Economic system

It’s America’s economic system that’s broken, not China’s – Baltimore Sun

Chinese President Xi Jinping could possibly agree in the coming days on new measures to reduce China’s trade imbalance with the United States, giving Donald Trump a face-saving way to end his trade war.

But Mr. Xi will not agree to change the Chinese economic system. Why should he?

The American economic system is geared towards maximizing returns for shareholders. And it achieves this goal: last Friday, the S&P 500 reached a new all-time high.

But average Americans have seen no significant gain in their incomes for four decades, adjusted for inflation.

The Chinese economic system, on the other hand, is all about maximizing China. And it achieves that goal. Forty years ago, China was still backward and agrarian. Today it is the world’s second largest economy, home to the world’s largest auto industry and some of the world’s most powerful technology companies. Over the past four decades, hundreds of millions of Chinese have been lifted out of poverty.

The two systems are fundamentally different.

At the heart of the American system are 500 giant corporations headquartered in the United States but making, buying, and selling things all over the world. Half of their employees and contractors are non-American, located outside of the United States. A third of their shareholders are non-American.

These giant corporations have no particular allegiance to America. Their only allegiance and responsibility is to their shareholders. They will do whatever it takes to keep their stock price as high as possible, including keeping wages low, fighting unions, reclassifying employees as independent contractors, outsourcing anywhere in the world where parts are the cheapest, shifting their profits around the world to where the taxes are lowest and paying their top CEOs paltry sums.

At the heart of China’s economy, by contrast, are state-owned enterprises that borrow from state banks at artificially low rates. These state-owned companies balance the ups and downs of the economy, spending more when private companies are reluctant to do so.

They are also engines of economic growth, making the capital-intensive investments that China needs to thrive, including investments in cutting-edge technology.

China’s leading planners and state-owned enterprises will do whatever is necessary to improve the welfare of the Chinese people and help China become the largest and most powerful economy in the world.

Mr. Trump thinks it’s unfair, but it works. Since 1978, the Chinese economy has experienced average growth of more than 9% per year. Growth has slowed recently and US tariffs could bring it down to 6 or 7%, but that’s still faster than almost any other economy in the world, including the US.

The American system relies on taxes, subsidies and regulations to incentivize companies to act in the interest of the American public. But those levers have proven weak relative to the company’s overarching goal of maximizing shareholder returns.

Recently, for example, Walmart, America’s largest employer, announced it would be laying off 570 employees despite having brought in more than $2 billion from Trump and Republican corporate tax cuts. Last year, the company closed dozens of Sam’s Club stores, leaving thousands of Americans out of work.

At the same time, Walmart has invested more than $20 billion in stock buybacks of its own stock, which boosts Walmart executives’ pay and enriches wealthy investors, but does nothing for the economy.

It should be noted that Walmart is a global company, which is not averse to bribing foreign officials to get what it wants. Last week, he agreed to pay $282 million to settle federal foreign bribery allegations. This included routing more than $500,000 to an intermediary in Brazil that specializes in resolving building permit issues.

Across the U.S. economy, Trump’s tax cut hampered jobs and wages, but did well for corporate executives and big investors. Instead of reinvesting the savings in their businesses, the companies used them to buy back shares, according to the International Monetary Fund.

But wait. America is a democracy and China is a dictatorship, right?

True, but most Americans have little or no influence on public policy – ​​which is why Trump’s tax cut has done so little for them.

That’s the conclusion of professors Martin Gilens of Princeton and Benjamin Page of Northwestern, who analyzed 1,799 policy issues before Congress and found that “the preferences of the average American seem to have only a tiny impact, close to zero and statistically insignificant on public opinion”. Politics.”

Instead, U.S. lawmakers respond to demands from wealthy individuals (typically corporate executives and Wall Street moguls) and big corporations — those with the most lobbying prowess and the deepest pockets. to fund campaigns.

Don’t blame American corporations. They are in business to make profits and maximize their stock price, not to serve America.

But because of their dominance in American politics and their commitment to price sharing instead of American welfare, it is folly to rely on them to create good American jobs or improve American competitiveness.

I am not saying that we imitate the Chinese economic system. I suggest that we are not satisfied with the American economic system.

Instead of trying to change China, we should reduce the dominance of big American business over American politics.

China isn’t the reason half of America hasn’t had a raise in four decades. The simple fact is that Americans cannot thrive in a system run largely by big American corporations, organized to raise their stock prices but not to boost Americans.

Robert Reich’s latest book is “The Common Good”, and his latest documentary is “Saving Capitalism”.