AMERICA AT RISK
China, Inc. Part Three
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This is the third and last in a series of articles.
See China Inc. One at http://jaygaskill.com/ChinaInc.htm
& China Inc. Two at – http://jaygaskill.com/ChinaInc2.htm .
CHINA, INC. PART THREE
The global economy changes everything.
AMERICA, INC. AT RISK
Countries behave more and more like corporations whose rise and fall depends crucially on the international (read external) markets for goods, services and borrowing. When China’s market manipulation and lending actions are seen through this lens, certain startling insights follow.
You can file them under the ‘predatory behavior’ category.
When a large business, seeking monopolistic dominance, floods a competitive market with dramatically under-priced goods for the purpose of burying competitors, anti-trust principles are invoked: This corporate behavior is called predatory pricing. [See the Wiki-primer at http://en.wikipedia.org/wiki/Predatory_pricing .]
When a country like China does this to the American manufacturing sector, we just say it’s part of the ‘global economy’. After all, there is no super country to enforce anti-trust norms.
When a large corporation offers weaker governments special incentives that have the effect of inducing dependence and constraining policy decisions, we call it ‘influence buying’ or, in extreme cases, ‘bribery.’
When the current Chinese regime, acting through its agents and puppets, becomes our principal creditor by gradually acquiring one trillion dollars of US debt and policy makers are intimidated, we just say it’s part of the ‘global economy’.
After all, aren’t we big enough and adult enough to take care of ourselves?
But when the best the American government can do is to reduce annual borrowing at the margins (i.e., reduce an annual deficit from the trillion dollar category to the merely multi-billion dollar category) we remain hostages; our creditors still hold they keys to our next payday.
The looming danger should be apparent: Fewer and fewer lenders are available, except for the ever ‘generous’ Chinese.
‘MIS-UNDERESTIMATING’ CHINA, INC.
The current Chinese regime can be counted on to compete with us ruthlessly and unfairly. Its current regime will never lift a finger to prevent or ameliorate the demise of the USA as an economic, geopolitical and cultural force in the world, even if that outcome causes temporary economic distress in China itself.
All the while, the regime will present to us a bland, amiable face, concealing the world’s oldest functioning governing arch-bureaucracy, the world’s most mature predator civilization, and a deep internal turmoil that threatens – always – a clique of frightened post-communist, communist rulers, hiding-in-plain sight. This is an acutely dangerous phase in China’s history.
Any other view of modern China represents suicidal naiveté.
PREDATOR – PREY ANALYSIS
America is a wounded animal, capable of lashing out, but all too vulnerable to predators.
All civilizations are inherently predatory, China and the Western democracies included. Modern, intelligent predators are capable of cooperating. The secret here is to avoid becoming prey or indulging in prey behavior.
Consider a pride of lions. The weaker, slower prey are always taken first. We were an ideal target for the Chinese planners. We have fallen to a trap exploited by a fellow predator civilization with a cultural predisposition for very long term thinking – not a virtue that immediately comes to mind when one thinks of Americans.
Now we Americans are in a life-death struggle, but it is not primarily a military confrontation. [Please note- any predator needs to retain and be prepared to use teeth.]
We have taken a dramatic hit in the first phase of a protracted economic confrontation. We are fully capable of losing in this struggle because we have disabled ourselves to a dangerous degree. Before I outline the measures that specifically apply to China, we need to take up the more urgent question of self-repair.
THE ELEPHANT IN THE ROOM
For the moment, our current politicians seem blithely unaware of the sheer scale of the transition that will be required to save the USA from the most brutal correction we have ever experienced, the Great Depression included.
Every annual deficit increases a total national indebtedness. A single surplus is like a touchdown the last minute of the game when your team is 30 points behind –not much to cheer about.
At the end of WW II, the national debt was 90% of our Gross Domestic Product (the aggregate measure of our internal economic activity). As we rapidly approach that number (on our way to passing it) we need to keep in mind that two things were dramatically different then:
(a) We dominated world trade.
(b) Our national debt was not held by our enemies.
In the current and following fiscal years, the national debt will be comparable to the percentage of GDP in WW II. Moreover – without a sharp course correction – it will exceed 100% of GNP within the currrent president’s tenure.
Yes, there are differing estimates, but the reality of the trendlines is starkly clear. Whatever the details, there is a consensus of recognized experts that the current course is unsustainable, that a debt to GDP ratio exceeding 60% will permanently cripple the economy and that the current debt structure (half of which is held by “foreign interests”) is dangerous.
The Heritage Foundation’s charts are available at http://www.heritage.org/research/features/budgetChartbook/Debt-and-Deficits.aspx .
The National Research Council’s recent report is summarized at: http://www8.nationalacademies.org/onpinews/newsitem.aspx?RecordID=12808 .
But federal policy makers are still in a denial bubble. Remember the refrain, “We’re passing the debt crisis on to our grandchildren” ? We are the grandchildren.
Here is the real elephant in the room:
For the last three decades the US enjoyed a consumption economy one subsidized by growing indebtedness. We now must become a production economy characterized by debt reduction. The longer this transition is delayed, the greater (and more brutally destructive) the inevitable correction.
To understand the alarming seriousness of our predicament, just imagine one scenario:
All foreign creditors are suddenly unable or unwilling to loan the US any additional money and the subset internal creditors (think of the constellation of US interests willing to put money into T Bills) shrinks radically. This would effectively end additional borrowing to fund federal spending. Debt service fop the remaining debt would be the single largest item in the so called ‘discretionary spending’ sector of the federal budget. The pending bankruptcy of the entire suite of under-funded entitlement programs, Medicare, Medicaid and Social Security among them, would instantly materialize, and most other federal programs would quickly collapse. If the fed attempted to monetize the shortfall by issuing more fiat money, rampant inflation on the scale of the banana republics (or pre-Nazi Wiemar Germany) would swiftly ensue. The Chinese regime would then be in a position to buy America or calmly watch our downward spiral from the sidelines, ready to move in a pick up the pieces.
I do not exaggerate when I say that this is exactly the kind of scenario that generates a World War.
THE TOUGH LOVE REMEDIES
We are credit addicts, beguiled by the impossible dream that incomes will always catch up with undisciplined spending. Our credit & consumption spree lasted three decades. It was subsidized by foreign investors who bought into a succession of financial bubbles, all of which were driven by a perversion of the American Dream.
Unless we act decisively, the next sound will be the American Bubble, the plop heard round the world.
The real American Dream was as simple as it is durable: “Work hard in a free country and eventually you can earn a place among the well off middle class”.
The perversion of that dream was as complicated as it was evanescent: “Get on board now with the current fad, borrow if you have too, but you too can be rich! Hurry! Get yours now!”
We are addicts to fantasy, to unearned wealth. We need to break the addiction. Our first priority: Wean ourselves from Chinese debt and under-priced Chinese goods, then foreign debt, then all but a tiny carry-over debt that is periodically retired in full, cycle to cycle.
This is not rocket science. It is just very difficult to implement.
There are three broad categories of solutions, all of which are well known. What is currently lacking? Leadership and political will
Radical fiscal discipline.
Eliminate all budget-forcing elements.
Global warming advocates speak of the “climate forcing” effects of human activities.
Here are the ‘budget forcing’ equivalents:
(a) Defined benefit entitlements. Instead of committing to a fixed dollar amount, government entitlement programs insist on meeting ‘needs’ by providing supplemental money in the form of cost of living adjustments and non-capped benefits. All this is hidden in a budget system that puts most annual appropriations outside regular scrutiny, relying on stealth accounting devices like the non-existent social security trust fund.
(b) Built-in cost of living adjustments for salaries and wages of federal employees.
(c) Inflation-adjusted year-to-year appropriations.
(d) Routine spending beyond realistic revenue projections. The failure to link general appropriations to real-time payment, allowing under-funded appropriations to create instant political constituencies for their continuation.
Fixed Dollar Amount Solutions:
(a) Flat line all entitlements, colas
(b) Eliminate all under-funded appropriations.
(c) Create robust overspending auto-correct mechanisms. Notwithstanding salaries, wages and purchase reserves, all department and agency budges are corrected on a month-to-month real time basis, with instant pro-rata salary, wage and benefit reductions to achieve zero deficit balance.
Adopt 100% discretionary annual budgeting.
At present most of the federal budget is tied down by so called “non-discretionary spending”, which essentially means that the congress has abrogated its ongoing spending authority where all entitlements, like social security, are concerned. Every appropriation needs to be freshly considered every fiscal year. No entitlement is sacred.
Practice Zero Minus 2% Budgeting.
Local governments and some larger private businesses are familiar with so called ‘zero based budgeting’ which requires that the affected agency, department or section start the budget process from scratch each fiscal year with a justification for the continuation of last years’ budget. In the Beltway mindset, it is a given that all existing appropriations have earned a permanent place at the trough, including a cost escalator for inflation. This model radically differs. Zero is a true zero, the actual absolute amount from the prior year, less 2%, must be justified: (a) what get even that sum, and (b) why not get 2% less.
Make the Transition to a Real Budget Surplus, Debt Retirement Model.
In addition to iron fiscal discipline, the present circumstances require us, not only to stop borrowing to fund the federal government (a radical idea in the current Beltway brain), it demands that we begin immediately to pay down the federal debt.
This requires us to face an unpleasant reality: Chronic deficits have almost buried us in not-repayable debt. Merely curtailing the accumulation of deficits will not work. Those who propose that we ‘grow our way’ out of our debt load have misjudged the sheer scale of the problem. Consider for moment, that a responsible American government actually began to generate small budget surpluses. At ground zero of this noble effort, the total debt would be roughly equal to our entire gross domestic product, about 12 trillion dollars. Any token debt repayments would probably not exceed the debt service. How much growth in our GDP can we reasonably count on? Take a number, say 4%. Assume we have stopped the debt growth in its tracks by not borrowing at all. To bring the ratio of outstanding debt to GDP below, say 40% (from unthinkable to horrendous, to awful, in other words) would require that we grow the Gross Domestic Product by about 150%. That would take us roughly 9 and a half years. And that assumes an unprecedented level of fiscal discipline coupled with a sustained growth rate, with no intervening recession.
But it could be done.
Achieve Sustained Economic Growth
This project requires a set of insights that some on the left, including the Chinese post-communist, communist leaders now dimly understand – an improvement over their former block-headed puzzlement. Economic progress starts with innovation, is propelled by risk-taking and sustained by reward. Every failed economic model in the last 80 years shares one fatal flaw: development killing bureaucracy.
The liberal mindset at its very best is the human charitable impulse made public policy. The conservative mindset at its very best is the creative impulse made public policy. Excessive bureaucracy kills both.
I am persuaded by the subset of economists who hold that economic progress is primarily driven by profit-making business progress. It follows that the next cohort of leaders capable of extricating the US from its economic malaise will have cut their teeth in intimate, ground level contact with the business community.
Several lessons emerge from a study of business-led economic recoveries. Here they are:
Don’t differentially burden achievement, as measured by the most rigorously honest metric available, profitable earnings. When governments punish behavior, the behaviors tend to abate. When politicians punish profits, there are fewer and fewer profitable enterprises.
About three years ago I witnessed a remarkable interview of an arch-liberal public figure (still in office, inhabiting one of those safe urban seats) who was being questioned about the economic wisdom of burdening the business economy with too many costly social programs. His reply was remarkably candid. I paraphrase: “We’ve learned that we need capitalism in order to have wealth to redistribute. And in recent years, we’ve learned that the private economy can tolerate a lot more that we thought it could.”
Three years later, we can now add, “…and now you’ve found the limit by running a train well past it…..”
Government spending dries up capital available for business development. [I won’t outline the evidence here. I invite my fiscally conservative friends in both parties to remove your ideological blinders and study the issue. Some relevant links include: http://online.wsj.com/article/SB10001424052748704471504574440723298786310.html and http://www.house.gov/ryan/speeches_and_editorials/2010speechesandeditorials/12710roadmap.htm ]
Bureaucracies unreasonably delay and constrain business development.
Obvious? not to our current political leaders. Some starting links: http://www.enterpriseworks.org/pubs/IRG%20Discussion%20Forum.pdf and http://www.aei.org/article/101387 .
Government imposed employment requirements retard job growth.
See these links among many others, http://www.cato.org/pubs/tbb/tbb-0508-25.pdf and http://www.infoplusacct.com/laborburden.html .
OUTLINE OF THE CHINA-SPECIFIC SOLUTIONS
Assume that the US works overtime to restore a vital,productive, debt paying economy. In the meantime we need to address the China issues because China is a bureaucratic, authoritarian state on the make.
China needs clear boundaries from us. Jimmie Carter’s impotent railing at the Soviet Union is not the model to follow. Our opposition must be bright line, to be sure, but in every instance it should be linked unflinchingly with real-world concrete consequences.
Here’s a short list to be followed by an economic war plan.
We oppose, prudently to be sure, but resolutely and effectively any Chinese territorial expansion, especially Taiwan.
Remedy: Military alliances in the Teddy Roosevelt tradition. We can afford to be polite in our rhetoric, while leaving no doubt whatsoever about our bottom line. We have a time window during which no Chinese regime, whatever its rhetoric, would dare entertain a military solution to our resolute defense of the democratic status quo.
We oppose Chinese intimidation of functioning democracies, especially Taiwan, but also Hong Kong.
Remedy: Economic support via a selective, pro-democratic trade policy. [More below].
We fight back against Chinese intellectual property and industrial secrets piracy.
Remedy: Pierce the government-corporate veil, attach assets, selectively devalue indebtedness. [More below.]
We prevent Chinese predatory pricing.
Remedy: Anti-democracy import surcharge. [More below.]
We face down Chinese predatory lending.
Remedy: Selective borrowing freeze. [More below.]
Conservatives have been just as naïve about free trade dogma as the liberals were about the immortal golden goose. The golden goose has lymphoma and free trade has become an open door to predators.
There are several concrete economic actions that the USA could put in place within the next four years:
We selectively deny free trade benefits to identified non-democratic regimes, especially China.
This would be accomplished via congressional legislation that binds the president. It would be accompanied by several findings, among them that Taiwan and, on a selective basis, Hong Kong-originated enterprises are presumptively exempt as long as these regions remain democratic in fact.
Otherwise, all Chinese enterprises are considered agents of the regime, whatever their pretensions to the contrary.
Based on compelling, dramatic evidence presented in open hearings, Chinese goods are determined to be tainted by employment abuses, slave labor, child labor, comprehensive health and safety violations, repression of free speech and religious practices
Based on a similar body of evidence, Chinese commercial enterprises are found to have collectively benefit from comprehensive and systematic theft of intellectual property and trade secrets.
A reparations-surcharge is applied across the board on all non-expect goods from Mainland Chinese sources, their agents and surrogates.
Based on appropriate congressional abuse findings, as above, all further borrowing by the US government, and all its agencies, including the fed, from Chinese mainland sources is forbidden. A separate debt-repayment surcharge is attached to all Mainland Chinese-sourced imports on a dollar-for-dollar basis, that is, for every dollar paid for an import, an additional dollar is charged and applied to retire a dollar of existing federal indebtedness to Mainline Chinese lenders.
Private lawsuits, including class action suits, for product contamination and related liability issues are authorized against Mainland Chinese enterprises directly against the Chinese government on a collective-control-equals-collective-responsibility basis. A collection procedure is established to attach Chinese assets and for further surcharges on Chinese goods. [See my 2008 proposal, China Syndrome – http://jaygaskill.com/ChinaSyndrome08.htm ]
Caveats and exceptions. Not all our strategic partners are perfect democratic countries. But they are partners and they do not hold us hostage as massive creditors. A presidential exception, limited in scope is an essential safety valve.
Make no mistake. Doing these things amounts to a declaration of war, a trade war to be sure, but a real war, one that will call us for a time to the same level of dedication and endurance our grandparents went through in WW II. What do we have to lose? They think we are already defeated. All we have to lose is our soft chains, our prey status. And we gain a brilliant future for our children, the restoration of the American dream.
Thank you, China, for waking us up before it as too late.
 In a forthcoming article: The dynamics of international finance will inevitably cause the traditional Keynsian economic remedies to fail at the national level.