Four Reasons Why China Isn't Quite Ready to Take Over the World

My boss was one of the few folks who came to the beer tasting early yesterday, and while he was there, we started talking about the recent political fiasco in Washington, i.e. the government shutdown and the debt ceiling.

I said that the biggest issue with the debt ceiling crisis was that it put the U.S. Dollar's position as the global reserve currency at risk.  Which is to say that for better or worse, the U.S. always borrows using its own currency, such that--if necessary--we can (and might!) simply print money in order to get out of a potential crisis.  This is distinctly not the case with countries like Greece and Iceland, who may borrow money, yes, but not in a currency whose supply they control.  For better or worse, there is a Central Bank of Europe, not a Central Bank of Greece.  So, bottom line, they have to pay back the same amount that they borrowed--in real terms--plus interest.  They can't play the kinds of games with the money supply that the U.S. government has been playing, borrowing so cheaply that they are effectively borrowing at a profit.  But that is the kind of thing that you can get away with as long as every other currency in the world is effectively valued in relation to yours.  Hence this idea that the debt ceiling crisis risked America's place as a Great Power.

To which my boss responded that the Illuminati in this country are all making their kids learn Mandarin because that's the future.

And I said that I wasn't convinced.  Because the one good thing about the debt ceiling crisis is that it makes it harder other countries to peg their currency value to that of the dollar rather than letting their currencies float freely on the global exchange.  Of course, that's kind of the reverse of my initial argument, but it does set us up to look at Four Reasons Why China Isn't Quite Ready to Take Over the World:

4.  Economic growth is fundamentally tied to improvements in efficiency.  However, it's hard to innovate when you have a system that is such a blatant public/private partnership, where people in power can and do choose winners in the market by giving State Owned Enterprises (SOEs) various financial and market advantages.  Of course, we have this, too, and so does Europe--examples include aircraft manufacture and various farming subsidies--but the problem is much more accute in China.  SOEs are an integral part of the market design there, and thus it can be difficult to disentangle proper government influence in public/private partnerships from old-fashioned greed-based corruption.

3.  Similarly, it's hard to innovate when your society takes few precautions to protect intellectual property.  Yes, it's true that all of the patent lawsuits in the U.S. and Europe are a mess, but the alternative--what we might think of as globally "free" ideas--destroys incentives for innovation by failing to protect the rights of inventors.  That kind of failure would be a particular kind of disaster in the U.S.  It would, for example, wipe out Silicon Valley overnight.

2.  China has one particular economic advantage, which it has leveraged to the hilt in order to become the world's factory; it has a large, cheap, reasonably well-educated work force.  However, this workforce is cheap largely through the effect of China's efforts to keep its currency values low relative to the rest of the world and to keep their workers disorganized.  That last is an irony in a nominally Socialist society, to be sure, but the facts remain.  In any event, for China to truly become the world's dominant economic power, they have to let their currency float and find its true natural value, and that process will immediately degrade the value of their primary resource--the cheapness of their labor.  Against that, however, the standard of living of the average, employed Chinese worker will rise markedly.  However, significant growth in unemployment is extremely likely.

1.  It doesn't make the same kinds of headlines over here, but reality is that China has all of the same problems that the U.S. and Europe have.  Which is to say that the Chinese population is also aging rapidly, that the number of workers entering the workforce is either just below or just above replacement rate, and in any event, folks are living longer.  Or, to put it another way, they also have a looming retirement crisis, it's just that the nature of their societal guarantees is less explicit.  China doesn't have a defined Social Security and Medicare program.  They do, however, have a Socialist government that is at least implicitly committed to taking care of its population and making sure that everyone who wants a job can find one.  So as far as all that's concerned, they're in no better shape than we are, and don't let anyone tell you differently.

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None of which makes the crises we've had in Washington recently even remotely forgivable.  What it does, however, is prove that what FDR said long ago was then and is still today true: "The only thing we have to fear is fear itself."

That said, we also need to learn to get out of our own way.