SPEAKING
FREELY Enjoy dying while it
lasts By Thomas Palley
Speaking Freely is an Asia Times
Online feature that allows guest writers to have
their say. Please click hereif you are interested in
contributing.
Vladimir Ilyich
Ulyanov, alias Lenin, was the leader of the 1917
Bolshevik Revolution in Russia. One of his
best-known quotes is: "The capitalists will sell
us the rope with which we will hang them." Today,
Lenin must be chuckling in his Moscow
mausoleum as he watches US
business dealings with China.
Lenin's
sarcastic quip identified how desire for profit
can sometimes undermine class interest. In today's
era of globalization, a similar logic can hold for
the national interest. Thus, with corporations
looking to maximize their global profits, what is
good for profit can sometimes be bad for country.
US-China relations provide a case study of
the "profit vs country" dilemma. Current US-China
economic relations are marked by huge US trade
deficits and a steady migration of manufacturing
to China. This structure was established in the
1990s at the behest of multinational corporations
and big retailers such as Wal-Mart. The former saw
China as providing an unequaled low-cost
production platform from which to export to the
US, while the latter saw China as a source of
low-cost imports.
Together, these business
interests pushed permanent normal trading
relations (PNTR) for China, and they also explain
the US Treasury's willingness to accept China's
undervalued exchange rate. That is because an
undervalued yuan holds down the cost of goods
sourced from China and increases profits on
production exported from there.
For China,
the new arrangements have contributed to
spectacular economic success. Companies sourcing
and exporting from China have also reaped handsome
profits. However, for the US economy it has been a
different story. Manufacturing has steadily bled
jobs as companies have closed factories in the
face of low-cost Chinese competition, and
production and investment have shifted to China.
That has tempered wages and investment spending,
which helps to explain the weak US economic
recovery and unsatisfactory expansion. It has also
eroded the US industrial base while expanding
China's, thereby creating new national-security
problems for the United States.
Through
its trade surpluses, China has accumulated US$1.2
trillion of foreign-exchange reserves - mostly
held in US Treasury bills. Recently, China
announced that it will invest some of those funds
in US equities, signaling the beginning of a new
chapter that promises to entrench existing US
policy further.
This is because the new
initiative will deepen Wall Street's support for
current US policy by offering the prospect of huge
fees and capital gains from reinvesting in China's
reserves. Consequently, Wall Street will now throw
its full weight behind existing policy, since the
Street recognizes that China needs continuing
trade surpluses if it is to invest its
foreign-exchange holdings in risky assets such as
equities. That augurs badly for the US and Main
Street.
Wall Street's greatest influence
is at the Treasury, which has been the leader in
designing US-China economic policy. The
strong-dollar policy originated at the Treasury in
the 1990s, and it has persistently refused to
label China a currency manipulator for fear of
triggering irresistible public pressure for real
action.
On top of this, Treasury Secretary
Henry Paulson - a Goldman Sachs alumnus - is
actively advocating policies that risk compounding
the damage to the US economy. Thus the Treasury
has consistently pushed China to open its
financial markets and let money exit, and China
has been doing just that. This benefits Wall
Street, since money flows there, but it reduces
pressure on China to appreciate its currency.
Worse than that, the yuan could even depreciate if
enough Chinese wealth-holders decide to exit to
diversify their portfolios against economic and
political risk. That would be disastrous for the
US economy, but good news for Wall Street.
The profit vs country dilemma is
compounded by the political power of corporations,
which has enabled them to capture policy. In
earlier eras, such capture promoted domestic
monopoly and corruption in government procurement
and tax policy. Today, it still does that (look at
the administration of President George W Bush),
but now it also enables corporations to push
policies placing their interests ahead of country.
That is the lesson of China.
Free-market
societies need separation between market and
government, intermediated by constitutional
democracy. In the 20th century, many countries
suffered from excessive government control over
market activities, and they paid a heavy price. In
the 21st century, the United States risks paying a
heavy price from the reverse problem of allowing
excessive corporate influence over government.
This is a huge danger, yet it is off the
political radar. One reason is that business funds
both main US political parties, Republicans and
Democrats, thereby silencing both. A second reason
is that much of the public believes business
people are smart and can run government well -
after all, they are rich. Put the two together,
and it is easy to see why business executives move
seamlessly from Wall Street and corporate
boardrooms to top government policy offices on
Pennsylvania and Constitution avenues. That
suggests the supply of rope will remain plentiful
and Lenin may have the last laugh.
Thomas Palley is founder of the
Economics for Democratic and Open Societies
Project.
(Copyright 2007 Thomas I
Palley.)
Speaking Freely is an Asia
Times Online feature that allows guest writers to
have their say. Please click hereif you are interested in
contributing.
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