September 7, 2009

American Socialism & Chinese Capitalism

On August 31, the Wall Street Journal reported that GM has entered into a 50-50 joint venture with FAW Group, a major "Chinese state-owned auto maker." GM is the major U.S. state-owned auto maker. The venture will add, according to GM China President Kevin Wale, a third assembly plant capable of producing 100,000 vehicles per year by the end of 2010. GM already engages in the production and sales of passenger cars and micro-minivans in China with other Chinese partners. GM's China sales during the first seven months of this year "soared 42.8% from the same period last year to 959,035 units."

Why is GM, a capitalist firm, so successful in Communist China and a failure in Capitalist USA? Apparently, the Chinese learned from the economic failures of socialism while the US Congress learned nothing and actively intervenes in the decision-making of American capitalist firms, imposing environmental restrictions few of which would pass the economic test that benefits should be equal to or greater than cost. It subsidizes energy-saving activities like insulating buildings, buying energy-saving autos and even light bulbs, none of which would survive the light of day as producers of net benefits. It orders banks to make bad loans, e.g., the Community Reinvestment Act. Through the EPA, it regulates factory emissions. It proposes a socialist solution to health care. It has declared its policy to replace fossil fuels with renewable alternative fuels. It pays a large portion of the costs of wind turbines and solar panels. The list goes on an on.

The fact that these activities require a subsidy almost guarantees that costs exceed benefits. Many of these subsidies are based on the mistaken belief that global warming is the result of man-made activities. But there are hundreds of scientists who believe climate change is the result of natural forces beyond the control of humans, principally changes in the cosmic ray inflow and the sun's radiations. The earth has experienced many cycles of warming and cooling before there was man. The global-warming fanatics cannot even explain why the last decade was one of the coolest during the past century!

We have urged China to join us in our quixotic attempt to prevent global warming. She has refused, arguing that her per capita consumption of energy is the lowest of any industrial country. Except for the leftist economists, economics tells us that we should let the prices of different energy sources determine when a new source is ready for development. No subsidy would be required if we let the market make the decision. Totalitarian China accepts this approach; free market U.S. takes the Soviet prescription.

American firms are currently not investing in the United States. Net non-residential investment is barely enough to replace capital that is wearing out. Instead, billions have been wasted by corporate managers who have been engaging in such foolishness as buying back corporate stock. All this does is increase share prices that will supposedly justify management bonuses when earnings stagnate. Even banks did this throughout the run-up to the financial crisis, making their financial situations more precarious. Economists call the process of consuming capital, "disinvestment."

Meanwhile, Chinese and foreign investors are helping China develop by building factories that produce every kind of consumer and capital good, making the most modern technologies freely available to the Chinese. Most of what the foreigners produce in China is exported. This, plus Congressional restrictions on oil-drilling on public lands and offshore and on nuclear generating plants, has resulted in our enormous trade deficits that have cost six to seven million American industrial jobs since the 1980s, one to two million more jobs than the recession has caused thus far.

Then, to top it off, we invite foreign governments to socialize our economic system in order to serve their purposes. We let the Chinese government fix the price at which the dollar is exchanged for the yuan at a rate that allows their producers to steal market share from ours. And we give foreign governments a tax break (no tax on interest or dividends earned) when they buy ownership in American businesses and thus turn our businesses into socialist enterprises serving foreign governments.

China learned the lessons of socialism's failure in Russia and is prospering. Congress did not.

Raymond L. Richman is a professor emeritus of public and international affairs at the University of Pittsburgh. Ray and Howard are father and son and co-authors of the 2008 book, Trading Away Our Future published by Ideal Taxes Association. They blog at tradeandtaxes.blogspot.com.