Enlightened Chinese Industrial Planning Will Crush U.S. Free Markets, Said Pundits: Maybe Not

Reminding pundits Tom Friedman, Robert Reich and others of what they said.



As the world watches China's Communist Party leaders try to order markets around, my mind turned to those pundits who earnestly recommended that the United States emulate the brilliant beneficient Chinese planners in running our economy. The most fulsome China booster was New York Times columnist Tom Friedman. Included below are a few choice obervations:

On September 8, 2009 Friedman adivsed:

One-party autocracy certainly has its drawbacks. But when it is led by a reasonably enlightened group of people, as China is today, it can also have great advantages. That one party can just impose the politically difficult but critically important policies needed to move a society forward in the 21st century. It is not an accident that China is committed to overtaking us in electric cars, solar power, energy efficiency, batteries, nuclear power and wind power. China's leaders understand that in a world of exploding populations and rising emerging-market middle classes, demand for clean power and energy efficiency is going to soar. Beijing wants to make sure that it owns that industry and is ordering the policies to do that, including boosting gasoline prices, from the top down.

So enamored of China's industrial policy was Friedman that in 2010 he likened Chinese economic planning boldness to making "moon-shots." He specifically cited Chinese government subsidies to support the innovative electric car company Coda as an example, and predicted that the company would soon put thousands of its vehicles on California's roads:

China is doing moon shots. Yes, that's plural. When I say "moon shots" I mean big, multibillion-dollar, 25-year-horizon, game-changing investments. China has at least four going now: one is building a network of ultramodern airports; another is building a web of high-speed trains connecting major cities; a third is in bioscience, where the Beijing Genomics Institute this year ordered 128 DNA sequencers — from America — giving China the largest number in the world in one institute to launch its own stem cell/genetic engineering industry; and, finally, Beijing just announced that it was providing $15 billion in seed money for the country's leading auto and battery companies to create an electric car industry, starting in 20 pilot cities. In essence, China Inc. just named its dream team of 16-state-owned enterprises to move China off oil and into the next industrial growth engine: electric cars.

Coda declared bankruptcy in 2013.

And then there is the inevitable Robert Reich. Reich, who is a former Clinton Secretary of Labor, has never been right about anything when it comes to economic policy prescriptions. For example, Reich was convinced in the 1980s the Japan would bury the United States due to the planning acumen of that country's savvy bureaucrats. In 1982, Reich co-authored Minding America's Business with Ira Magaziner which recommended that the federal government start directing the economy. A few excerpts below:

U.S. companies and the government [should] develop a coherent and coordinated industrial policy whose aim is to raise the real income of our citizens by improving the pattern of our investments…

Perhaps the most striking feature of the U.S. industrial policy apparatus is the absence of a single agency or office with overall responsibility for monitoring changes in world markets or in the competitiveness of American industry, or for easing the adjustment of the domestic economy to these changes…

The failure of U.S. industrial policy is not simply a failure of organization, of course. It is a failure of substantive strategy. The industrial policies of Japan, West Germany and France have been more successful than U.S. policies because they have explicitly and consciously aimed at improving the international competitiveness of their businesses.

Just shy of 30 years later Reich sang the same stale tune in 2011, only instead of Japanese planners, he was praising the the wonders of Chinese industrial planning:

Here's the real story. China has a national economic strategy designed to make it, and its people, the economic powerhouse of the future. They're intent on learning as much as they can from us and then going beyond us (as they already are in solar and electric-battery technologies). They're pouring money into basic research and education at all levels. In the last 12 years they've built twenty universities, each designed to be the equivalent of MIT.

Their goal is to make China Number one in power and prestige, and in high-wage jobs.

The United States doesn't have a national economic strategy.

As late as 2012, Richard D'Aveni, a Professor of Strategy at Tuck School of Business at Dartmouth College, declared in The Atlantic that "The U.S. Must Learn From China's State Capitalism to Beat It."

Free markets alone won't be enough if we want to keep pace with China. It's time for some new-fashioned industrial policy …To win, we must to add to our repertoire of free-market tools the tools of managed capitalism. We cannot rely only on free-market policies of the 1980s and 1990s. We must learn new capabilities to beat a form of capitalism that is overwhelming our old formula for success. 

Perhaps I am wrong and the "reasonably enlightened" autocrats who rule China will beat the forces of the market … but I wouldn't make any bets on it.

As I concluded in a recent on-line debate with China idolizer economist Dambisa Moyo over Chinese economic policies at Cato Unbound:

The [Chinese Communist] Party leaders evidently are still in thrall to the failed ideology of economic central planning and the ultimate results of those policies will not be pretty.

For more background on what the Chinese government actually should do, see my article, "China Needs the Rule of Law."