In a February 15, 2019, article, I asked “Does America Believe In Free Enterprise?” My question was prompted by the combination of President Trump’s approach to a trade deal with China and the Democrats’ turn to the left. I found the Trump approach of demanding that the Chinese adopt a lesser role for the state in economic affairs ironic, in light of traditional Republican theory about the relative benefits of free enterprise and government control.
Since I wrote that article, a number of interesting things have been published that make my question more urgent - and make my ironic answer less useful.
Two intertwined questions now appear fairly urgent for American trade policy and foreign policy: Do we think our system of relatively-free-but-rules-based private enterprise is superior to China’s mix of state-sponsored enterprises and private enterprises? And do we think China is an enemy or a competitor?
In this first of two articles, I will discuss the first question - the one about trade policy - and the attendant question of whether America needs an industrial policy. A second article will discuss the enemy/competitor dichotomy.
Let me restate the trade question in two parts: (1) Do we believe that entrepreneurship and competition create long-term prosperity and value or do we believe that state-directed investment does so? (2) And if we believe that entrepreneurship and competition are superior, is there nevertheless room for some better third way to create a “capitalism with Chinese characteristics”?
I have my doubts about the desirability of an American industrial policy. Industrial policy means government picks what it thinks will be winners and supports them. I think American history since WWII shows that competitive markets in ideas as well as in goods, services and capital lead to the most successful enterprises. But an array of Americans on the right as well as the left appear to think we have to adopt the third way, and some of them deny (unconvincingly to me) that it means government picking winners.
David Brooks and others have identified serious issues
David Brooks, a moderate Republican who publishes in The New York Times, set a tone that can apply to both the trade discussion and the competitor/enemy discussion. Here are some snippets of his broad statement of the current apparent antipathy between the U.S. and China:
I’ve always thought Americans would come together when we realized that we faced a dangerous foreign foe. And lo and behold, now we have one: China. It’s become increasingly clear that China is a grave economic, technological and intellectual threat to the United States and the world order.
And sure enough, beneath the TV bluster of daily politics, Americans are beginning to join together. Mike Pence and Elizabeth Warren can sound shockingly similar when talking about China’s economic policy.
If we don’t learn to make the case for our system, if we don’t make our system better, a lot of people everywhere will say: I’ll take what [the Chinese are] having.
Free-market Republicans used to fight against industrial policy — heavy government intervention to support key sectors — until their dying breaths. But the Chinese threat is already fundamentally changing thinking across the board. The Rubio report seeks to move beyond the free-market/statist dichotomy and find new ways to proceed.[More about the Rubio Report below]
Hal Brands and Zack Cooper of the AEI published their take on the change in American policy:
In recent years, however, that strategy [a bipartisan approach to China that had prevailed for a couple of decades] unraveled as China became more repressive internally and grew stronger and more assertive externally. In response, the Trump administration has proclaimed the “responsible stakeholder” strategy dead and argued that Washington must get serious about competing with Beijing.
What happened instead [instead of becoming more open] was that, as China rose, the Chinese Communist Party became more willing to use its newfound power in coercive and disruptive ways. Confounding Western hopes that China would liberalize, the Chinese Communist Party embraced more repressive policies, especially after Xi Jinping became general secretary in 2012. Meanwhile, Beijing sought to control the Indo-Pacific region by coercing its neighbors, undermining U.S. alliances, practicing mercantilist policies, steadily increasing its presence and influence in the South China Sea, and modernizing its military.
Rather than becoming a responsible stakeholder in a U.S.-led system, China appears increasingly determined to compete with Washington for primacy in the Indo-Pacific and beyond.
What should we expect of China?
The Brands-Cooper “responsible stakeholder” notion seems to me like a stalking horse. Anyone who thought that China was going to be happy in a “U.S.-led system” in which Washington maintained primacy in the East was smoking some kind of powerful and debilitating dope. And I do not think that Secretary Paulson in the Bush 43 Administration or the people who dealt with China for President Obama had any such naïve view. I think they expected a greater “opening up” economically, as the Chinese call it, but neither they nor anyone seriously looking at China in this century thought that China was going to settle for subservient status. I wrote about “reform and opening up” on December 18, 2018, here and about the reasons China will not settle for subservient status here.
Basically, like the participants in U.S. policy vis-a-vis China, I have been disappointed by President Xi’s turn toward greater state control of business and by China’s building of artificial islands in the South China Sea. But otherwise, I do not see that much has changed to justify the sharp change in American attitudes toward China.
The South China Sea adventure is not going to be reversed short of war (it is not even on the table in current negotiations), and, in my opinion, the turn to greater state control of industry and finance will be to China’s long-term detriment, not advantage. That opinion is shared by many business people and economists inside China, as well as economists from elsewhere, as I will outline later in this article.
Nevertheless, the current debate in the U.S. seems to be focused on how to respond to a hostile foe. On the economic side, American trade negotiators are trying to get China to subsidize less and American politicians seem to be focused on emulating the Chinese system of state support and control rather than on reinforcing the benefits of enterprise competition that seem to have served our economy so well, at least since WWII. As David Brooks remarked, Mike Pence and Elizabeth Warren can sound shockingly similar on this subject.
The Rubio Report
Into the economic debate comes an important report called “Made in China 2025 and the Future of American Industry,” prepared for the U.S. Senate Committee on Small Business and Entrepreneurship that is chaired by Senator Marco Rubio, whose intellect I respect and who happens now to be the senior senator from my home state. I will call it “the Rubio Report.”
“Made in China 2025” is a policy paper released by the Chinese government in 2015 that basically seeks To Make China Great Again. It outlines approaches to ten high-value industries where the Chinese government aims to promote sufficient progress for Chinese companies to become world leaders. The Chinese approach emphasizes the role of a state industrial policy in which the state selects industries to promote and subsidizes those industries through financing and other preferential treatment.
At any time in the last 40 years, the prevailing American response to such a policy would have been that the Chinese approach will not succeed because competition is a better arbiter of value than are the elites who will choose what industries to support, what companies should be the winners, and what subsidies they should receive. And we might have pointed to events like the failures of the savings and loan associations as examples of how subsidies eventually tend to kill what they intend to promote, even in the U.S., as well as the failure of the Soviet command and control economy to be able to compete with American capitalism.
But that traditional American approach appears to have changed significantly - perhaps even radically. America (not only our avowed socialists) now seems to believe that China’s state-driven industrial policy will succeed more than our traditional reliance on competition would succeed, and that therefore we have to change our policies. The Rubio Report is quite explicit on that account:
This report’s central conclusion is that the U.S. cannot escape or avoid decisions about industrial policy. ...
In a world of state competition for valuable industries, a domestic policy of neutrality among activities is itself a selection of priority. “Not choosing” is a choice, however it is made. The relevant policy consideration, then, is not whether states should organize their economies, but how they should be organized. Total neutrality among interacting economic systems is impossible, but relative material decline is not.
-Rubio Report p. 11 [Italics added. I will discuss the relative decline idea below.]
The impetus for the change in economic theory appears to be that, as stated in the Rubio Report, “At the heart of trade conflict between the United States (U.S.) and the People’s Republic of China (China) is a shift in relative economic position.” Rubio Report p. 19.
That approach is either naïve or disingenuous because it has been apparent for several decades that China inevitably would be gaining a greater share of global economic power and that the U.S. would be ceding share of global economic power as China and other nations became more productive - and nothing short of war could prevent that progress from taking place, either in the recent past or in the near future. And to many observers, including me, Chinese economic progress - even China gaining a greater share of the global economic pie - is good so long as America and Americans also make economic progress in an absolute sense. But even if it is not good, it remains inevitable.
Basically, it appears that the authors of the Rubio Report are trying to find an economic theory that bridges aspects of capitalism, socialism, and state socialism - in short, the third way or perhaps uncharitably, “capitalism with Chinese characteristics.”
Here are some more quotations from Chairman Rubio’s report that will form the basis for my critique of the new approach:
Existing characterizations of “industrial policy” do not apply cleanly in the 21st century. Economic organization does not require picking “winners and losers” or protectionist self-sufficiency. Dynamism and exposure to the global economy can also be priorities of economic decision. [Italics added. I will discuss this important idea below.]
Second, comparing areas of China’s success to America’s relative decline can help identify areas for creative reform.
The motivating factor to move out of this binary framing is that both ends of the spectrum no longer accomplish their stated goals. Reduced long-term economic growth fails the standards of those who prioritize global efficiency, manufacturing job loss fails the standards of those who prioritize national self sufficiency, and low productivity growth fails the standards of both.
Dynamism can itself be a priority of industrial policy. Setting up competition for new fields, in which firms compete on the quality of their investment and on a global scale, make high growth dynamism the terms for success, whether those terms are set by the state or the market.
In the pursuit of this goal, economic value can be defined prior to the value assigned by the market.
The initial decision to prioritize American workers and their families becomes clear in the definition of these implications and how they relate to regular workers.
Reversing the decline in American manufacturing production will require an honest assessment of what has worked, and what hasn’t.
Who should be the arbiter of value? Bureaucrats or the market?
That all these statements come from a report under the name of a conservative Republican is astounding. If some of them had come from a socialist, I would have found them less surprising.
For me, the most troubling of the above quotations is “economic value can be defined prior to the value assigned by the market.” Reliance on markets, however, is the basis for modern capitalism. If value can be divined by smart bureaucrats without reference to the market, then why not rely on them to value everything - as they did in the Soviet Union?
If the U.S. Senate does not believe in markets, then our form of economic life is endangered. Some may find that an attractive prospect. I do not.
“Reversing the decline in American manufacturing production”
The Rubio Report’s misinterpretation of the data on American manufacturing seems to be a motivating factor in its willingness to embrace an industrial policy.
“Reversing the decline in American manufacturing production” is an important goal of the report. One problem with that goal, however, is that American manufacturing production, as a whole, has not declined. The following graph tells the story quite clearly. Based on FRED data (IPMAN vs. MANEMP), the red line shows manufacturing employment, going back to 1972. The blue line shows manufacturing production since that date. While manufacturing employment has declined slightly over the period, manufacturing production has risen steadily, except for the recessions of 1981, 1991, 2001 and 2008. The clear message is that American manufacturing has become steadily more efficient, tripling its output while using approximately the same number of workers.
We can look at the issue of industrial decline (or not) a few other (more short-term) ways to try to isolate the possible impact of China’s entry into the WTO in 1999. The next graph from FRED is a fairly short-term graph, and it might suggest that American manufacturing employment (not production) declined generally in the 10-year period following China’s WTO entry.
It is possible, of course, that China was not responsible for this decline in manufacturing employment. Indeed, the decline also immediately followed the great burst in U.S. productivity from 1996 to 1999, and I do not know to what extent the increased use of digital manufacturing technology may have caused the decline in employment. But the foregoing graph at least supports the idea that due to something, manufacturing employment declined at a time of relative prosperity.
Using other data from FRED, however (a data series that was discontinued in 2012), we see that from 1970 through 2009 there was a steady decline in manufacturing employment as a percentage of total employment, with a possible hint of increase from 2010 to 2012. In this data set, a blip that follows China’s WTO entry does not exist.
Another factor we should consider in evaluating the importance that the Rubio Report attaches to manufacturing employment is how small the manufacturing sector is today in terms of total employment, compared with the services sector. Manufacturing employs only about 8.5% of American workers, who on average make about 12% more than the American average, including fringes. As the FRED graph below indicates, we are a nation of service workers, and that preponderance has been increasing steadily since WWII. And, therefore, the idea that our government should subsidize manufacturing (but not anything else) seems like it must be for political effect rather than really aimed at providing benefit to the largest segments of the population that need help.
I suppose that the period following WWII, when manufacturing was in its heyday, is the paradigm to which many people would like to return. But that is just nostalgia. That world does not exist - and we would not like to live in it, if it did still exist.
“Dynamism can itself be a priority of industrial policy”
Dynamism, one of the Rubio Report’s favorite words, is indeed desirable. What is it? Where does it come from?
There seems not to be a generally accepted definition of “dynamism.” Look at a few dictionaries and you will find many different interpretations. I think the following is the one that the Rubio Report means to adopt: “the quality of being characterized by vigorous activity and progress,” perhaps along with something like this: “If you refer to the dynamism of a situation or system, you are referring to the fact that it is changing in an exciting and dramatic way.” Vigorous activity, progress, exciting change, these are the positive characteristics that we may associate with dynamism.
Where do those characteristics come from, among economic actors? That is the main question that the Rubio Report’s use of the term almost begs us to consider. Do they come from government decision-making? From private sector vigor? Or from some combination of the two?
Government decision-making does need to set the stage for business dynamism. If government policies discourage dynamic vigor in the private sector, then it will be less plentiful than it might be. Therefore, we should ask whether our system of government discourages or encourages dynamism. In general, I think it does encourage dynamism in many ways. In general, our system of government enables private enterprises to make their own decisions, to retain the fruits of their labor (subject to taxation), and to finance their efforts through capital markets. Our government also undertakes a number of forms of fundamental research, both through government agencies such as NIH and through support of basic research in universities. That basic research helps to create the building blocks from which private enterprise creates a dynamic, ever-changing economy. And if dynamism means anything, it means embracing change, as contrasted with stasis.
Therefore I ask, “What would dynamism have to do with industrial policy?”
The things that government does to encourage dynamism are fundamentally freedoms (within a framework that provides worker protections and consumer protections) and a system of education that enables people to take advantage of their freedoms.
Should the U.S. government encourage (by subsidy) computer technology? Automobile making? Ship building? Rail car manufacture? Nanotechnology? Although the Chinese Communist Party thinks it knows what industries to choose, I have no idea what would be most productive, nor do I think economists or any other class of Brahmins have an inside scoop, either.
In general, we leave it to the market to choose what businesses to support, and the market has supported world-class businesses of many kinds - dynamically, changing over time. Take a look at the S&P 500 stocks over a 20-year period, you will find that the market is dynamic indeed, with close to half of the companies going and coming over such a period due to changes in success and failure.
The U.S. government does subsidize farming, it does subsidize airplane manufacture through the Ex-Im Bank, and there are dozens, probably hundreds of more hidden subsidies, in the tax code and elsewhere. But should policy increase those subsidies or should it seek to root them out on the ground that the market does a better job of estimating value?
When we talk about American subsidies, a look at Tesla Motors (NASDAQ:TSLA) may help us to sort out what kinds of subsidies commonly are offered and how we might analyze them and their consequences. Tesla receives basically two kinds of subsidies: a subsidy of $7,500 per plug-in electric car sold in the U.S.; and it receives tax credits and similar types of subsidies from states where it has built major plants - notably Nevada and New York. See here for a good, more detailed description. But before we jump to conclusions that Tesla is the beneficiary of an industrial policy, let’s look more closely: The $7,500 is a tax credit that goes to the buyer of the car. It reduces the price of the car, which is a kind of subsidy to the seller, but that same subsidy is available to plug-in vehicle buyers from any manufacturer, including a foreign manufacturer. And Tesla and other plug-in manufacturers benefit from similar subsidies in numerous foreign countries (including China), all of which are designed to promote cleaner air through electric rather than gas-powered vehicles.
The second kind of subsidy that Tesla receives is from states that have used the subsidies to attract Tesla’s factories. One might wish that states did not compete with each other by offering such subsidies, but in fact, they are quite common, as recent to-dos about Amazon (NASDAQ:AMZN) in New York and Fox Conn in Wisconsin illustrate. Thus, the states are employing industrial policies against each other in order to attract jobs.
Most of Tesla’s actual financing has come from the private sector, including large investments from Tencent (OTCPK:TCEHY) and Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG) and from the public. Thus, the U.S. capital markets have shown that they can and will fund risky ventures that appear to have good long-term payoffs. Tesla Motors, regardless of whether it ultimately succeeds, seems like as dynamic a company as there is in the world right now.
Support for the goal of dynamism would suggest that, at least in theory, subsidies are counterproductive because they tend to entrench and stultify whatever they subsidize, whereas dynamism would enable and encourage change.
Nevertheless, perhaps sometimes a government-supported architecture might make sense in order to promote greater competition at other levels. The proposal for the government to support a rollout of 5G towers and other infrastructure that then could be leased to wholesalers at market prices is one such proposal. It would eliminate competition in the infrastructure-building phase but promote competition among potential wholesalers who then would sell competitively to the public. The competition within the entire system would be greater than the competition that might result from giant companies like AT&T (NYSE:T) and Verizon (NYSE:VZ) competitively building towers (which they still would be free to do but probably would not do on a large scale). There are many issues to be dealt with, but such infrastructure ideas should be taken seriously, in the interests of facilitating greater overall competitive and dynamic markets. See Wharton professor Kevin Werbach describing the ideas here.
Undersea cables are another piece of important infrastructure where there has been a mix of public and private financing and ownership. In recent years, consortia of private companies (usually large users of bandwidth, such as Facebook (NASDAQ:FB) and Google have laid most of the cable, but even more recently, some of them (notably Google) have begun to invest in their own cables. See the interesting story in the NY Times here.
Google also has been innovative in its use of infrastructure owned by other technology companies. Google Fi is Google’s cell phone service. Google does not own the cellular towers. Instead, it leases the infrastructure from other cell phone companies, with which it competes. This is a form of dynamism and market competition that I do not think government decision-makers would have foreseen.
Despite all this dynamism that competitive markets generate, politicians throughout the world rail against other nations’ subsidies - by America as well as China - and call for corresponding subsidies to offset them. Here is French President Macron speaking in favor of a European industrial policy to respond to preferential treatment for local companies in strategic industries and public procurement “as is done by our American and Chinese competitors.” Almost no one in government, it appears, places faith in private enterprise any more.
Can we make sense of the Rubio Report’s proposed Sino-American dynamism?
In a key section, the Rubio Report says that:
Dynamism can itself be a priority of industrial policy. Setting up competition for new fields, in which firms compete on the quality of their investment and on a global scale, make high growth dynamism the terms for success, whether those terms are set by the state or the market.
A new approach to the dilemma is required. Lost in the polarity of the discussion is a path forward that can resolve the concerns of both economic dynamism and efficiency for one, and national sovereignty and value-chain position for the other. To identify such a path requires an imagination beyond the category choices of global market harmonization and protectionist retreat from trade, which are currently understood as the only options available. Dynamism can itself be a priority of industrial policy. Setting up competition for new fields, in which firms compete on the quality of their investment and on a global scale, make high growth dynamism the terms for success, whether those terms are set by the state or the market.
Frankly, if you can understand that gobbledygook, then maybe you will be in favor of adding the Chinese characteristics to American capitalism. My experience with locutions that are not understandable is that they are not understandable because they make no sense. If they did make sense, they would have been written comprehensibly.
Should our economy be more Chinese?
In sum, the Rubio Report seems to aver that, as a nation, we should become more like the Chinese economically.
What is the state of Chinese private sector companies? And what are China’s government policies doing for or to them?
The Chinese Private Sector
There is evidence that the Chinese private sector is vibrant and a very important part of China’s success. For example, the FT reports that “Private companies generate 60 per cent of China’s economic growth and 90 per cent of new jobs, according to an industry association that represents them.” And the wealthy Chinese that are buying property all over the world are largely the successful business people who own much of the private sector.
On the other hand, it is fairly clear that many private companies are now having difficulty getting financing. It appears that many of them were funded by the “shadow banking” sector - less formal banks that often were supported by state banks or local governments. But the Chinese government has targeted that less formal sector for practical extermination, probably both because it could not be controlled by the central government and because the entities often were undercapitalized and obtained funding from unsuspecting small investors who suffered significant losses.
Many private enterprises are having difficulty getting financing without the shadow banking sector.
There is some evidence that for this reason, the central government now is trying to get the state banks to provide greater support to the private sector. But so many of the small and medium-sized businesses are themselves undercapitalized (as they tend to be pretty much everywhere in the world) that prudent bankers may not want to expose their institutions to the risks. Those risks seem to be evidenced by the surge of bond defaults in 2018, as shown by the following chart from the FT.
Is China choking its private sector? Or is its government-sponsored sector, with apparent government guarantees, so much better from a credit point of view that state banks are properly reluctant to lend to the private sector? I am not in a position to know. But many private companies do appear to be struggling, and Chinese entrepreneurs appear to believe they are not getting the economic liberalization they need in order to succeed in the largely state-controlled system.
Nevertheless, the March 2019 Chinese economic policy-making conference may have signaled a change in policy in favor of private enterprise. As reported by Bloomberg, “Both monetary and fiscal stimulus measures this time around are very much focused on revitalizing the private corporate sector, not the highly leveraged property and state-owned enterprise SOE sectors,” said Qu Hongbin, chief China economist and co-head of Asian economic research at HSBC Holdings Plc in Hong Kong.”
Chinese entrepreneurs certainly would be pleased (probably surprised as well) by such a change in policy. The New York Times reported recently that many Chinese entrepreneurs say,
China’s leadership has mismanaged the world’s second-largest economy, and China’s entrepreneur class is losing confidence in the country’s future.
"Many entrepreneurs are more broadly worried that China won’t pursue the economic and political liberalization it needs. On the contrary, since Xi Jinping took control of the Communist Party in 2012, the party has increased its dominance in every aspect of Chinese society."
“A few young hedge fund managers told me [the NYT reporter] over dinner in Hong Kong that the trade war with President Trump could be a blessing in disguise because it might force Beijing to undertake structural reforms to reach a deal. Only Mr. Trump can save China, it is often said at private gatherings, only half-jokingly.”
Henny Sender, one of FT’s best commentators, recently reported similar sentiments to those reported by the New York Times:
Chinese entrepreneurs will privately admit that a bigger motivation for them to sell their businesses now is the loss of confidence in their own government. For them, the trade war with the US is simply a symptom of an underlying malaise that begins with President Xi Jinping’s approach to the economy.
In a world where much technology has both military and civilian applications, some in China say they saw the manifesto [China 2025] as throwing down a challenge to American supremacy when the wiser choice would have been to discreetly pursue its ambitions to leapfrog the US.
Beijing’s growing embrace of state-owned companies at the expense of the private sector is also causing concern, given the majority of jobs since Mr Xi came to power in 2012 were generated from the latter. That [the emphasis on state-owned enterprises] intensified when Mr Xi did away with the two-term limit on the presidency.
"Indeed, many of the business elite say they believe that while Mr Trump is China’s enemy in the short term, in the long term he will, unwittingly, prove to be the country’s best friend."
"And in the long run the trade battle holds bigger risks to the US if one effect of China’s response is to make the country a better home for entrepreneurs.” [Italics mine]
That last point made by Ms. Sender is the most important one for this article. Do we believe that entrepreneurship and competition create long-term prosperity and value or do we believe that state-directed investment does so? And if we believe the former, is there nevertheless room for some better third way to create a new “capitalism with Chinese characteristics,” as the Rubio Report implies?
Some private sector Chinese companies do flourish
Although many Chinese private sector companies are having financial difficulties, some are flourishing by exercising old-fashioned entrepreneurship. Huawei is one such company. As Bloomberg put it, “This is the story of how Huawei went from a small-time parts reseller to the homegrown tech giant that China always hoped for, and the west always feared.”
Did Huawei get there by being clever or did it need to steal trade secrets from American companies? I do not know. But regardless of how it got to its present state of dominance in an important area of communications technology (5G), it appears fairly certain that Huawei is the product of a crusty entrepreneur, not state capitalism.
However, maybe technological innovation is discouraged by autocracy
Although there are Chinese companies that are innovative, there are respected American voices that say autocratic repression and technological innovation do not mix. See James Pethokoukis of the AEI here and Why Nations Fail: The Origins of Power, Prosperity, and Poverty by Daron Acemoglu and James A. Robinson, first published in 2013. I am not quite a believer in that idea. I do not know whether technological innovation can occur in an autocratic system. But I will say that on a second reading, I found Why Nations Fail more convincing to the effect that autocracy stifles innovation.
Why we might love China’s subsidies
Mark J. Perry of AEI has rehearsed the classical arguments for why the U.S. should be grateful for Chinese subsidies rather than oppose to them. See “China’s subsidies are unfair and harm Americans, right?” and the contrary comments the article generated here. In brief, Perry said that Americans benefitted from Chinese subsidies because they reduced the cost of many goods. Responders said that, however, some American industries could decay and be very hard to start up again, such as steel and aluminum smelters. Probably both are correct, with the steel and aluminum smelter problem being a very much more isolated one.
One of the areas where Chinese manufacturing is dominant is in solar electricity generating panels - and it is an area where the Chinese government has provided subsidies that have made Chinese solar panels cheaper than panels made anywhere else. The low price has encouraged growth of the world market, which has benefits to the U.S. in a number of ways, including the facilitation of more green power. But another big payoff for Americans is the growth of jobs installing solar panels. Those jobs, that pay quite well, have soared in recent years. According to the Wall Street Journal’s survey of work published March 2, 2019, the projected 10-year change in employment of solar photovoltaic installers from 2016 to 2026 will be 104.9%, which is the largest projected change for any occupation.
One example does not conclude an argument, of course, but the solar panel example is illustrative of how Chinese industrial policy subsidies can help Americans, not only by reducing the cost of purchases but also by making entire domestic industries more vibrant.
One of the things that the U.S. and China have in common is growing budget deficits. China’s may in part be due to its subsidies of various kinds. And the Chinese government seems not to be able to control its spending, as the following graph from Bloomberg suggests:
The U.S. government seems no better at controlling its spending in relation to its income, though in the American case, the most recent cause seems to be reducing taxes as well as increasing spending. The consequences to both economies are debated in both nations. Can deficits reach to the sky without consequences? My bet is that they cannot.
The unique American funding advantage
One of the points that I think the Rubio Report and similar calls for an American industrial policy overlook is that the U.S. has a unique advantage in funding technology and progress: our capital markets. Nowhere else in the world are capital markets so large, so deep, and so diverse. Whereas other nations, such as China, may indeed have to pick winners and support them financially, the U.S. does not have to do that because investors are always looking for profitable ways to deploy their capital. Goldman Sachs (NYSE:GS) does not do God’s work, as its chairman once claimed, but it and its investment banking and money management brethren do capitalism’s essential work of creating capital markets that are capable of financing projects, especially large ones. (Yes, there are things that the private sector does not finance well, such as infrastructure, education, and public safety.)
Seeking Alpha readers are part of the vast network of independent investors who make our capital markets - and therefore American capitalism - work.
The pro-industrial-policy tide is rising. I hope that Americans can have enough faith in the benefits of our economic system of rules-based, competitive free enterprise to allow it to continue to provide prosperity, as well as to finance and people companies that can be world leaders in their fields. We are better off not trying to pick our national champions.
Our system is far from perfect. Most importantly, under our system, too many people are unable to participate in our prosperity. That defect requires remedies. But state-directed capitalism is not one of the potential remedies.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.