It’s Time To Worry About China

One dreary refrain of the America is failing chorus is that China is taking over. Prompted by the likes of Lou Dobbs, they worry that because toasters, drills, and iPods are made in China, US prominence is ending. While intrusive and expensive labor laws make manufacturing in the US uncompetitive with China, simply losing the advantage in assembly costs is not a major concern for the US. A great economy is based on innovation and entrepreneurship, which the US has had in spades. How the US handles its first real recession since 1982 may shift the innovation advantage to China, and that is a real worry.

The US gets credit for any number of important inventions and industries that were the work of immigrants. The telephone, the atomic reactor, the moon landing, and microprocessors were all invented or heavily advanced by US immigrants. Throughout the 20^th Century, immigrants accounted for twice the rate of US Nobel Prizes, patents, and founding of new public companies than the general US population. These immigrants were drawn to the US because it rewarded innovation, hence the most flattering of monikers “the land of opportunity.” The US is prosperous because the world’s brightest minds choose to live where they can spread their wings.

China, by comparison, is responsible for more inventions throughout history than any other country. No people are more capable of innovation, but the Chinese history of repressive dictators left the benefits of these inventions to other nations. Despite impressive cities like Shanghai, most Chinese are impoverished serfs with few attachments to the modern world. While the US constantly innovates and reinvents, China merely exploits its massive labor force. Under that model, the lion’s share of value flows to the US.

The old formula of US as innovator and China as workshop is changing. Businessmen like Liam Casey (“Mr. China”) profit from integrating US innovation with Chinese efficiency, but they also see the Chinese changing their model to capture the value of product innovation. The Chinese are using the current recession to develop their own brands and products for Asian markets. Factories that innovate and retool will survive the recession and replace those that do not. China is closing the circuit that connects innovation to wealth.

The US, by comparison, is breaking that connection. The US is taking a left turn to the Old European model of choosing stability before growth and innovation. The US is bailing out union shops, but not their open competitors. They are favoring large companies at the expense of smaller ones through oppressive regulation. Lehman is out, while Fanny is in. Where the market once ruled, the government is now choosing the winners.

During the last meaningful recession, 1982, the US chose to deregulate, which combined with lower taxes unleashed the greatest wave of prosperity ever. Inefficient companies and industries were swept away, and the survivors thrived on the resulting opportunities. The current plan to bail out politically connected industries ensures a future of governmentally backed industries, along with permanent high unemployment and stagnant domestic product.

Recessions, while painful, are natural and unavoidable. Each recession, however, can either create new opportunity for innovation or advance government’s death grip on the productive classes. China seems to be generally choosing the former, while the US is choosing the latter. Once the world’s innovators see China as their land of opportunity, the US will be in big trouble. The Obama administration’s socialist agenda of spending, regulation, and labor unions may be the passing of the torch, and if so, the Chinese will not have won the race so much as the US chose to lose.