U.S. employment about 18 million in 1979, 11.5 million now), and

(6/2010) Why China Owns The Fastest Growing Economy
By Loyd E. Eskildson, Basil & Spice
Jun. 21--A Chinese Foreign Ministry spokesman slammed the U.S. early last week for continuing to request that China boost the value of its RMB currency. Instead, he urged U.S. politicians to stop blaming others for its economic problems (People's Daily, 6/15/2010). Seems that China, managing the world's fastest growing economy for three decades (11.9 percent Q1 2010 growth, vs. 3.2 percent U.S.) and holder of the world's largest surplus, doesn't appreciate demands for trade relief from a profligate nation unwilling to make hard choices that support economic growth. Preoccupation with a self-appointed role of world policeman and arbiter of truth and justice, overly complex government structure, laws, regulations, and non-stop ideological politicking haven't helped either. Our results include $58+ trillion in unfunded Medicare, Social Security, and state liabilities, a $13 trillion federal deficit, wasting $2.5 trillion/year on excess health care, defense, and education spending (compared to other Asian nations), a $2.2 trillion need to repair and upgrade our infrastructure, annual $800 billion or so trade deficits, a seemingly never-ending war on Islam, an inability to manufacture and/or source many complex products necessary to modern life and military defense, and difficulty competing even in new high-technology areas.

Raising the exchange value of China's RMB might reduce America's trade deficit in the short run. In the longer run, it would shift at least part of our deficit to other nations, encourage oil-exporting nations to raise the dollar price of oil, already about one-third of our trade deficit, (Our per capita use of petroleum is about twice that of the U.K., Germany, and France, and far higher than Japan, South Korea, and China -- despite fewer proportionate high-paying energy-intensive manufacturing jobs -- U.S. Energy Information Administration.) It would also lower our standard of living, and entice few jobs back to the U.S. -- American investors would be leery of Chinese productivity improvements and price-cutting to retain existing work.

According to the IMF's "Direction of Trade Statistics," our 2008 trade deficit with China was $285 billion, larger than any nation. However, we also run deficits with Germany, Israel, Italy, Japan, South Korea, Switzerland, and Vietnam, despite some having higher production costs. Why? How do Germany, Switzerland, and Sweden accomplish a nearly balanced trade relationship with China? Why can't we?

Business Week (5/5/201) reports U.S. employment in high-paying, essential manufacturing continues to decline (about 18 million in 1979, 11.5 million now), and now is the lowest since March 1941. Productivity improvements account for some job reductions, but not all. Manufacturing's share of GDP shrank from 25 percent in the 1960s to 11 percent in 2008, according to data from the Commerce Dept.'s Bureau of Economic Analysis. We keep hoping new high-technology jobs will absorb those losing manufacturing jobs -- however, Business Week also reports that we bought nearly $15 billion worth of advanced technology products from China during January-February of this year, but sold China only $3 billion in high-tech goods. The Chinese will soon also have more high-technology DNA-sequencing capacity in one building than the entire U.S., and at least one respected economist expects massive offshoring of U.S. service jobs next.

Where does America excel? Our best performing S&P stock for the past five years, Priceline, is a discount travel search engine that created less than 2,000 jobs (Business Week, 6/17/2010). Apple, America's 'Most Innovative Company' for six consecutive years (Business Week), does most of its manufacturing in Asia. Far more profitable than either are U.S. stock traders using inside information and trading thousands of orders/second who earned $21 billion in 2008 (about twice that of Apple, far more than Priceline), while employing very few individuals (New York Times, 7/23/2009).

Self-interest, acting through Adam Smith's 'invisible hand,' is supposed to provide an optimal allocation of resources, thereby justifying a laissez-faire economic environment. For almost two centuries it worked quite well, other than a period of problems with monopolies, and absent concerns over pollution and Global Warming, or strong international competitors. In 1979, China, however, made an economic U-turn, and combined some of Adam Smith's capitalism with strong government leadership, support, and regulation.

Bottom-Line: At week's end the Chinese agreed (again) to revalue the RMB. However, this faux 'solution' only temporarily covers up our underlying problems. The Chinese use a 'team' approach that includes their entire economy following a coordinated, long-term strategy (eg. deflating potential 'bubbles,' moving away from reliance on energy-intensive, polluting, low-tech exports; expanding expertise in magnetic levitation trains and electric cars to reduce petroleum dependence and develop new export strengths), and is government-nurtured and protected (providing R&D funding and tariffs, requiring foreign partners to provide technical education to Chinese leaders, creating scale economies and regional centers; providing a supportive infrastructure). Result -- a 20+ year winning streak. Similarly, with Japan and South Korea. The U.S., on the other hand, lacks a team approach (eg. consumers are not 'encouraged' to buy U.S.A.; health care, defense, education, finance and the oil industry are allowed to seriously drain the economy), and adheres to an 'every man for himself' strategy largely pursuing short-term financial-market rewards for offshoring vital national skills and capabilities, creating massive trade deficits, and hiring illegal workers without regard to their impact on the local community. Expecting a self-directed economy to outperform coordinated competitors makes about as much sense as waiting for monkeys to randomly type out tomorrow's news. 

Loyd Eskildson is retired from a life of computer programming, teaching economics and finance, education and health care administration, and cross-country truck driving. He's now a blogger and reviewer for Basil & Spice.