Friday, April 6, 2018

China Worries: Echoes of Japan, and the Soviet Union

There seems to be an ongoing fear in the psyche of Americans that an economy based on intensive government planning will inevitably outstrip a US economy that lacks such a degree of central planning. I first remember encountering this fear with respect to the Soviet Union, which was greatly feared as an economic competitor to the US from the 1930s up through the 1980s. Sometime in the 1970s and 1980s, US fears of agovernment-directed economy transferred over to Japan. And in recent years, those fears seem to have transferred to China.

Back in the 1960s and 1970s, there was a widespread belief among prominent economists that the Soviet Union would overtake the US economy in per capita GDP within 2-3 decades.  Such predictions seem deeply implausible now, knowing what we know about breakup of the Soviet Union in the 1990s and its economic course since then. But at the time, the perspective was that the US economy frittered away output on raising personal consumption, while the Soviet economy led to high levels of investment in equipment and technology. Surely, these high levels of investment would gradually cause the Soviet standard of living to pull ahead?

As one illustration of this viewpoint, Mark Skousen discussed the treatment of Soviet growth in Paul Samuelson's classic introductory economic textbook (in "The Perseverance of Paul Samuelson's Economics." Journal of Economic Perspectives, Spring 1997, 11:2, pp.  137-152). The first edition of the book was published in 1948. Skousen writes:
"But with the fifth edition (1961), although expressing some skepticism of Soviet statistics, he [Samuelson] stated that economists "seem to agree that her recent growth rates have been considerably greater than ours as a percentage per year," though less than West Germany, Japan, Italy and France (5:829). The fifth through the eleventh editions showed a graph indicating the gap between the United States and the USSR narrowing and possibly even disappearing (for example, 5:830). The twelfth edition replaced the graph with a table declaring that between 1928 and 1983, the Soviet Union had grown at a remarkable 4.9 percent annual growth rate, higher than did the United States, the United Kingdom, or even Germany and Japan (12:776). By the thirteenth edition (1989), Samuelson and Nordhaus declared, "the Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive" (13:837). Samuelson and Nordhaus were not alone in their optimistic views about Soviet central planning; other popular textbooks were also generous in their descriptions of economic life under communism prior to the collapse of the Soviet Union.
"By the next edition, the fourteenth, published during the demise of the Soviet Union, Samuelson and Nordhaus dropped the word "thrive" and placed question marks next to the Soviet statistics, adding "the Soviet data are questioned by many experts" (14:389). The fifteenth edition (1995) has no chart at all, declaring Soviet Communism "the failed model" (15:714–8)."
My point here is not to single out the Samuelson text. As Skousen notes, this perspective on Soviet growth was common among many economists. In retrospect, there were certainly signs from the 1960s through the 1980s that the Soviet economy was not in fact catching up. Commonsensical observation of how average people were living in the Soviet Union, especially in rural areas, told a different story. And those projections about when the Soviet Union would catch the US in per capita GDP always seemed to remain 2-3 decades off in the future. Nonetheless, standard economics textbooks taught for about three decades that the Soviets were likely to catch up and pull ahead.

But as the risk of being overtaken by an ever-richer Soviet Union came to seem less plausible, the rising threat from Japan took its place. Again, we now think of Japan's as suffering a financial meltdown back in the early 1990s, which has now been followed by a quarter-century of slow growth. But as Japanese competitor rose in world markets in the 1970s and 1980s, the view was quite different. 

For a trip down memory lane on this issue, I recommend a 1998 essay called "Revisiting the “Revisionists”: The Rise and Fall of the Japanese Economic Model," by Brink Lindsey and Aaron Lukas (Cato Institute, July 31, 1998). Here's a snippet: 
"After the collapse of Soviet-style communism, the “Japan, Inc.” economic model stood as the world’s only real alternative to Western free-market capitalism. Its leading American supporters—who became known as “revisionists”—argued in the late 1980s and early 1990s that the United States could not compete with Japan’s unique form of state-directed insider capitalism. Unless Washington adopted Japanese-style policies and abandoned free markets in favor of “managed trade,” they said, America would become an economic colony of Japan. ...
"Four figures in particular stand out: political scientist Chalmers Johnson, whose 1982 book MITI and the Japanese Miracle laid much of the intellectual groundwork for later writers; former Reagan administration trade negotiator Clyde Prestowitz, who authored Trading Places: How We Are Giving Our Future to Japan and How to Reclaim It and later founded the Economic Strategy Institute to advance the revisionist viewpoint; former U.S. News & World Report editor James Fallows, whose 1989 article “Containing Japan” in the Atlantic Monthly cast U.S.-Japan relations in Cold War terms; and Dutch journalist Karel van Wolferen, author of The Enigma of Japanese Power. These men influenced many others—including novelist Michael Crichton, whose 1992 jingoistic thriller Rising Sun became a number-one bestseller.
"The revisionists asserted that, in contrast to the open-market capitalism of the “Anglo-American” model, Japan practiced a unique form of state-directed insider capitalism. Under that model, close relationships among business executives, bankers, and government officials strongly influence economic outcomes. By strategically allocating capital through a tightly controlled banking system, they argued, Japan would drive foreign competitors out of sector after sector, leading eventually to world economic domination.
"Revisionists also maintained that because Japan was not playing by the normal rules of Western capitalism, it was useless to employ rules-based trade negotiations to open the Japanese market. Instead, they advocated “results-based” or “managed trade” agreements as the only realistic way to reduce the U.S.-Japan trade imbalance. Beyond that, they proposed elements of a Japanese-style industrial policy as a means of improving U.S. economic performance."
I was working as a newspaper editorial writer for the San Jose Mercury News in the mid-1980s, in the heart of Silicon Valley, so I heard lots about the Japanese threat. I remember a lot of anguish about Japan's "Fifth Generation Computer Project," which was going to assure Japanese dominance of computing, and the a Japanese program to take the lead in high-definition televisions--a program built on analog rather than digital technology. But again, the overall story was that Japan had high levels of investment that it would focus on key technology areas, and thus would surely outstrip the US level. The fears of Japan as an economic colossus turned out to be considerably overblown, too. 

It seems to me that China has now taken the place of Russia and Japan, and many of the terms used by Lindsey and Lukas to describe attitudes toward Japan fit quite well in cuirrent arguments about of China. Thus, it's become fairly common to hear claims that China practices "state-directed insider capitalism," that China has "close relationships among business executives, bankers, and government officials," that China practices "strategically allocating capital through a tightly controlled banking system," and that China is " not playing by the normal rules of Western capitalism." Just as with Japan, the argument is now made that the only way to address US-China trade is with “results-based” or “managed trade” agreements,

Of course, the fact that these very similar arguments and predictions turned out to be incorrect with the Soviet Union and with Japan doesn't prove they will be incorrect with regard to China. But it should raise some questions.

It's worth remembering that according to the World Bank, per capita GDP in the United States is $57,600 in 2016, which compares with $38,900 in Japan, $8,748 in the Russian Federation, and $8,123 in China.

China's economy has of course been growing quickly in recent decades, and has the possibility to continue rapid growth in the future. It's also an economy facing a number of challenges: an extraordinary rise in corporate debt in recent years; a risk of its own housing price bubble; the difficulties of shifting from and investment-driven to a consumption-driven economy; and an aging population creating a real possibility that China will get old before it gets rich.

Kenneth Rogoff recently wrote an op-ed on the topic, "Will China Really Supplant US Economic Hegemony?" He points out that for a country with an extremely large workforce, like China, the rise of robotics may be especially disruptive. He adds:
"But China’s rapid growth has been driven mostly by technology catch-up and investment. ... China’s gains still come largely from adoption of Western technology, and in some cases, appropriation of intellectual property. ... In the economy of the twenty-first century, other factors, including rule of law, as well as access to energy, arable land, and clean water may also become increasingly important. China is following its own path and may yet prove that centralized systems can push development further and faster than anyone had imagined, far beyond simply being a growing middle-income country. But China’s global dominance is hardly the predetermined certainty that so many experts seem to assume."
The US economy has its full share of challenges and difficulties, many of which have been chronicled on the blog repeatedly in the last few years. But the fear that the US economy will soon be overtaken by a country using a recipe consisting of state-directed high investment levels and unfair trading practices has not worked in the past. Perhaps the energies of US eocnomic policymakers should be less focused on worries about outside threats, and more focused on how to strengthen US productivity and competitiveness.