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Tantrums about China

Over at Commentary, Jonathan Tobin rants about China's supposed Maoist Counter-Revolution. This in my view is an hallucination: Tobin has been reading the New York Times and believes what he reads, which is a dangerous thing to do. Nonetheless China should concern us.  China is now (or soon will be) the world's largest economy. At "only" 7% growth it will double every 10 years. China is close to challenging America's conventional military advantage in the Pacific, as the perspicacious Elbridge Colby observes over at National Interest.

What can we do about China now? "Nothing," sighs Mr. Tobin. "We lost all our economic leverage over the regime when Congress bowed to a business community that loves commerce more than it loathes Communism and stopped the practice of voting China Most Favored Nation trading status a long time ago."

The idea that the Congress won or lost anything of value is whimsical, to put it charitably.  China is succeeding despite many problems (including authoritarian administration) because the Chinese are working very hard. The most important New York Times dispatch about China was the magazine item last week that reported on the cram schools that offer rural students a shot at admission to top universities. China now produces as many PhDs as the U.S., and twice as many STEM PhDs. Western commentators tend to dismiss Chinese as uncreative imitators, and there is some truth to the charge. China's merciless meritocracy makes university admission entirely dependent on examination scores. It is a transparent, rules-based system that cannot be gamed. One can bribe a public official in China by covertly paying the college tuition for a child at an overseas university, but not at a university in China itself. Any transparent, rules-based system requires inflexible rules; inevitably, a great deal of effort is devoted to memorization. That is the secret of China's social cohesion: not only have living standards soared, but even the rural kids portrayed in the Times cram school story have a chance to grab the brass ring. You can't fund a new building at Peking University and get your kid accepted: it's the raw exam score, and nothing else.

No matter: memorization also requires work. An economy doesn't need a lot of creative people. It needs a few creative people and a great many people who are simply competent.

There are plenty of creative people in China, as it happens, for example Alibaba's Jack Ma, the country's wealthiest man, who has done more to transform commerce through the Web than anyone else in the world. And there are dozens of high-tech companies that are first in their league on a global basis. And they have an army of millions of highly competent people coming into the labor market. That's what we should worry about.

I believe that China is a competitor, but not necessarily (and hopefully not) an enemy. If we want to compete more effectively against China, we should look toward our capacity to innovate. But we aren't innovating. Half the CapEx among tech companies in the S&P 500 is conducted by just five firms (Apple, Microsoft, IBM, Micron, HP). Take out the monopolies and the cupboard looks pretty bare. The rest of the tech world is investing less (in current dollars) than in 1999. We no longer have a tech sector: we have consumer electronics monopolies run by patent trolls whose job is to crush innovation. I am tired of hearing about the wonders of American innovation as manifest in hydraulic fracking. Yes, that is a good technology, but it has been crushed commercially by the world's least modern government, namely Saudi Arabia. Here's a factoid: two-fifths of all U.S. corporate capital expenditure went to the energy sector in 2014. The collapse in oil prices could cut that in half, and reduce overall CapEx by 20% year-on-year. That's a recession.