China Has a Master Economic Plan. Is It Better Than America’s?

 

Former Trump White House adviser Steve Bannon told CNBC viewers today that China has “a master plan to become an economic hegemon.” I mean, yeah. Sure. A quarter millennium ago, China was the world’s largest economy and it is no doubt eager to regain that position if possible. And not just in terms of nominal GDP, but also as an economy on the technological frontier. Thus its efforts to leap forward in advanced manufacturing and AI.

The former, GDP, is easier to measure than relative tech prowess. Well, not that easy. My AEI colleague Derek Scissors has argued that “claims that China’s economy is already the world’s largest may be exaggerated by up to 30%.” And a comparison of national wealth shows “the American lead expanding.” But clearly the Chinese economy is pretty big and getting bigger and is technologically sophisticated in a way that the Soviet Union never was.

In those terms, America’s geopolitical rivals past and present are different. But they are the same in that both believed in the power of planning. But it’s tough for flawed models to execute even the smartest of plans. And as Bannon later said, “We have all the cards. The Chinese business model cannot continue. It won’t continue.” I think Bannon meant that the Trump trade war will cause the model’s demise rather than its own internal contradictions.

But those contradictions are important: Can China do what the Soviets couldn’t and adapt an innovative market economy — or at least a more open and responsive one — to a totalitarian political system and surveillance state? Is that sort of top-down political economy the equal or superior of America’s in sustaining an ecology of entrepreneurship, imagination, creativity, and dynamism?

Maybe not. As Reuters recently reported, “Chinese productivity growth has gone into reverse for the first time since the Cultural Revolution tore the country apart in the 1970s, according to a new study, highlighting the failure of recent reforms to set China on a sustainable development path.” And it that really surprising? As Scissors notes, “Beijing has long abandoned the pro-market path and shows no true interest in returning to it.”

Maybe the most important move America can make is to heighten the contradictions via market-driven policies that embrace innovation and dynamism. Whatever’s wrong with the American economy can best be fixed by what’s right with the American economy. It’s important trade policy doesn’t undermine those deep strengths by closing America off to competition or portraying the natural churn of a market economy as a market failure. America’s master plan must be keeping its economy open to risk, talent, capital, and the “invisible foot” of failure. Slowing China’s advance is less important and doable than accelerating America’s.

Published in Economics
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There are 2 comments.

  1. Coolidge

    I like Steve Bannon a lot. His predictions about China may not be the best thing he has done.

    https://chicagoboyz.net/archives/59768.html

    “China has to resume purchases of U.S. soybeans,” Oil World said in its latest newsletter. “The South American supply shortage will make it necessary for China, in our opinion, to import 15 million tonnes of U.S. soybeans in October 2018/March 2019, even if the current trade war is not resolved.”

    China may not be in good shape to handle a trade war.

    The tariff escalation is worrisome for Chinese officials, who are watching potential ripple effects, from weakening of the currency to crimping future foreign investment. Raising existing tariffs or imposing new ones could hit products China’s economy needs, like semiconductors, pork, oil and passenger jets.

    A wider-scale trade conflict could also force Beijing to further ease credit and boost government spending to shore up growth, doubling down on the stimulus used last year at a time some analysts say it should be ratcheting back such measures.

     

    • #1
    • May 15, 2019, at 6:41 PM PDT
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  2. Member

    Yeah, China. Enough of that free market stuff. Time to get Friedmanesque and do some enlightened mandating. Roll back market reforms in favor of massive government intervention and direction at the behest of a self-serving unelected unaccountable elite? What could possibly go wrong?

    • #2
    • May 16, 2019, at 7:35 AM PDT
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