major strength of the US economy that people find the US to be the best place to realize their ambitions.  We erode that strength at our peril.

Anger at elite technologists may be natural, but they are the wrong targets.  Their effect on the rest of us is positive.  What we need to avoid is a two-tiered society of haves and have-nots, as we’ll discuss later.

  1. Businesses today are different from the past in important ways.

Since we’ve identified the key role played by the tech sector, it’s worth thinking about what kind of businesses those are.  So let’s take a quick look at Google, Apple, Amazon, Microsoft, and Facebook.

– A first point to notice is that they are all some form of monopoly.  This is not surprising as they are all (even Amazon and Apple) essentially software companies.  Software businesses invite monopoly, because costs of production are minimal. In such cases, research and development costs become primary, and the company with largest market share can afford to offer products with more features than a smaller competitor can.  As automation continues, particularly with AI, similar arguments will apply to much of the rest of the economy.

Managing monopolies is a serious issue:

Monopolies squelch competition.   It is imperative for our success that established companies can’t limit the innovative power of new entrants.  That has been our historical advantage over foreign competitors and is a major factor in any discussion of how we deal with the rise of China.  This is not just a problem with Google, etc.  The demise of Net Neutrality is a classic case of giving in to established players, in this case the major telecom carriers.

Monopolies take more than their share of our money.  Monopoly power limits price sensitivity. Since the determining feature of competition is more often uniqueness more than price point, products are priced at what the market will bear—as with the iPhone or patented drugs.   Furthermore, through manipulation of assets including intellectual property, hi-tech monopolies have been tough to tax.   Apple’s success in this is legendary.   Their windfall from the recent corporate tax cuts is something to behold (and unnecessary as a spur to investment).  It is imperative we learn how to tax monopoly-level profits.

– Next, personal success in these companies requires a high-level of technical competence.   Amazon is obviously a case in point, with two completely different populations:  the mass of box fillers versus the corporate staff.  Note that technical competence is not just a matter for developers, but is also required for the many people in management, support, administration, and even sales.  As just noted, as automation proceeds, this trend will extend well outside of high-tech.

This represents the threat of a two-tiered society, as discussed earlier.  As a country this implies at the very least a basic responsibility for broad-based solid education and a livable minimum wage.

It should be emphasized that strengthening of education is required for both national success and personal prosperity.   Regardless of what advantages we have for staying on top of the heap, we cannot succeed if we don’t have the people to do it.

– Third, all of these business are intrinsically international.  With the growth of the world economy (and China in particular) economies of scale are such that we have to think in global terms.

– Finally our fourth and last comment for this section is about a different trend not limited to high-tech—the institutionalized irresponsibility of business.  It has become gospel that businesses have responsibility only to their investors, and all other considerations are more or less theft.  Businesses used to care about retirement, healthcare, training, even local charity.  But current reality is that if someone is going to care about those things, it’s out of the question for it to be them.

In addition, because of the sheer size of the country, the US more than anywhere else has to deal with the phenomenon of towns or regions where the economic base can just disappear. Company town are the obvious example. In an age of accelerating technology change, we can’t stop such things from happening.   And we can’t expect rescue to happen by all by itself.

However we emphasize this isn’t just about charity.  In the current state of affairs, the private sector is not be doing what’s necessary even to provide the environment for its own success.

That leads to the next topic—what do we need for national success?

  1. Our infrastructure problems mean more than we thought.

Infrastructure has to be thought of as whatever is necessary for national success and personal welfare.  I.e. much more than roads and bridges.  The educational system fits in this category as it is required for both personal and national success.  Declining upward mobility and the student loan crisis are two indications that there is a lot that needs to be done.

Support for theoretical research is in the same category.  It is precursor work for new technologies before they are ready for business. A point worth stressing it that it is not only the research itself that is important—research work assures that there will be a population ready to exploit new opportunities as they arise.

Continuing on, we list a few more significant infrastructure projects needing immediate attention.

– The American Society of Civil Engineers keeps a web site with a break down of national infrastructure requirements.  We currently rate a D+.

– To that we add the urgent needs of combatting climate change, which will be considerable, regardless of how the final plans work out.

– Healthcare is currently in flux with ACA under attack and nothing to replace it.

– Finally we have the general specter of a two-tiered society, with all the misery and threat of conflict that represents.  That too needs to be dealt with as a national problem, and there’s no one in this picture other than government to do it.

Government’s role in this picture is three-tiered:

i. Government needs to make sure everyone has the education and access to the opportunities to succeed.

ii. Government needs to support what is necessary for national infrastructure, much of which will not happen spontaneously in the private sector.

iii. Government needs to supply a last-line safety net for those who fall through the cracks.

This is a non-trivial task, and we emphasize that the biggest part of it is not charity.   We have a current mismatch between a dearth of good jobs and a growing backlog of infrastructure needs of all kinds.

From the point of view here our much-discussed infrastructure needs—back to the roads and bridges—have to be viewed as bellwethers.  The fact that we can’t deal even with roads and bridges means that we have a fundamental problem funding the common good, and we have to take that head on.

  1. There is a mismatch between the needs of our country and the forces that currently control it.

The governing ideology of this country is simple to summarize:  let the private sector do it and get out of the way.  All government regulation is bad, and taxes are just a brake on the private sector’s ability to make everything great.

The chief beneficiaries of this policy are the ultra-rich funders of the Republican Party, although the problem of money in politics (especially after Citizens United) transcends parties. In this enterprise Trump is largely a front man for the real forces running things.

For these people, with fortunes going back even into the nineteenth century, it’s natural to regard the country as a money-machine.  Taxes, regulations, and government services—except for the military—are deductions off the bottom line.

The problem with that view, even for them, is that it is the wrong model for the world we just described.  That set of policies would make sense in an extractive economy, where all that is necessary for success is a cadre of imported experts to arrange for pumping oil with purchased technology.  In that case you don’t need much from the national population in order to collect the proceeds.

That’s not our situation.  As described, we live in a technology-dominated world where the population must earn our national success.  For that world we’re currently going in the wrong direction.  Devaluing education, denying climate change, cutting research, encouraging xenophobia will get to us sooner than we’d like to think.  China is a formidable challenger.

However, it not so hard to be optimistic if we can just be serious about what needs to be done.  We have all the tools for success:  the money, the work to be done, even the means to avoid a two-tiered society.

The story is not complicated.  If we can return to exploiting our strengths, then we should be able to remain in the technological forefront for our chosen areas of focus.   If we can control the monopolies, then the associated margins in an expanding world economy should yield money enough (if we can collect it) to produce a workable society for everyone ready to participate.

There is certainly no shortage of work in the infrastructure area, and it needs all kinds of people.  In this respect the Green New Deal may be too glib in pinning everything on climate change, but their basic idea is correct.   If we play our cards right, the high technology future will provide the funds to support the infrastructure for its own success and for the prosperity of the nation.

We should not underestimate the job.  Careful and transparent planning is critical—defining exactly what needs to be done to support both the economy and the population.  And then determining how that work can be best supplied.

It should be emphasized is that we’re NOT talking about socializing away the free market economy.  If there’s one bad misconception that needs to be hammered down everywhere, it’s the idea that the private sector is magic for all problems.  We’ve just gone down a long list of things it’s not going to do.

Even Adam Smith was clear about this from the beginning.  The private sector is a participant in the public economy, but that economy will deliver the benefits of a free market only if #1 government keeps the private sector from corrupting the markets (e.g with monopolies and bribes) and #2 government provides the resources (e.g. education and other infrastructure) necessary for success.  That’s the definition of our job.

This will necessarily require a renewed focus on government and public service.  It’s interesting that a couple of recent mainstream books (Volker, Lewis) have recognized public service as an important issue.  In that respect “Green New Deal” isn’t a bad term:  we need to be as serious as Roosevelt’s brain trust in planning for the next stage for our country’s future.

This is a battle both old and new.   In Smith’s words, “The interest of [businessmen] is always in some respects different from, and even opposite to, that of the public …The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention.”  Wealth of Nations is only achieved when government does its job.

Getting Productive with China

/ ontheoutside / 3 Comments

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This is yet another note about China. It’s hard to stop thinking about it, as our current policies are both dangerously unproductive and difficult to undo.

Let’s start by believing the worst.  Suppose the Chinese really do represent the devil incarnate—the third Reich back again for another racist attempt at world domination.  What should we be doing in that case?

The answer is clear.  The Chinese have a huge population, world-class technology, and the industrial might to back it all up.  They are a formidable adversary, and need to be confronted (as in the past) by a world united against them.  What we need are strong alliances, in the Far East and elsewhere, to counteract the threat.  That alliance must be ready to act in everyone’s interest, with partners able to trust each other’s long-term commitments and no one looking to make a few bucks off the others on the sly.

We just failed that one, so let’s back the threat down.  Suppose the Chinese threat of domination is economic, not military and political.  In that case we need to protect world-wide supply chains, so the Chinese can’t just pull the rug out from under the existing order.  And we need clear rules defining fair trade, so that it’s obvious who is a renegade.  That sounds like some version of TPP and the WTO—so the highest priority is getting those right.  (TPP can’t be too bad, since large chunks of it were taken verbatim in the new version of NAFTA.)  What it doesn’t sound like is our modern version of protectionism, where we reserve the right to do anything we like and impose it unilaterally on anyone else.

Now let’s add one more element to the picture—China is the largest most rapidly growing market in the world.  This is an item of some interest, although it doesn’t get the press it deserves.  For one thing China has just added an inconceivable number of people to the world’s middle class.  One of our grievances is that China has not opened its markets as it should.

There are two remarks to be made.   One is that China has only recently developed enough of an upper middle class to be an effective market for us.  This is a matter for emphasis now, and the maximum leverage is when the US and EU work together (each representing 18 percent of Chinese exports).   There are actually multiple reasons to be guardedly optimistic about current prospects for negotiation.

Second, the fact is that as a country we’re actually rather reluctant exporters.  Our domestic market has always been so large as to be primary.  Going forward, this is a matter of some concern.  For example we claim we want to sell cars in China and elsewhere, but we’re relaxing environmental regulations to help our manufacturers—and guarantee that the mainline production won’t be acceptable in most other countries.  Denying climate change has the same kind of effects across the board.  We can’t forget that open markets are only the first step to actually selling the stuff.  Even today the Europeans, with the same level of Chinese imports as us, have a substantially lower trade deficit.

As a next point, in formulating China policy we should at least make an attempt to think about things from their point of view.  That doesn’t justify it, but we have a large blind spot if we don’t try.   It’s a worthwhile exercise independent of whether we like their current leadership or not.

On that subject the primary factor is that China underwent some of the worst effects of western imperialism, lasting well into the twentieth century.  The Opium Wars deserve their name.  The British made fortunes with opium produced in India and sold under military protection in China.  And the rest of the West joined in.  The Chinese had expected some help in the aftermath of World War I, but were denied.

It is not surprising that the Chinese feel both suspicion and hostility toward the West, as well as a need to be fully in control of their own destiny.  In that light it is easy to imagine the attitude of the Chinese toward Trump’s initial set of demands in the trade war, expressed as terms for unconditional surrender.  It probably made Trump feel important and powerful, but it’s hard to imagine anything less likely to produce real cooperation. As for Chinese attitudes toward the South China Sea and intellectual property, we should remember the “Monroe Doctrine” and the heroes who brought British textile technology to the early US.  That’s not to say they’re right; it’s just counterproductive—and frequently delusional—to approach international cooperation as a moral crusade.

The only solid basis for relations with China (or anyone else) is shared interest—again regardless of whether we like their current leadership or not.  We’re not going to defeat them—in either military or economic terms—so it’s crazy to assume that’s the right model for policy.  (You can even go farther and say that’s it’s not even in our interest, but we don’t have to go that far here.)  They’re no more willing to capitulate than we are, so it’s a lot more productive to stay in the real world.  Mutual trust is a requirement for success.

With that we can make some suggestions:

  1. We should be negotiating rules for open markets and intellectual property protection as a matter for the WTO. As noted, there is ample basis for agreement of those subjects going forward, so there is reason for guarded optimism—meaning not just agreement but cooperation.  To be clear, the US has historically won 85% of its cases with the WTO.
  2. Technological competition with China is inevitable. They are already formidable competitors, but our strengths and weaknesses are different, so there is room for both of us in a growing world economy. Above all we should recognize and take care of our own strengths.
  3. We have work to do in preparing our economy for a world where the outside is at least as important as the domestic market. Not being the world’s biggest economy is a big change.
  4. We have even more work to do to make sure that the whole population profits from an ever more highly-integrated and highly-automated world. That’s not only a moral requirement, but the only way to defeat the parasitic demagogues who threaten to take over here and elsewhere.