China Is No Economic Model for America
The country's current struggles show the problems of the Beijing way—and make the case for freedom.
China's economy is struggling post-COVID-19. Growth is slower than expected, demographic trends are negative, youth unemployment is high, overbuilding has created a housing crisis, and government indebtedness is ballooning. These are only a few of the symptoms ailing the country, and things could get worse. Did any of the Americans who not long ago wanted to implement some of China's top-down economic policies see this coming? Of course not. We've seen these pessimists make similar mistakes before.
Indeed, much of the economic narrative of the late 20th century was consumed by Japan's meteoric rise. Just a few decades ago, many in academic and policymaking spheres made similar predictions about how Japan's postwar resurgence portended U.S. demise. Many also advocated replacing our free market policies with the heavy-handed economic interventions that they were confident formed the secret sauce of Japan's fast growth: industrial policy.
We should always be suspicious of single-factor explanations of an extremely complex phenomenon like economic growth. Japan's once-famed Ministry of International Trade and Industry (MITI), the agency in charge of its industrial policy, was only one of millions of decision makers large and small that were operating, producing, and investing in Japan. While MITI was indeed involved in various aspects of the Japanese economy, with a major focus on strengthening the country's industrial base and increasing its exports, the narrative that it masterminded Japan's growth was grossly overstated.
Indeed, a far more significant contributor to Japan's economic success was overall economic freedom between the 1950s and 1970s. Texas Tech economist Benjamin Powell notes that in 1970, Japan was the seventh-freest economy in the world.
Reduced cronyism due to the postwar breakup of special interests, a lack of antitrust restrictions on joint research and development, and the freedom of banks to own stock are examples of circumstances that cleared the way for Japan's impressive postwar growth. This growth was further assisted by both the Japanese cultural propensity to save and by pro-saving tax policies.
Japan's overall environment of low and declining taxes and economic freedom between the 1950s and 1970s, along with high Japanese savings, fueled a legitimate boom in private sector investment. The Hoover Institution's David Henderson reports that gross private investment grew from roughly 17 percent of Japan's gross national product in the early 1950s to 30 percent in the early 1970s. These numbers dwarf the size of any government investments in the economy during that period.
What's more, some of the most significant Japanese success stories emerged from sectors that were not the primary focus of MITI. Not the least of these is the automobile industry. Companies like Toyota and Honda rose to global prominence by refining their production processes, exemplified by the famed Toyota Production System. These innovations were driven by the companies themselves, not by directives from MITI.
In fact, MITI once attempted to consolidate the Japanese auto industry, believing that the result would be more efficient production. Fortunately, industry leaders resisted. Had they not done so, we might never have seen the global rise of brands like Honda. And luckily for Japan, MITI tried but failed to stop Sony from buying the manufacturing rights from Western Electric to develop the transistor radio. The rest is history.
Although some MITI-championed industries are profitable today, this is not evidence that they wouldn't have been profitable without the original government investment. Similarly, the Japanese government's push to reallocate resources away from an inefficient agricultural sector into manufacturing may have played some role in the country's economic growth, but there's a limit to what policies like these can achieve.
As the country transformed its economy into an export factory, it failed to shift to more of an innovation-based economy in large part due to government-erected barriers, leaving average citizens with little to show for the "success" of subsidizing the production of lots of stuff for foreigners to consume.
Japan's government eventually tried to mask this resulting impoverishment with tighter import restrictions, more government spending, and easier money. But to no avail, as evidenced by a painful economic slowdown. As the country entered the 1990s—what is now known as its "lost decade"—it also became known as an example of government mismanagement.
Something similar is happening now in China, only on steroids. Japan didn't have an authoritarian communist government to make big problems even bigger. The only question that remains to be answered is this: Why do we Americans always seem to believe those who tell us that industrial policy is a surer path to prosperity than economic freedom?
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Because economics and thinking are hard! Next question …
Sounds good in theory, but when was the last time you bought cheap shot from Walmart?
As long as Americans are an consumption culture, China has unlimited headroom.
No, no it doesn’t. In fact, countries like India, Indonesia and Vietnam are fast replacing China in the production of cheap consumer goods. China still may be dominant but it’s days are numbered. Like Korea, Taiwan, Japan and Germany before them, all once go to places for cheap consumer goods, China will be undercut by new emerging economies.
Check the labels at Walmart, the product that a few years ago stated Made In China now just as likely say Made in Pakistan, or India or Vietnam. Especially clothing.
“China Is No Economic Model for America”
No, it’s the social model.
I’ve reported this comment to the FBI, report for your re education, citizen! (I guess since you’re Canadian you could just sit in with Jordan Peterson at his reeducation classes.)
Veronique: Is it an immutable law of nature that economies that grew on free markets will inevitably fall to authoritarian impulses when their dominance is challenged by talented and ambitious newcomers?
Small businesses have been hammered by government empowered labor unions, local zoning restrictions, COVID lock downs for them but not their big competitors, costs of regulatory compliance that are chump change for giant companies but mean bankruptcy for smaller firms.
Corporate tax cuts were neither asked for, nor cheered on by the behemoths. They virtue signaled by increasing benefits for their employees in the hopes that no one would notice their lack of enthusiasm for lower taxes. The mega-corporations weren’t paying these high levels due to inversions and tax subsidies that their smaller competitors could not avail themselves.
The resurrection of corporatism bodes ill for the future.
Not true. It happened in the metropoleis of Phoenix and Miami prior to the 2008 collapse as well as in other locations. Governments will just do it bigger and better, i.e., worse.
It was driven nationwide by easy credit driven by Fed policy as well as Janet Reno’s enforcement of The Community Reinvestment Act, which required banks and financial institutions to extend mortgages to minority clients, regardless of overall creditworthiness. These taken together created the boom, which was followed by the bust.
“Why do we Americans always seem to believe those who tell us that industrial policy is a surer path to prosperity than economic freedom?”
Because they think it’s much easier to run a mouth, complain, throw a spoiled brat fit, build a [WE] gang of gun toting thugs and go threaten, bully and force the ‘icky’ slaves into being subservient for anything their hearts desire. It’s the very baseline of [WE] mobs RULE “democracy” without any Supreme Law Principle requiring Individual Liberty and Justice for all.
Or in blunter terms…. They believe gov-guns make sh*t. Just like armed-criminals do.
This is the weirdest explanation I have yet seen for why Japan is in the fix it’s in. Japan’s problem was its debt bubble from 1986-1991, the bust of the bubble, the unwillingness to write off that debt and instead to keep zombie banks alive via bailouts, which has resulted now in two generations of Japanese sinking deeper and deeper into debt.
This is precisely the same problem as China – the property bubble financial crisis from 2020 to now. And it will be our problem too since our economy has been nothing but real estate and banking bubbles for a couple decades.
WTF kind of economist are you?
A good one.
The BIS capital accord of 1986 was supposedly intended to reduce systemic risk of international banking but was in fact designed to reduce the lending competitiveness of Japanese banks, They were willing to use much higher leverage – debt/equity ratios of more than 100:1 were not unusual – than Western lenders, and they were already in a pathological condition by that point.
Is BIS capital accord the Plaza Accord?
I know there ave been different BIS agreements that always screw everything up worldwide. The mortgage debt as Tier 1 capital agreement which is what drove the credit ratings fraud and precipitated the 2008 crisis. We still haven’t hit the next crisis – a government securities as Tier 1 capital – but it was i think part of the problem with the Greece/euro stuff in 2012.
BIS accords that I know of are called Basel 1,2,3,4. IDK the particulars of most of them except Basel2
Basel 1 was 1986 and was concerned largely with credit risk. There was nothing on rate risk, which allowed trading desks capital arbitrage.
A better capital agreement was the EC Capital Adequacy Directive of 1989 – it included rate risk and made capital arbitrage more difficult.
FWIW in the early 90s I used to give a seminar on the efficient use of bank capital – which was one of my favourite classes to teach – so was au courant with capital regulations then but thereafter lost track of regs until the Fed’s stress test scenario stuff in the last decade or so.
What caused that debt bubble in China? The exact things the author listed. Good job there, trying to obscure the subject by pointing to debt bubbles without listing what caused those debt bubbles.
But at least the US has
high inflation, high gas prices and a flood of cheap laborBidenomics.Apparently, like the NBA (h/t Noah Lyles!) you seem unaware of the existence of other countries.
https://tradingeconomics.com/country-list/inflation-rate
And yet, almost everything sold in a Walmart today is made in China or some other communist country.
Not that I am advocating for communism, obviously. Just that free markets don’t care about anything but cheapness of goods. Slave labor? Child labor? No environmental protection? A country that plans on going to war with us? Who cares, as long as we can make the most profit possible.
What free market? The USA is already communist.
I must have missed the shutting down of NYSE and Nasdaq.
Well you sure missed the ‘Climate Change’ hoax take over. The Commie-Education, the Socialist Security, the government retirement, the wealth redistribution, the bank bailouts, the federal reserve, the Obamacare, the Biden-economics etc, etc, etc.
Not true. In FREE markets you would find those who care about those things and those who don’t.
Not nearly true, was true a decade ago, but today you’ll find many of those goods are manufactured in Vietnam, India or Pakistan.
I don’t often agree with DeSantis but in this case he is showing leadership that would have spared the United States endless economic and constitutional crises:
https://www.politico.com/news/2023/08/30/desantis-refuses-biden-climate-ira-money-00113397
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