Some interesting thoughts on the rapidly developing confrontation between the USA and China.
Dean Baker is a Senior Economist at the Center for Economic and Policy Research (CEPR)
Cross-posted from the CEPR Blog
MC2 Nardel Gervacio | Credit: U.S. Navy
After Donald Trump’s clown shows, it was nice to have a U.S. president who at least takes world issues seriously while representing the country at the various summits over the last week. But that is a low bar. While we want adults in positions of responsibility, we have to ask where those adults want to take us. It is not clear that we should all eagerly follow the path that President Biden seems to be outlining with regard to China.
Unfortunately, people in the United States (including reporter-type people) tend to have little knowledge of history. Many have no first-hand knowledge of the Cold War with the Soviet Union and have not done much reading to make up for this deficiency. In fact, they also don’t seem to have much knowledge of the Iraq War, which is probably the better place to start here.
Target Iraq: Bad Guy Saddam Hussein
When President George W. Bush fixed his eyes on overthrowing Saddam Hussein in the summer of 2002, he decided the rationale was going to be that Hussein possessed or was developing nuclear weapons. This complaint came in spite of the fact that UN weapons inspectors had been in place in the country ever since its defeat in the first Iraq war in 1991.
The weapons inspectors insisted that they saw no evidence that Iraq was developing nuclear weapons. The inspectors’ assessment was dismissed by the Bush administration and to a large extent by major news outlets. They claimed that the restrictions that Iraq imposed on inspections, usually ones of timing, made it impossible for the inspectors to get an accurate assessment of the country’s nuclear capabilities.
The Bush administration then went about whipping up its own “intelligence,” supporting the administration’s claim that Iraq was far along in developing a nuclear bomb. Much of its case was complete fabrication, while other parts were very selective presentations of evidence. But they did manage to sell most of the media and the public on the threat of Iraq’s nuclear weapons.
However, the Bush administration also had a fallback to assuage many liberal types who had qualms about overthrowing a foreign government. The fallback was that Saddam Hussein was a really bad guy.
They had a very good case on this one. Hussein routinely imprisoned or executed political opponents or critics. He had invaded two of his neighbors (Iran in 1980 and Kuwait in 1990) and he persecuted domestic minorities within Iraq, most notably the Kurds and Shite population.
No one could seriously want to defend Hussein’s practices as the ruler of Iraq, but that didn’t mean that overthrowing him was a good policy. It may still be too early to pass a final judgement, and we can never know a counterfactual. At this point, it would be difficult to claim that things have changed for the better for the people of Iraq and the region as a result of the U.S. invasion.
Anyhow, the Hussein as bad guy story is important for our current policy toward China. We can point to the country’s repressive measures against internal dissidents. We can also point to the repression directed towards its Uighur population in Western China, as well as, its belligerence towards its neighbors in making claims on territorial waters. These and other actions can be used to show that China is far from a model democracy that respects the rights of its own citizens, as well as, international law.
But this issue is really beside the point. The question from the standpoint of U.S. policy is how any of our actions can be expected to improve the situation. Specifically, if we adopt a confrontational stance towards China, involving economic measures and a beefed-up military presence in the region, is there reason to believe that the country will improve its behavior in the areas that we care about?
My guess is that the answer is no. Perhaps those with more expertise on China can make a strong case that China’s government would change its behavior in response to a more confrontational approach by the United States, but that really shouldn’t be the issue. It doesn’t make sense to have confrontation as a feel-good approach.
Unfortunately, that seems to be the current path. It is also worth noting in this respect that China was hardly a model of human rights and democracy when the Clinton administration pushed to have it admitted to the WTO at the end of the 1990s. At the time, anyone who raised human rights and labor issues as a reason not to further open trade with China was denounced as a Neanderthal protectionist. We were told that somehow, by buying clothes shoes and other items produced with low cost Chinese labor, we would turn the country into a liberal democracy. Guess that claim is no longer operative.
Using the Cold War to Justify Otherwise Unjustifiable Policies
In the days of the first Cold War the U.S. government pursued many policies, both foreign and domestic, that would be hard to justify without the threat of the Soviet Union. On the domestic side, we had a range of policies by both the government and private companies, to crack down on alleged communists and Soviet sympathizers.
These included loyalty oaths where people had to swear that they were not members of the Communist Party to get government jobs. This often kept not only people who were actual party members from getting jobs, but also people who sympathized with many of the party’s stated goals, like promoting civil rights and avoiding nuclear war.
The 1947 Taft-Hartley Act required unions to force all officers to sign affidavits saying that they were not communists in order to be eligible for recognition through a National Labor Relations Board certified election. Many of the most committed labor organizers were in fact members of the Communist Party, so they were thrown out of labor movement if they refused to sign this pledge. In other cases, committed organizers refused to go along with this demand even if they were not themselves actually party members. On the private side, we had the Hollywood blacklist, where a large number of screenwriters and actors were prevented from working for much of their career.
Internationally, the United States had numerous interventions around the world that had little or nothing to do with combatting the Soviet Union. Just to take two prominent ones: we overthrew the democratically elected government in Iran in 1953 and installed a brutal dictatorship. The issue was not communism or the Soviet Union. The issue was that our oil companies wanted access to Iranian oil.
In another case, the U.S. overthrew an elected government in Guatemala in 1954. Again, this had nothing really to do with the Soviet Union, the United Fruit Company was unhappy about its banana plantations being taken in a land reform program.
The list of interventions could be extended at great length, but the point is that the U.S. government used the Soviet threat to justify policies designed to serve powerful corporate interests that would be very difficult to rationalize without this threat. In addition, we spent enormous sums on the military, which meant large profits for military contractors.
A New Cold War against China could be used in the same way. Needless to say, we can justify pretty much endless military spending based on the need to meet the China threat. Many people don’t seem to realize the absurdity of trying to spend China into the ground, as some would claim we did with the Soviet Union. While the Soviet Union’s economy peaked at around half of the size of the U.S. economy, China’s economy is already almost 20 percent larger than the U.S. economy, and will be around 80 percent larger by the end of the decade.
If the goal of arms race is to spend China into the ground, it is more likely we would spend ourselves into the ground. The burden of a major arms buildup would be much greater on the U.S. than China, although just like in the first Cold War, it would make lots of military contractors rich.
The Implications of the New Cold War for Domestic Policies
There are other aspects to the prospect of Cold War-type competition that are equally pernicious. Last week the Senate passed a bill that would provide $250 billion over the next decade in research spending, ostensibly to help us compete with China. (The $25 billion in annual spending comes to 0.4 percent of the total budget, which you can find out quickly with CEPR’s “It’s the Budget, Stupid” budget calculator.)
The idea of boosting public spending on R&D is a good one, but we need to ask some serious questions about who gets the benefits. Operation Warp Speed gave us a great model for the benefits of public spending, while at the same time showing us the potential for skewing of the gains.
Moderna probably shows the issue most clearly. The federal government fully funded the development and testing of its vaccine. Yet, it gave the company a patent monopoly, which allows it to restrict the distribution of the vaccine and charge prices far above the free market price. As result, Moderna’s stockholders and its top executives have made billions of dollars, effectively profiting off of the government’s investment.
We could structure public contracts differently. For example, we could require that all innovations derived from government research be placed in the public domain so that anyone could manufacture them who possessed the necessary expertise. In some cases, this could involve going deeper downstream in the development process than is intended in the bill approved by the Senate, but there is no reason that the funding could not be used to cover the full costs of developing a product, as was the case with Moderna.
Unfortunately, this bill looks like the funding will follow the model of Moderna. The government puts up the money and takes the risk, while private corporations will be able to gain patent and copyright monopolies, which will allow them to garner a disproportionate share of the gains. In a context where we are supposed to be concerned about the distribution of income, this looks like a huge step in the wrong direction.
Some people have supported this sort of investment with the idea that it will bring manufacturing jobs back to the United States and therefore reduce inequality. Unfortunately, this is a view that has not kept pace with the data. Historically, manufacturing has been a source of good paying jobs for workers without college degrees. However, the wage premium in manufacturing has largely disappeared over the last three decades.
To take a very simple measure, the average hourly wage for production non-supervisory workers in manufacturing was 5.7 percent above the average for the private sector as a whole in 1990. In the most recent data (May, 2021), the wage for production workers in manufacturing was 8.1 percent lower than in the private sector as a whole. This comparison is incomplete, since it doesn’t capture the value of benefits, which tend to be higher in manufacturing, nor does it control for education, experience, and other factors, but it is clear that the premium is substantially smaller than it had been in prior decades.
The reason for the deterioration in the quality of manufacturing jobs is not a secret. The unionization rate in manufacturing has plummeted, largely due to trade, as well as aggressive anti-union measures by employers. In 1990, more than 20 percent of workers in manufacturing were unionized. In 2020, just 8.5 percent of workers in manufacturing were unionized. That is only slightly higher than the 6.3 percent average for the private sector as a whole.
Furthermore, more manufacturing jobs has not meant more union jobs. Until the pandemic hit in March, we had added back more than 1.6 million manufacturing jobs from the Great Recession trough in 2010. Nonetheless, the number of union members in manufacturing had fallen by almost 900,000. As we added back jobs in the sector, they were overwhelmingly lower paying non-union jobs.
The Biden administration hopes to change this story by pressing government contractors to be neutral on workers’ decision to unionize. Hopefully this effort will prove successful, but it would have the same benefit for workers if employers in other areas, like health care, transportation, and warehousing could be pressured to be neutral in organizing drives.
The historic link between manufacturing jobs and unions has largely disappeared, and there is not an obvious reason to put any special effort into bringing it back. We want jobs to be union jobs, in every sector of the economy. When manufacturing disproportionately had union jobs, increasing manufacturing jobs might have meant increasing union jobs. This is no longer true.
In this respect it is also worth noting that manufacturing jobs continue to be overwhelmingly male. There is no obvious reason that we should focus on improving the quality of the jobs held by men, while neglecting jobs held disproportionately by women. The idea that a Cold War stance to China will be a big positive for the working class as a whole is simply wrong.
The Cooperative Alternative
As I have argued in the past, we should look to cooperate with China in the areas where it will provide both countries with clear benefits. The most obvious areas for such cooperation are health care and climate change. Both countries, and in fact the whole world, would benefit from the sharing of technology in these areas. We would all benefit from having new technology in health care and clean energy distributed as quickly and widely as possible.
This cooperation should mean open-source research where all findings are fully open. This would both allow for the most rapid possible progress and also have an equalizing effect on income distribution. Top researchers should be well-paid, but there is no reason to believe that they need to be motivated by payoffs in the tens or hundreds of millions, or even billions, of dollars.
Instead of furthering the upward redistribution of the last four decades, open-source research in major areas of the economy would likely redistribute downward. If the price of patent-copyright protected items fell to the free market price, it would effectively raise the real wages of workers.
To take the most important example, we are currently spending over $500 billion a year on prescription drugs. If these drugs sold in a free market without patents or related protections, they would likely cost us less than $100 billion. The savings of $400 billion comes to roughly $3,000 a year for every household in the country. (The actual savings would be somewhat less since we would likely have to increase public funding of research by $50 to $100 billion a year.) There would also be huge savings on medical equipment and a wide variety of other areas where public funding was substituted for patent monopoly funding.
A policy that focuses on cooperating with China, where we can, is likely to produce the best results from both a foreign policy and domestic economic perspective. Our resources will be far better used on fighting climate change and disease than on trying to intimidate China militarily. And, if we adopt policies that almost seemed as though they are designed to redistribute income upwards, we should not be surprised that we end up with more inequality.
Unlike Trump, President Biden is a serious person, but he also can be seriously wrong. Putting us on a path towards a new Cold War with China would be a disastrous mistake. We should do everything possible to keep Biden from going this route.