06/02/2013 10:35 pm ET Updated Aug 02, 2013

The China Dance: It Ain't No One Step

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I found this long critique of Chinese expansionary economics in Sunday mornings New York Times to be pretty misguided. Lots of good info and the authors did their homework, but their core thesis seemed wrong to me in the following ways:

  • I don't agree with the assertion that "Beijing's essentially unlimited financial resources" support China's pursuit of "... a soft but unstoppable form of economic domination," allowing "... the country to be a game-changing force in both the developed and developing world, one that threatens to obliterate the competitive edge of Western firms, kill jobs in Europe and America and blunt criticism of human rights abuses in China."
  • That's both non-economic and over-the-top in ways I'll stress below.
  • There's too little of the Michael Pettis/Martin Wolf-style analysis of simple balance-of-payment identities that underlie a lot of what's going on here. These imbalances are highly problematic and damaging for sure, but they're the stuff of demand excesses and shortfalls, not world domination.
  • In this regard, let's be very clear that there's a two-step going on, with the U.S. and others as willing dance partners. Our policy makers have happily absorbed excess Chinese (and other surplus countries') savings, exporting scads of demand/jobs and supporting large US trade deficits (meanwhile, obsessing over far less damaging-to the contrary, necessary in the downturn-budget deficits).
  • There's a vilification of state-owned capitalism and deification of free market capitalism, when there's no such thing as either -- we all exist on continua. True, China needs more market-driven decisions and particularly, higher living standards through increased consumption of their household sector. But our policy makers need to take more control of our own international accounts in ways stressed below.

Neither China, nor any other country, has "unlimited financial resources." Finite resources are, in fact, the core principle of economics. When you tee up the problem that way, you risk missing the actual problem, which is a combination of state power and the savings imbalances noted above. As the authors note, it has long been the policy of China to suppress household consumption, virtually insuring both excess national savings (Pettis stresses that Chinese household savings are not unusually high) and wide-spread poverty (though they should have noted that there are at least internal noises in China pushing the other way -- we'll have to see what they amount to).

Those national savings must flow somewhere, and flow they do, to countries across the globe that consume more than they produce. This is not long-term functional, to be sure -- remember the quip during the latter 2000s in response to this corner of international finance?: China sends us toxic toys and we send them toxic debt. And, as the authors note, a big part of the problem is China's mercantile stance, suppressing the value of their currency and jealously controlling capital flows.

But that's called "globalization" and it isn't always pretty and not everyone is going to play it the way you want them to. To wring your hands about China's outward investment is a bit like complaining that LeBron just dunked over you. That's what he does. Our job then becomes like that of the Pacers: How do we stop LeBron? Whining about how he keeps slamming it down in our face won't do it.

In that sense, this passage is key:

... when Chinese state-owned companies go abroad and seek to play by rules that emanate from an authoritarian regime, there is grave danger that Western countries will, out of economic need, end up playing by Beijing's rules.

They may have a point with developing economies, but why should that apply to advanced ones? First off, by elevating a strong dollar as a policy goal (which hurts the competitiveness of our tradable sector), refusing to seriously go after currency managers like China, allowing our manufacturing base to erode while promoting "free trade" (whatever that is), consistently and uncritically absorbing savings from abroad -- analytically equivalent to exporting demand, deregulating our financial markets and then watching bubble after bubble (, housing) inflate to offset the lost demand, we have been co-conspirators. If you'd rather not slog through the balance-of-payments math, a quick look at a two-sided scale should be enough to convince you that imbalances require both sides to offset each other.

But while the math may be unforgiving, the policy set just articulated need not be. It is within our scope to reverse every one of those policies just noted, reduce our trade deficit and promote more internal demand. In fact, it is essential if we ever hope to get back to full employment.

Second, and here I thought the authors landed in the right place -- we must be vigilant in our regulation of foreign investment. As long as the imbalances persist, China and other surplus countries will make acquisitions like Smithfield. The key is that we provide the requisite level of oversight to insure that our standards, not theirs, prevail. In this regard, and in contrast to conservative anti-regulation mantras, globalization requires higher, not lower, regulatory standards in advanced economies. And I would very much extend that to financial markets as unregulated global securitization clearly leads to systemically under-priced risk.

Though I wouldn't bet on the outcome, the Pacers are turning out to be a lot more competitive against the Heat than a lot of folks expected. We should emulate them in the globalization sphere.

This post originally appeared at Jared Bernstein's On The Economy blog.