Diatribes of Jay

This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

14 February 2009

China Rising III: America and China in Crisis


Economic History of the Early Twenty-First Century
Chapter 10: The Collapse of the American Economy (2008 – 2020)
Chapter 12: Rise of the People’s Republic of China
Coda
Brief Update: 10/14/13

This is the third in a series of essays on China’s rise. The first analyzed aspects of China’s political culture that could have beneficial geopolitical effects. The second hypothesized that China’s beautiful but inefficient system of writing might be holding China back. In this essay, I speculate on how the close relationship between America and China might affect the outcome of the current economic crisis and what the world might look like in two or three decades as a result.

Three appalling trends in our own country provoked this speculation. First and foremost was our Senate Republicans stonewalling the economic stimulus package. I understand that, after forty years, Republican economic fairy tales are deeply engrained in our national psyche, let alone the political ideology of so-called “conservatives.” But I had no idea.

How would a petroleum engineer react upon designing a pilot refining plant and seeing it explode in its first test, utterly destroying both the plant and the building surrounding it? Would she recommend using the very same design in a plant of commercial scale? That’s what the Senate Republicans are doing in proposing more tax cuts to remedy our current economic implosion.

The second appalling trend is “conservative” senators’ lack of imagination. Apparently the ones who have not had to campaign recently are oblivious to the widespread pain of job loss, foreclosure, loss of health care, and economic fear. They can’t seem to foresee how these trends will translate, in just a few months, into homelessness, family breakup, vagrancy, crime, disease, suicide, and disorder in our cities and suburbs.

The final appalling trend is ignorance. You don’t need much imagination to foresee social unrest if you know a little history or can read a newspaper. All you have to recall is the riots and labor strife of eighty or so years ago—in which our army and police forces massacred our own protesting citizens. It might also help to recall the “bonus marchers,” World War I veterans who came to Washington to protest denial of bonuses promised them for their service. They built a tent city on our national mall and met repression by our own army and police. But I guess it’s too much to expect people who spend their lives practicing “civics” to know as much about our history as the average college graduate.

What follows is speculation or, if you prefer, fiction. But how improbable is it? There are only two underlying assumptions. The first is that Republicans will continue to obstruct—and Democrats will continue to balk at—the unprecedented measures required to address our unprecedented economic crisis. The second is that, at some point, China’s economic pain will reach the point of provoking significant social unrest. Then China will start withdrawing its massive investments in our collapsing economy before their value erodes entirely. It will use the money to jump-start its own economy with real products, including autos, housing, mass transit, health care, infrastucture, heavy industry and eventually aerospace products. The rest of my “fiction” follows from these two pivotal assumptions.

Economic History of the Early Twenty-First Century
Copyright © 2033, Tsinghua University Faculty of History
(Translated from the Mandarin by Li Hua-Lo, Visiting Scholar, 2032)

Chapter 10: The Collapse of the American Economy (2008 – 2020)

While the People’s Republic achieved its present greatness during the period under study, the United States of America suffered a dramatic decline. Some scholars believe the decline began during the eight-year presidency of George W. Bush (2001 – 2009). Many believe that it became irreversible toward the end of the presidency of Barack Obama (2009 – 2017).

This view has some irony. Mr. Obama—the first African-American president in American history—enjoyed worldwide admiration and great domestic popularity throughout all but the last two years of his presidency. Scholars who think the decline became irreversible during this period attribute it not to Mr. Obama but to the structure of the American government and the ideological persistence of Mr. Obama’s political opponents.

Readers will recall that, unlike the People’s Republic, America was a two-party state. (See Chapter 3: America, Government and Political Structure.) Today, like many European nations, it is a multi-party state. But until about 2020, only two parties dominated American politics.

The two parties were known as the Democratic and Republican Parties. Their approaches to government and the economy differed radically. The Democratic Party endorsed a “mixed” economy based on private markets subject to strong government. It thought strong government leadership essential to guide and regulate markets, build and maintain infrastructure, and protect and support the poor and unemployed masses. The Republican Party pushed for as small and weak a government as possible, with as low taxes as possible. Its consistent recommendations for any economic problem were reducing taxes (except for foreign wars), repealing government regulation, and giving business owners more money and more freedom. Although this party strongly opposed deficit spending in theory, in practice it supported enormous deficit spending for foreign wars, including the early twenty-first century wars in Iraq and Afghanistan. (For the immediate political causes of these wars, see Chapter 5: America and Terrorism.)

The Republican Party had governed America during most of the four decades before Mr. Obama won the presidency in 2008. Mr. Obama’s election marked an important transition in government, but the country was bitterly divided. Only eight years before, the presidential election had been so close and indecisive that the American Supreme Court decided it, giving George W. Bush the presidency. While Mr. Obama won his election by an indisputable margin, the division and discord between the parties and among the people remained.

What followed was an object lesson in the defects of two-party government in times of crisis. Neither Mr. Obama’s decisive election nor his enormous popularity resolved the division and discord between the two parties, especially on economic matters. Furthermore, the peculiar non-parliamentary structure of the American government exaggerated the political power of the Republican Party, which had lost both the presidential election and the previous election for the American Congress decisively. (See Glossary: Great Compromise, Senate, filibuster, Electoral College.) As a result, Mr. Obama, who had received the votes of states representing 72% of America’s productive capacity in his first presidential election, and whose party had a substantial majority of both houses of Congress, had to seek the votes of members of a party with a completely different governing philosophy.

Some scholars believe that paralysis was built into this two-party system and the structure of American government from the very beginning. Others think it was just bad luck that the second Great Depression came precisely at the moment when the government and the people were bitterly divided.

But whatever the reason, the results are now clear. As a strong recession began to turn into what Americans now call the “Second Great Depression” the Democratic Party under President Obama’s leadership tried to implement economic stimuli adequate to the challenge. Although in the minority in both houses of Congress, the Republican party successfully blocked the strongest recovery measures, which most expert economists thought were barely adequate to the task.

For example, in 2009, facing a projected $2.9 trillion dollar shortfall in national productivity, all the Republican Party would allow to pass was a stimulus package of less than $800 billion. And one-third of that package was devoted to tax cuts, not investment. The package included only about $120 billion dollars in infrastructure investment, as against $2.2 trillion that the American Society of Civil Engineers said was required.

By late 2013, after the collapse of its trading partners’ consumer economies, the People’s Republic had lost its export markets almost entirely. It had no alternative but to invest massively in its internal economy, building infrastructure and encouraging domestic production and consumption of goods and services. For that purpose, it sold a trillion dollars of American assets to obtain money to invest.

As the People’s Republic attempted to conduct orderly sales of American assets, the dollar dropped to one-third its former value. Interest rates in America rose to 18% or more. Unemployment, which had reached 20% previously, skyrocketed further. Trillions of dollars of capital fled America, finding their way principally to the People’s Republic, Europe, and Australia. American business and commerce came to a virtual standstill.

In theory, the dollar’s low value was supposed to promote American exports. In practice there was little American industry left to make anything that trading partners wanted. And because the depression was global, there were few buyers for what America still made. The result is now known to Western economists as the Great Collapse. Among many other changes, it motivated replacing the dollar as a global currency with the yuan and the Euro.

Political repercussions within America were equally dramatic. During the Food Riots of 2015, President Obama had to send troops into several large cities to quell violence and looting and to protect lives and property. In some cases, the targets of popular violence were the business owners who had supported the Republican party. Several prominent members of the party, including a few members of Congress, were assassinated or killed in general violence.

Dispirited and derided, the Republican Party split into two fractious camps, extreme capitalists (along with libertarians) and religious fundamentalists. The latter believed that Armageddon and the return of Jesus Christ were near. (See Chapter 6: Role of Religion, Christian Fundamentalism.) What was left of the Republican party was no match for the Democratic Party’s vastly increased strength. The latter party won the presidential election of 2016 decisively, by the biggest margin in over 50 years.

Unfortunately for America, the winning candidate was Victor Cassidy. He was an effective demagogue but not especially thoughtful or well-educated in economics or policy. In an attempt to save American industry from utter destruction, he imposed drastic trade-protectionist measures that only made matters worse. By the end of his single term, America’s economic output had decreased to 45% of its 2007 value.

The American economy has yet to recover fully. Today America is widely perceived as a second-rank industrial and economic power.

A notable consequence of the Great Collapse was the destruction of America’s energy economy. While the People’s Republic, India, Russia and Brazil converted largely to nuclear and renewable energy, America did not have the economic resources to do so. It continued to rely on oil for its transportation needs, even as oil reached $12 per gallon (about $3 per liter) in the early 2020s. It economy was so fractured that, after Wang Ho-Bao invented phytomicrobiotic electricity in 2021 (see Chapter 15: Scientific Revolutions, Wang’s Invention of Photosynthetic Electric Panels and his Nobel Prize), it was unable to afford the cheap panels to produce it. At the present time, America is the world’s largest emitter of greenhouse gases and subject to United Nations sanctions, as climate change continues to erode the world’s coastal cities and displace millions.

Chapter 12: The People’s Republic of China

The collapse of America’s economy mirrored China’s rise. Yet the first decade of the twenty-first century was a difficult one for China. Its economy was almost entirely dependent upon exports, mainly of low-technology items like toys, clothes, shoes and furniture. Its cities and rivers were polluted by coal smoke, industrial effluent and an exploding quantity of car-produced smog. It was one of the world’s two biggest producers of greenhouse gases. Although it had a large, favorable balance of global trade, it had to keep the yuan at a low exchange rate in order to cheapen its exports and maintain export-led growth.

Corruption was rampant, as vestiges of the old Communist guanxi system vied with a new, unrestrained “cowboy” capitalism. The Central Committee’s policies exacerbated all these trends—especially corruption. China’s leaders ignored these evils, believing that only economic growth at any cost could forestall social unrest.

The situation was unsustainable. Events forced change upon China near the end of the first decade.

After the crash of the American stock market and financial system in 2008-2009, China spent trillions of yuan to build domestic infrastructure and promote domestic consumption. But the effort was too little, too late. By 2013, when America finally acknowledged that its economic crisis had become a second Great Depression, Chinese exports had fallen more than 70%, and domestic consumption had not begun to dent the deficit. To avoid economic collapse at home, the Central Committee sold its American assets to raise money for domestic economic support, precipitating the Great Collapse in America.

Unfortunately, even that reluctant initiative by China’s leaders was insufficient. By 2014, over 150 million unemployed migrant workers had returned to the countryside, which could no longer support them. There was widespread social unrest. Disorganized rebellions began in several provinces. The Central Committee sent the People’s Liberation Army to quell the unrest, and an estimated 178,000 citizens and soldiers died in the fighting.

The Great Reform arose out of this turbulent period. Both the Party and the masses felt revulsion at the turmoil, suffering, and loss of life. In extraordinary session, the Central Committee elected Lu Hsiao-Yu Premier and General Secretary of the Party and gave him extraordinary power to address the crisis. Along with that extraordinary power came the title “Chairman,” which until then no one else but Mao Tse-Tung had used.

The Party’s faith in Chairman Lu was not misplaced. He promptly announced the Five Principles as the road to national recovery.

Today every school child knows the Five Principles. But their immediate effect is less well known. Some took longer than others, but in time all contributed to the Great Reform’s success.

The People’s Struggle Against Corruption had the most immediate effect. Chairman Lu traveled about the country, personally setting up tribunals of Party members and ordinary people of good character to root out corruption and try corrupt officials. By 2016, 120,000 corrupt officials had been executed, and over 240,000 had been removed from their posts in government and business. Those driven from office included 74 delegates to the People’s Congress and even two members of the Central Committee. The demonstration that no one was exempt from prosecution did much to earn the people’s trust.

The next most important of the Five Principles was the Principle of Enlightened Democracy. As early as 2014, Chairman Lu instituted popular elections for local officials in the provinces hardest hit by unrest. At first, he screened all the candidates himself, or with the aid of committees of trusted Party members. The requirement for achieving Rank 1 on the Standard State University Entrance Examination came in 2016. It was not until 2019 that screening of candidates for character and fitness by the National Scientific Psychological Committee began.

Although local elections developed slowly and at different rates in different provinces, they, too, were instrumental in reducing unrest. Those provinces that first used these procedures generally experienced the most rapid economic recovery.

Most scholars believe that the third and fourth of the Five Principles—Freedom of Business and State Industrial Guidance—made the greatest contribution to economic recovery. Chairman Lu established the State Industrial Guidance Council in 2015, and the Freedom of Business Manifesto came later in the same year. The former made general, nationwide policy for industry, and the latter made it easy and cheap to form and run businesses complying with state policy.

The Council’s first–five year plan set five goals for state policy: (1) building national infrastructure, (2) developing nuclear, wind and solar energy, (3) providing good jobs in the countryside, (4) reducing pollution in cities, and (5) curbing greenhouse-gas emissions. Spurred by massive state investment in those goals, the growing private sector made even larger investments and effort in achieving them. A decade later, the People’s Republic was a vastly different state.

The last of the Five Principles was the Principle of Excellent Universities. Under Chairman Lu’s leadership, the Party devoted almost half a trillion yuan to this goal. That money underwrote building the New Campuses for the Great Universities of Beijing, Shanghai, Guangdong and (after voluntary accession of Taiwan in 2020) Taipei, with their magnificent architecture, comprehensive libraries, and infinitely expandable laboratories. During the early years, the Party offered to double the salary of any distinguished foreign professor who would relocate to one of these universities, and the offer attracted over 160 educators, including twenty Nobel Prize winners. Chairman Lu also introduced the Standard State University Entrance Examination, which any Chinese citizen is eligible to take.

As a symbol of his commitment to excellence in learning and culture, Chairman Lu changed the Party’s name to its current form: People’s Mandarin Party. It had previously been called the “Communist” Party, after the failed economic ideology of the twentieth century. (See Chapter 1: The Legacy of Communism and Mao Tse-Tung). The change, he said, reflected the Chinese people’s glory under the ancient Mandarin system, with its emphasis on education and excellence, as demonstrated by egalitarian, nationwide examinations that anyone could take. It also reflected the nation’s linguistic unification under the Mandarin language.

The Great Reform took nearly two decades, but its effects are evident everywhere today. Today the People’s Republic is the world’s leading economic power. Its greenhouse emissions are lower than those of India, the European Union, America, Indonesia, and Russia, all of which have lower populations. Just last year, the United Nations Educational, Cultural and Scientific Organization rated the four Great Universities among the top ten in the world, with two (Beijing and Shanghai) ahead of Harvard (the best American university) and Cambridge (the best British university). Over the last ten years, Chinese have won more Nobel Prizes than any other nationality in every field except literature.

Question for Students

1. What caused America to decline dramatically at the same time that China rose? Does this history suggest that one-party states are more decisive and effective in economic crises than two-party or multiparty states? Or does America’s division and discord, at just the wrong time, explain its inadequate response to the economic crises of the second Great Depression? What effect did the peculiar structure of American government have in creating paralysis? the peculiar economic ideology of the American Republican Party?

2. Democracy can be messy and indecisive. Winston Churchill (see Chapter 4: Great Britain, the Legacy of World War II) once said that democracy is the worst form of government except the alternatives. But why did the People’s Republic’s Enlightened Democracy succeed while America’s chaotic and divisive brand of democracy failed? Is the difference China’s one-party system? Or is the difference the wisdom of Chairman Lu, who imposed a Mandarin meritocracy on candidates whom the people might democratically elect?

* * *


Coda. If you think this fictional “historical” textbook is wild fantasy, consider two things. First, remember how you felt on November 1, 2000. That was a few days before the election which (with the Supreme Court’s help) made George W. Bush president. Then ask yourself honestly: in your wildest imagination, could you then have conceived the situation in which we find ourselves today?

Second, consider the Chinese predicament. The “overseas Chinese” that I know here are renowned for “being patient money.” They hold investments for the long term, through good times and bad. That’s one of the secrets of their success. That feature of Chinese culture bodes well for us; the Chinese will not likely sell us out for temporary profit.

But an important feature of Chinese political culture is strong aversion to disorder and unrest. If economic collapse threatens social instability in China, and if the only way to curb it is to sell U.S. assets and invest the money at home, all bets are off.

There is already evidence that the collapse of the U.S. and Western consumer markets has caused China considerable pain. So we don’t have much time. If our own collapse continues while Chinese pain grows, the foregoing scenarios seem much less fictional, apart from the fanciful Chairman Lu. That’s why stonewalling adequate recovery measures is so abysmally stupid.

As for Chairman Lu and the Five Principles, they are just fictional devices to illustrate the success of which China is capable if it gets its act together. At the personal level, Chinese culture has magnificent values, including hard work, pragmatism, discipline, and respect for learning and excellence.

It is China’s political culture—in particular a reluctance to accept some form of democracy and the transparency it needs to thrive—that holds China back. If China’s leaders abandon that reluctance, in whatever unique way they choose, the sky’s the limit for China.

In today’s economic crisis, China has three advantages over the United States. First, it has a huge trade surplus and about $ 2 trillion dollars of foreign reserves. Second, its authoritarian form of government allows it to take drastic steps more quickly and resolutely. Finally, it abandoned its own nonsensical economic ideology thirty years ago. We only began to get rid of ours last November.

Brief Update: 10/14/13

When I wrote the foregoing post, in the first month of President Obama’s first term, our recovery from the so-called “Great Recession” was still very much in doubt. It never occurred to me that, despite the GOP’s stonewalling adequate stimulus, our Fed would save the day by what later came to be known as “quantitative easing.” Sometimes unanticipated events are positive.

But it equally never occurred to me that, 4.5 years later, a small group of House Republicans from the South, masquerading under the historic name “Tea Party,” would cause a national default in an attempt to extort political concessions. Sometimes unanticipated events can be decidedly negative.

Of course much of the “future history” described above never happened. But if you shift the time frame few years forward and think of the decisive event as a national default, rather than a deepening recession due to blocked stimulus, most of that “future history” is still entirely possible. In fact, a real default—even for just a few weeks—would likely cause an international economic collapse far faster and more devastating than slowly worsening unemployment due to inadequate fiscal stimulus might have.

Our nation’s economic future is still quite precarious. It is so not because we don’t have smart people who can make wise policy, but because, except for the Fed, they are no longer in control. We have minority rule in the House and, through routine filibusters and Senate “holds,” minority rule in the Senate. So our future may well depend on the whim of minorities unversed in economics, or even lacking firm contact with reality. Or it may depend on the President taking decisive and correct but constitutionally suspect action to save us from our own worst impulses.

In any event, the future scenario described above remains entirely possible, with the main trigger being a U.S. national default. As much as we consider ourselves “exceptional,” we have no guarantee of continued economic supremacy. We are only four percent of the world’s population, and we are slipping into an historical epoch when minority rule may make our actions and policies unpredictable and even capricious. When national economic policy depends on the whim of pols acting out grudges two centuries old, anything can happen.

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