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By Greg Smith

The tea leaves of history – 1956 to be specific — tell us the Asian Century will in the near future be downgraded to the Asian decade, and the 21st Century will be a continuation of the last American Century if only the United States can recognize its inherent strengths and step up to the plate.

Since the turn of this century, fear has been focused on China’s rapid industrialization and commensurate rise in military spending. History has covered this ground before.

While still dealing with the legacy of Stalinism, Soviet Premier Nikita Khrushchev in November 1956 boldly said, “We will bury you!” in a speech to Western ambassadors. His prediction seemed unsettling accurate, as annual economic growth of the Soviet Union in the 1950s averaged about 8%, far in excess of the 3.3% annual average in the U.S. In the 1960s it was about 7% for the Soviets, 3.9% for the U.S.

Serious predictions the Soviet Union would overtake the U.S. as the world’s largest economy in the 1980s were down right preposterous by the time they were supposed to come to pass. Why?

By the 1980s we had a new economic bogeyman to fear, as Americans fretted Japan Inc. would succeed economically where it had failed militarily. But in 1990 the supposed juggernaut of Japan went into recession and never came out. China’s economic growth will soon be severely curtailed by a combination of the reasons that caused the Soviet Union and Japan to falter.

Economies of the Soviet Union, Japan and China share one component: Heavy government involvement. These top-down models placed great power in the hands of bureaucrats to make decisions that had and will have long-term consequences. The greatest problem with involving bureaucrats and politicians in economies is they are most concerned with short-term performance. Their interference is akin to putting out every small forest fire as quickly as possible. You just wind up with a forest full of dry tinder and, in the future when conditions are right massive, uncontrollable forest fires instead.

Japan’s economic bubble in the late 1980s was created largely by its Ministry of Finance, which had a considerable say over capital allocation. Bureaucrats do not risk their own money and receive no greater compensation for wise decision-making. Their greatest stake is in keeping their job, which causes them to postpone tough decisions as long as possible, regardless of economic consequences. In Japan this led the MIF to allow banks and corporations to engage in all manner of paper transactions that propped up the books without providing long-term economic benefit. In effect Japan became a sovereign equivalent of Enron.

In the 1980s Japan’s Ministry of International Trade and Industry made big decisions on the future technologies of computers and television. Because of the incestuous centralization of Japanese industry, when these decisions — a fifth generation computer project and analog high definition television — turned out to be wrong Japanese industry was already far down dead-end paths.

At about the same time the U.S. government was looking to set a standard for HDTV. A competition was set up for private sector companies to develop and enter a system that was digital, analog or a combination. General Instruments, a company that had little association with television put together a small team of engineers who managed to build a working prototype for a fully digital HDTV system. This last minute, dark horse entry led to the adoption of a fully digital format, providing American companies with the most advanced HDTV system and a lead on related technology. U.S. companies also went on to lead the world’s computer industry because of the marketplace wasn’t led down a single path for the sake of uniformity.

In economies such as Japan’s and China’s, the U.S. HDTV competition would have been by invitation only and General Instruments would not have been on the guest list. Needless to say the outcome would have been as mediocre as Japan’s economy post-1990.

Recent news headlines shouted the Chinese Ministry of Industry and Information Technology has handed a “death sentence” to three quarters of Chinese firms that produce solar power components. The MIIT decided there are too many firms in that particular industry, decided on criteria to choose winners and losers, and to the latter is denying access to financing and other benefits critical to survival in a largely state-run economy. This veritable ‘venture capitalism by the DMV’ goes on all over the world’s second largest economy. Its affects are accumulating.

Apparently Chinese bureaucrats are head and shoulders above Soviet bureaucrats at picking winners and losers. They must have a crystal ball which allows them to avoid choking the life out of the few companies that will produce the important advances that move mankind forward.

Economics is considered a soft science, but its basic laws are as iron as any of the hard sciences. Immature economies like the Soviet economy in 1945, Japanese economy in 1960, and Chinese economy in 1980 are very easy to ‘goose’ with government intervention. The basics are generally easy. As economies grow and mature they become far too complicated for any level of central planning to be effective. That is when economic law catches up.

The rapid rise in China’s economy was had through artificial means: Preferential treatment for the well-connected, considerable subsidies, a rapidly accumulating public debt load, little intellectual property protection, currency manipulation, unnaturally low interest rates and extraordinarily low wages. These macroeconomic equivalents of diet pills have long-term negative consequences. China’s economy cannot permanently exist as it is and has not shown it can highly function as a mature economy.

China’s annual economic growth rates largely mirror those of the post-war Soviet Union, but its economy more closely resembles that of an export-driven Japan 30 years ago. Barring a massive shift toward a free market, China’s next recession will drive her to ever more government intervention in an attempt to continue the post-1980 miracle. The ensuing vicious Keynesian catch-22 will fail, as it did in Japan and is in the U.S. The subsequent period may be the most dangerous time for Taiwan, though China’s military build up will taper off, leaving the Middle Kingdom a regional military and economic power hemmed in by weary neighbors.

Business has flocked to China for cheap manufacturing, which has fostered the growth of a middle class. This has permanently raised China’s economy above where it humbly sat in 1980, but Chinese exceptionalism is better explained by the Easter Bunny. Oh wait, he can’t because he doesn’t exist either.

In contrast, America’s economic growth was made possible by personal and economic freedom. When the U.S. Constitution was written in 1787, it was not intended to create an economic superpower. The intent of the framers was to create a workable government that ensured individual liberty and prevented tyranny. There was a basic assumption that economy would follow as citizens were able to pursue it; there was no thought of creating an economic colossus. No Department of Commerce, yet economic growth was considerable and sustained. No Department of Education, but fine colleges flourished; primary and secondary education became more common and advanced. Growth and development were organic so the firmest of foundations were established.

American commerce was dominant in the 20th Century precisely because individual actors were quite free to invest in divergent ideas, products and technologies. If the U.S. simplifies its tax code, and stops attempting to make the world a perfect place through the constant additions and alterations of rules and regulations with which businesses must comply, American commerce will once again offer us its greatest advantage: Employment and opportunity for anyone willing to work. That is the foundation of the American Dream, and it can be done!

Leave people be and they will produce long-term economic growth. Another reason why we are better fat than fascist. ©

Greg Smith is a freelance writer and political consultant who lives in Bantam, CT. His blog is found at http://www.betterfatthanfascist.com

Note from the author: There is no intent to disparage China. The intent is to encourage fellow Americans to abandon the big government that is steadily eroding freedom as well as economic opportunity. GS

http://asia.nikkei.com/Politics-Economy/International-Relations/Has-China-s-military-expansion-peaked