In today’s Wall Street Journal, Andy Stern the former president of the Service Employees International Union says that we in the USA “worship the free market.” It is this misplaced adherence to “free market fundamentalism” that puts us at a disadvantage vs. China.
What free market economy is he talking about? I sure don’t see one in the United States.
Stern does get one thing right. He does recognize that we are in the midst of a technological, economic, and social revolution and that organized labor and business have no choice but to adapt. I’ll give him a tiny (and I mean tiny) bit of credit for that. However his prescription for future prosperity is deeply flawed.
He raves about how China has achieved what it has with the heavy hand of government guiding the way.
Our delegation witnessed China’s people-oriented development in Chongqing, a city of 32 million in Western China, which is led by an aggressive and popular Communist Party leader—Bo Xilai. A skyline of cranes are building roughly 1.5 million square feet of usable floor space daily—including, our delegation was told, 700,000 units of public housing annually.
Public housing huh? Well the Chinese Central Bank has flooded the country with renminbi creating lots and lots of “public housing.” In fact there are whole cities that were thrown up in the last 5 years that are completely empty. It takes some serious economic incompetence to create giant empty cities in a country with 1.3 billion people. But this is the guidance that Mr. Stern thinks is such a good idea.
He praises China’s growth. Yes it is remarkable. But it has grown despite the state not because of the state. Where markets were allowed to breathe a little bit economic growth happened. Over time the Communist Party figured this out but also recognized the challenge to their supremacy that came with some economic freedom. They decided to set up shop as crony capitalists. This allowed them to benefit from the wealth creation while also keeping a thumb on the people. Stern might call this good government management of the economy.
What Stern also neglects to address is that a country coming from nothing can ramp up growth at a rate much higher than that of a developed country. They may be “growing” at a rate of 10% but where are they coming from?
The numbers that come out of China should be taken with a grain of salt. If you thought Enron got creative with its accounting, my bet is that China may have taken such shenanigans to another level. I have no proof of this. Perhaps the books in China are on the up and up. I would be shocked if this was indeed the case though. Again, when the Party controls the banks, and there are multiple ghost cities littered throughout the country, I think it’s fair to infer that the economic numbers we hear coming out of China are finessed in a big way.
But old Andy, now professor at Columbia University thinks that China is the model we should emulate. There is too much free market thinking in this country. And just look what it has done to our economy!
The United States is far from a free market economy. As sited multiple times on this site the most important price of all, interest rates, which in turn influence the cost of everything else, are determined by fiat at the Federal Reserve. It is because the Fed refuses to allow rates to move as they should (in a free market) that we are in the economic doldrums we are in.
I believe the degree to which an economy is unhealthy is determined in large part by the degree to which interest rates do not reflect the real rate of interest at which banks should be lending. So if the Fed keeps rates at >1% while the economy demands 5%, the 4% difference determines to a large degree the amount of distortion and malinvestment in the economy generally.
In the short run rates set below the market rate can send a jolt into the system. In the medium to long run if rates remain below what the market demands malivestment will build up and then topple the economy. The Fed then must cut rates again to try to reinflate the economy.
If, as was the case between 2001 and 2006 the Fed did not raise rates quickly enough, malivestment topples the economy and the Fed doesn’t have any room to move to goose the economy again. The only course then (according to the Fed) is to print, as it is doing now.
This is why we are in the mess we are in. There is too much economic planning in the United States, not to little as Stern asserts. The last thing we need is increased government/corporate “cooperation.” Yet Stern speaks for a large group of very smart people who honestly believe that if America just managed it’s economy better from Washington things would be better.
It would be better for people like Stern.
Nick Sorrentino 12-1-2011