January 12, 2020

America dreams of Chinese state capitalism
The U.S. economy is in the 11th year of a record-long expansion. Unemployment is at a 50-year low. And most of the biggest, most innovative companies in the world hail from America. Given such abundant good news, one might think that American policymakers would exude deep confidence in the American Way of Capitalism.Not so much. Democrats are making their usual arguments about inequality, saying the economy has been failing workers for decades. No surprise there. What's new is the skepticism coming from some Republicans who, not so long ago, enthusiastically extolled the wonder-working power of free-market economics. As Sen. Marco Rubio (R-Fla.) said in a speech at Catholic University last month, "The market will always reach the most efficient economic outcome, but sometimes the most efficient outcome is at odds with the common good and the national interest."One aspect of the national interest that concerns Rubio and many other conservatives is the geopolitical threat from China. They're worried that the Chinese Way of Capitalism — particularly government backing of key sectors such as AI and robotics — might actually work and make China the economic and technological leader of the 21st century.So maybe it's time for Washington to play China's game. Chinese capitalism with American characteristics. Rubio, for instance, wants a "pro-American industrial policy" that would target funding to "strategically important" sectors such as aerospace and telecommunications. Others on the right would greatly expand basic research funding, as well as applied research fields like advanced materials. At the core of these approaches is an acceptance that if China can successfully pick winners and losers, so can America.But maybe China can't. It may seem like the central planners in Beijing have figured a new and better way to do capitalism. After all, their managed version continues to produce high economic growth growth rates — though many observers think they're overstated — as well as some large and innovative tech firms such as Tencent and Huawei. But a deeper dive shows a troubled economic model. Compared to the U.S., China is an old country and a poor country, at least on a per capita basis. It needs to become far more productive, which is one reason Beijing massively funds cutting-edge technology.But state capitalism isn't working so well anymore. As The Economist recently noted, "There is evidence that China's heavy-handed intervention is becoming increasingly ineffective. Total factor productivity growth in China in recent years has been a third of what it was before the 2008 global financial crisis." Indeed, some analyses see no productivity growth at all. A recent article in the Harvard Business Review concludes that "absent a major pivot in thinking and approach, [Chinese firms] will be unable to deliver the productivity gains needed to offset the consequences of the steepening decline in the country's working-age population." And 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."The bottom line here is that for China to succeed over the long-term, it must return to the pro-market path. It must become a lot more like America where companies rise and fall based on market forces, not the whims of politicians. And while America could surely use more science investment, that's far different than creating a massive new system of business interventions and subsidies directed from Washington and influenced by all manner of interest groups.America has a history of overestimating the economic strength of rival nations. Back in the 1980s, the U.S. also flirted with industrial policy because Japan seemed so successful at it. That was just before Japan entered a long period of stagnation. Then there was the Soviet Union. And after the Evil Empire's sudden implosion, some in Washington attacked the Central Intelligence Agency for producing analysis that overestimated the USSR's economic strength. With more accurate estimates, some critics suggested, perhaps the United States would have avoided its expensive military buildup during the Reagan era.Maybe there's again more reason for confidence and optimism than we think.Want more essential commentary and analysis like this delivered straight to your inbox? Sign up for The Week's "Today's best articles" newsletter here.More stories from theweek.com The death of rock's master craftsman The booming stock market shows America is diseased Chip Walter recommends 6 great science books
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