First, there are industries of strategic importance that America should remain active in -- like steel production, machine tool parts, computer micro-chips, airplanes -- all of which china does, save for the last.
Ok, so it appears to me that you fear some sort of future clash with China (what's that you say, a farsighted quasi-socialist dictatorship acting to bring down the global world order and impoverish itself and everyone else? Never), and for that reason you want America to stay active in industries of “strategic importance”. It’s not (just) an economics question, it’s a foreign policy grand strategy question, and it rests on an assumption. So maybe we should deal with that separately.
Of course, you bring up these industries because America is active in them, and you imply that you compete to your disadvantage. But, to take the example of steel, there’s a big difference between semi-skilled Chinese labourers producing low quality steel, and highly skilled, highly productive American engineers, working in a capital intensive environment, producing complex, expensive, super-steel compounds. American manufacturing is actually more productive than it's ever been (gross productivity), and continues to grow.
Manufacturing jobs are lost to technology, not China. Alternatively, think of American agriculture – you have a very small workforce (like manufacturing, almost no one is employed in this sector), it’s very capital intensive, and it produces a massive amount of food. It’s what you are good at! It brings us neatly to another point that you raise:
Please define low and high productivity.
I would hope that this is not really necessary, since we are arguing with the same lexicon (or should be). I define productivity the same way everyone else does: the amount of output per unit of input. High productivity means more output per unit of input.
I’m not sure how "productive" lawyers and waiters and customer service agents are, so maybe you can enlighten me . . .
It makes
no difference whether we are discussing services or manufacturing, high productivity is more unit of output per unit of input.
Let’s look at American versus Chinese productivity. American GDP in 2006 was $13,201,819 million, or just over one quarter of gross world product, which makes America the single most productive nation in 2006. PRC GDP (including Taiwan) for the same year was $3,068,071 million, or about one sixteenth of gross world product. If we look at GDP per capita, the picture is even starker. American GDP per capita for 2006 was $45,594 (9th in world rankings). PRC GDP per capita for 2006 was $2,460 (104th in world rankings). Therefore, the average American worker, in terms of their contribution to nominal GDP, was nearly nineteen times more productive than the average Chinese worker was in 2006.
That is the difference between high productivity and low productivity.
And as for comparative advantage, considering that China and America are both large continental countries with large populations (albeit China's much larger), I don't see how it is relevant.
It’s relevant because if you can both specialise in areas where you have a comparative advantage, you will both gain. If America specialises in high-skilled, high value-added sectors, and China specialises in low-skilled manufacturing, neither are competing in the same markets. And America can use all the wealth it derives from its specialisation to buy the cheap manufactures that are the result of China’s specialisation.
Manufacturing has shifted to China not because it has a comparative advantage in all kinds of sectors, but because in China WAGES are LOW and environmental regulations lax.
Dominic – that
is China’s comparative advantage (or part of it, at least).
Second, Chinese industry is more sophisticated than you suggest, and many innovations will likely now occur in china, not the west, as china is now the site of production -- i.e., innovation is more likely to occur where something is being made than elsewhere.
Paul Romer
says that, “human history teaches us… that economic growth springs from better recipes, not just from more cooking.” You seem to imply that innovation will happen in China but not in America, because China produces more, and that isn’t true. Innovation will hopefully occur in those sectors where China is productive and invests in human capital. America will continue to grow if it continues to innovate, and it will continue to innovate if it continues to invest in human capital. And whatever you think about politics, innovation is obviously not a zero-sum game.
Moreover, china now has so much wealth held in savings that its state companies could simply hire the best and brightest engineers and scientists to come to china and work for them.
Even if it’s true, so what? Good for them! America did the same for decades and look where it’s gotten you – worrying about threats from developing nations.
And the average American has not moved on to higher opportunity jobs in the meantime, but to low-wage service jobs. (Wages in America have been stagnant for the last 30 years.)
That’s what Paul Krugman thinks. What data are you drawing on?
According to Thomas Sowell, summarising recent IRS data,
“People in the bottom fifth of income-tax filers in 1996 saw their incomes rise 91 percent by 2005. The top 1 percent … saw their incomes decline a whopping 26 percent. Meanwhile, the average taxpayers’ real income rose 24 percent between 1996 and 2005.”
I also have a handy graphic:
Cheap goods from China simply give Americans more opportunity to consume more.
That feels like a pretty loaded use of the term “consume”. But what does it actually mean, this increase in consumption-ability? In the article on growth, Romer mentions that in 1985, he paid a thousand dollars per million transistors for memory in his computer. In 2005, he paid ten dollars per million transistors. He can now do a lot more with the same amount of money. Americans can consume more, i.e. they have more resources to allocate in whatever ways they see fit. You don’t like the results of their actions.
Not only that, but American industries also consume. Thanks to cheap foreign goods, American firms have cheaper inputs,
upping their productivity.
And, as it happens, fall ever further into national debt.
Wouldn’t know about that, but can agree that there is a lot of debt in this country. Is that really because of cheap foreign goods?
What does America make that China consumes???
I have no idea. Stocks and shares?
EDIT: Dollars -- of course!
Read that article last night. Powerful stuff: the financial inconsistencies alone are frightening enough, factor in adjusted levels of uncertainty and Chinese Communist Party opaqueness, and I'm buying up tinned goods and planning a long trip to the country ...
It certainly has some profound strategic implications. I wonder what Barnett says.
Ask yourself that question
Ok – what? And why do you want to know?
[Phew! More to follow…]
