When facts about China change, elites should change their views too

By Robert D. Atkinson

Since the late 1970s, the United States has been in the grip of a deep, almost religious belief that free markets and unfettered globalization maximize U.S. and global welfare. Termed the "Washington Consensus," the view is based on a number of deeply held beliefs, including that small government is best, governments should not try to pick winners, no industry is more important than another, and more economic competition and global integration are always good.

For decades, economists and others who proffered such ideologically-based wisdom ran the show in D.C. Anyone who did not agree was excluded from polite policy-making circles. The sad part is that this was never based on actual empirical research or even careful logic. There were no studies that said government can't pick winners. It was all based on ideology.

Many of this dominant policymaking group remain firmly committed to this view, rejecting any and all contrary evidence that might require reinventing their guiding intellectual paradigm. They are not like Lord John Maynard Keynes, who once when criticized for changing his view on a matter said, "When the facts change I change my views. What do you do?" The answer for most holders of the Washington Consensus is: deny the new facts.

A case in point is a recent Project Syndicate article by Harvard scholar Joe Nye entitled "Peak China?" It's important to note that the major "facts change" in Washington in the last five years has been the rise of China and the recognition that President Xi is a Marxist-Leninist and that China's goal is to become the new global hegemon, economically, technologically, diplomatically and perhaps militarily. That recognition is changing the views of U.S. economic and foreign policy, and leading many, including in the U.S. Congress, to have second thoughts about the Washington Consensus. For true believers, like Nye, that is simply unacceptable. As such, the China threat must be destroyed intellectually.

And that is what Nye attempts in "Peak China?" Nye tells us that he simply wants to provide a "careful net assessment." But his article does not do that. In fact, he concludes, "All told, the U.S. holds a strong hand... For now, Americans have ample reason to feel optimistic about their place in the world. But if the U.S. were to abandon its external alliances and domestic openness, the balance could shift." That is code "no need to abandon the Washington Consensus."

He argues, "America has been at the forefront in the development of key technologies (bio, nano, and information) that are central to this century's economic growth." The key phrase here is "has been." A forthcoming ITIF report finds that when looking at a key range of innovation indicators, such as R&D spending, patents, STEM workers, and output in advanced industries, China had 39 percent more capabilities and output in 2020 than the United States. And as ITIF has shown, to match China's advanced industry output as a share of GDP, the U.S. output would have to grow by over $680 billion.

Nye then proudly notes that "the U.S. derives unrivaled financial power from its large transnational financial institutions and the international role of the dollar." But countries can't eat dollars or use them as weapons. That requires real production, and the dollar as the global reserve currency is a mill-stone around America's industrial neck, removing "market-based" currency devaluation from the tools of industrial competitiveness. Indeed, the strong dollar makes Chinese ―and Korean ― exports to the United States cheaper and U.S. exports to China more expensive.

He next claims that "The U.S. also has an energy advantage." It does, but energy is a commodity that any nation can get if they just pay for it. Does anyone want to say that Russia is a powerhouse because it has a lot of oil? That's about all it has.

Finally, he plays what is now the trump card among China denialists in Washington: demography. He rightly notes that China, like Korea, is facing a declining working-age population. But that's like saying someone who has 10 cars is in trouble if one breaks down. China has 986 million working-age people. What real difference does it make if that falls to 750 million in 2050, at a time when America's working-age population will be just one-third of that. Besides, over the last five years Chinese labor productivity growth, using a conservative estimate, was 3.5 times faster than U.S. productivity growth.

Even if Xi's Leninist policies slow Chinese growth by half, Chinese productivity would still be expected to grow faster than their labor decline, meaning that Chinese GDP will likely grow faster than U.S. GDP. This is not to say that China will catch up to the United States on per-capita GDP, something Korea is having a hard time doing now. But it is to say that as a nation with around 20 percent of the per-capita income of the United States, they have a long way to go before their productivity gains will be hard fought.

As Winston Churchill once stated "The truth is incontrovertible. Malice may attack it, ignorance may deride it, but in the end, there it is." And the truth about China sure looks like China will continue to challenge American leadership, especially if policymakers don't consign to the dustbin of history the Washington Consensus and instead embrace an alternative "national developmentalism" approach.

Dr. Robert D. Atkinson (@RobAtkinsonITIF) is the president of the Information Technology and Innovation Foundation (ITIF), an independent, nonpartisan research and educational institute focusing on the intersection of technological innovation and public policy. The views expressed in the above article are those of the author and do not reflect the editorial direction of The Korea Times.