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China Has a Few Things to Teach the US Economy

China Has a Few Things to Teach the US Economy

Friday, 23 October, 2020 - 05:00

Ever since China’s spectacular economic growth became apparent in the 2000s, people have wondered whether that country’s brand of authoritarian state capitalism has proven superior to the more liberal American model. Until recently, it was possible to dismiss those concerns, but Chinese successes and US failures keep piling up. If the US wants to maintain both its relative power and its prestige as a model for the world, it needs to make some big adjustments.

China’s rapid growth, by itself, was not an argument for the superiority of the Chinese system. Any country can grow briskly from a very low starting point, if it has the right policies. Whereas developed nations have to invent new technologies to grow, developing countries can copy existing ideas and build up their capital stock. Even after decades of hypergrowth, and despite having a huge economy in terms of total size, China was and is still much poorer than the US on a per capita basis. The typical Chinese family has a smaller house, fewer cars and less opportunity for travel and entertainment than its American counterpart.

But in recent years, China has shown that it can compete at the leading edge of technology -- something most middle-income countries are unable to do. The nation is now a peer competitor with the US in the field of artificial intelligence, and is dominating the global race to build fifth-generation wireless networks. China is home to the world’s leading drone manufacturer, is building the world’s fastest trains, and is becoming a leader in genetic engineering. It even has a mission to Mars. With innovation like this, it’s hard to argue that China deserves exclusion from the rank of leading nations, despite its still-modest living standards.

In addition to technological wizardry, China is proving adept at managing the types of crises that regularly flummox the US. Its huge program of bank-driven stimulus -- something that would have been much harder in a country where the state doesn’t control the banks -- helped it sail through the 2008 financial crisis with only minor damage. This left China with an overhang of bad debts, but the country is now in the process of cleaning those out of the system.

China’s swift suppression of the Covid-19 pandemic also allowed its economy to rapidly recover from the economic devastation -- something rich liberal countries have struggled to do. China’s GDP was 4.9% higher in the third quarter of 2020 than in the third quarter of 2019. Meanwhile, the US recovery is losing steam, as yet another titanic wave of coronavirus infections swamps the country.

These successes add up. The Economist, traditionally a bastion of free-market ideas, recently entertained the idea that Chinese leader Xi Jinping may have found a form of state capitalism that really works. While granting the demise of the American model may be premature, it seems likely that the U.S. needs to make some adjustments if it wants to keep up.

The best approach is to do what the US has always done -- shore up its weaknesses by selectively adapting its’ rivals’ best ideas. In last century's Cold War, the US responded to Soviet scientific achievements with a huge investment in research. A similar approach is warranted with China.

The Endless Frontier Act, a bill which would boost federal research spending by $20 billion a year, would be a good first step. Rapid scientific progress in areas like wireless networking, artificial intelligence and energy storage would help preserve US industrial dominance, just as it did in the 20th century.

Also during the Cold War, the US responded to the Soviet Union’s massive state-directed infrastructure push with its own burst of construction, including the interstate highway system and the creation of the suburbs. Government investment surged to almost 7% of GDP.

The US already has much of its infrastructure in place, and certainly can’t match China’s often wasteful construction binges. But it can do much more. In addition to repairing the country’s crumbling roads and upgrading its ports, the US can build a modern national electrical grid that will speed the transition to next-generation energy sources and boost new energy industries. A national effort to increase density in inner-ring suburbs would create a housing construction boom, and make it economical to build more trains as well.

The US also has to upgrade its human resources. Bailing out struggling universities and extending Medicare to cover all Americans would be important steps in this direction. Crushing the Covid-19 pandemic with public health measures (which are necessary in addition to vaccines) is another urgent task.

All this will require a lot of government spending. But a burst of stimulus, especially when spent on things with long-term economic payoffs like research, infrastructure and more efficient health care, happens to be exactly what the country needs to boost its economy out of its Covid-19 slump. The mindset of fiscal austerity must be left in the past; the US should copy China’s willingness to fight recessions with all necessary firepower, even if its exact methods will necessarily be different than China’s.

China’s model isn’t yet supreme. But if the US refuses to learn from China’s successes and tweak its own system to shore up its weaknesses, the day will come when the world agrees that China found a better way. It’s up to US leaders and voters to prevent that from happening.


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