The Return of the Five Year Plan

This is going to be a weird post even for me.   I read Andy Stern’s WSJ article today called “China’s Superior Economic Model: The free-market fundamentalist economic model is being thrown onto the trash heap of history”.  So, these are my thoughts.  I come not to bury or to praise either central economic planning or free-market fundamentalism.  I come to question the prudence of extremes. Both are fairly played out utopian philosophies.  I am forever the practitioner of the pragmatic, data-based, and well thought-out middle path.  I am always in search of what works most efficiently and judiciously. Andy, we don’t need more government/public sector enterprises.  We need to let the government be the government.

What is weird is that an article with that title by that person could show up at the WSJ.  It’s really odd to even hear people discuss industrial plans these days.  This harkens back to Mussolini and Fascism, Stalin and single party states with their failed command economies, and maybe a little of post industrial Japan with its kyoka kaisha.  I know Andy comes from a union background but that makes it even more bizarre.    Industrial plans are as much an artifact of a by gone era as the term laissez faire which took hold out of disgust for monopoly creating monarchs during a period when homogenous commodities from small enterprises were the heart of commerce and the only way to mess a market up good was to disallow every one but the king’s favorite to participate in production.

So, what’s the deal with romanticizing the current Chinese model?  Why not look at Sweden or Norway instead?

Secretary of State Hillary Clinton, former Gov. Mitt Romney and President Barack Obama all weighed in with their views—ranging from warnings that China must “end unfair discrimination” (Mrs. Clinton) to complaints that the U.S. has “been played like a fiddle” (Mr. Romney) and that China needs to stop “gaming” the international system (Mr. Obama).

As this was happening, I was part of a U.S.-China dialogue—a trip organized by the China-United States Exchange Foundation and the Center for American Progress—with high-ranking Chinese government officials, both past and present. For me, the tension resulting from the chorus of American criticism paled in significance compared to reading the emerging outline of China’s 12th five-year plan. The aims: a 7% annual economic growth rate; a $640 billion investment in renewable energy; construction of six million homes; and expanding next-generation IT, clean-energy vehicles, biotechnology, high-end manufacturing and environmental protection—all while promoting social equity and rural development.

Some Americans are drawing lessons from this. Last month, the China Daily quoted Orville Schell, who directs the Center on U.S.-China Relations at the Asia Society, as saying: “I think we have come to realize the ability to plan is exactly what is missing in America.” The article also noted that Robert Engle, who won a Nobel Prize in 2003 for economics, has said that while China is making five-year plans for the next generation, Americans are planning only for the next election.

Yes, things are changing and China is making tons of progress.  That’s bound to happen when you are that big, have that many people, and you have a long way to grow from a huge 20th century hole to the golden mean. China has done quite well mixing the free market model with its new and improved brand of central planning.  However, so has most of Scandinavia and there’s a lot less reliance there on industrial planning and a much bigger appreciation of an open society.  There’s also less pollution, less horrible labor practices, and a lot less selective use of resources.

The conservative-preferred, free-market fundamentalist, shareholder-only model—so successful in the 20th century—is being thrown onto the trash heap of history in the 21st century. In an era when countries need to become economic teams, Team USA’s results—a jobless decade, 30 years of flat median wages, a trade deficit, a shrinking middle class and phenomenal gains in wealth but only for the top 1%—are pathetic.

This should motivate leaders to rethink, rather than double down on an empirically failing free-market extremism. As painful and humbling as it may be, America needs to do what a once-dominant business or sports team would do when the tide turns: study the ingredients of its competitors’ success.

While we debate, Team China rolls on. 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.

Meanwhile, the Chinese government can boast that it has established in Western China an economic zone for cloud computing and automotive and aerospace production resulting in 12.5% annual growth and 49% growth in annual tax revenue, with wages rising more than 10% a year.

To me, the problem isn’t that we’re bad at planning, it’s that we’ve had a concerted political and corporate effort to go back to a kleptocracy where the monarchs in charge set up the perfect conditions for a few big players to capture markets.   We say that we’re all about free market fundamentalism but we’re not for that any more than what our government is doing now is some kind of central planning that’s “collectivism” gone amok which is the equally ridiculous libertarian narrative. Government does have a role in commerce and markets.  It should be not be efficient central planning or  being so hands off as to create the situation where entire markets collapse from frictions.  It also shouldn’t be using its legal and power status to promote the interests of one group of market participants over another.

Stern offers this view.

America needs to embrace a plan for growth and innovation, with a streamlined government as a partner with the private sector.

Uhhh, no.  The government needs to ensure that markets can operate efficiently and nothing gets illegally exploited.  This isn’t exactly akin to partnering with the private sector.  As a Katrina Carpetbagger victim, I can tell you that government partnering with the private sector usually means companies of Jeb Bush get contracts for pumps with the Army Corps of Engineers that are so faulty that the entire ground shakes throughout the city when switched on.  They make plenty of noise and release a lot of energy, but those pumps took around 3 years worth of refitting to be made to pump water out of the canal and into the lake.  Then there was Halliburton that took up blocks worth of parking in the French Quarter and fed tons of federal workers while preventing access to parking for people that wanted to access struggling restaurants and local businesses. Don’t even get me started on the number of debris collection trucks that came from Virginia, Maryland and Texas to haul things when New Orleans companies weren’t even considered.

We know what makes markets functional.  They need to be translucent with minimized information asymmetry.  They need to have minimal moral hazard opportunities like insider trading. It’s best when there isn’t any market concentration or powerful blocs.  Some products and services are most appropriately and efficiently provided by government; not outsourced to profit mongers for monopoly rent extraction and nothing else. We know that taxes reduce incentives, subsidies increase incentives, and that things like patents that serve as barriers to entry to a market reduce quantities available to the market, increase prices, and provide market power.   We don’t even use all of this knowledge right now. That’s because there is too much corporate money and corporate access to the political system.  It’s not for the lack of efficient government planning.

Yes, the government can create a legal environment, regulatory framework, and infrastructure to support economic growth.  But what do we have?  Laws that extol corporate personhood and free speech that create the environment where senior executives can do immense harm and never be held to legal account. We have lax and captured regulators that are more likely to let a bad drug get through to help a drugmaker than worry about the potential damage to newborns, the elderly, or any number of the weakest members of society.  Then, we have enormous pressure to change laws so the damaged can’t recover any recompense for the damages.  We have lawmakers that create laws to transfer enormous wealth, income and resources to business that donate money to them.  We now learn they own stock in companies and pass laws that protect bad market practices as long as they positively impact stockholder bottom lines.  Don’t even get me started on how the government can’t even fund the rebuilding and improvement of basic infrastructure unless there is direct political benefit to the politician or one of his/her donors.  We get bridges to no where and major interstate bridges in Minneapolis that collapse into the river with people and cars because no one funds refits and maintenance.

We’re going to embrace government/private sector cooperation given this experience?  I would hope not.  The focus on China right now reminds me of the obsession with Japan in the 80s and the USSR in the post ww2 period.  Any country that manages to start developing itself out of a hole is going to have a meteoric rise.  That’s just simple math.  Most of the best of our technology booms in the last century came from happenstance and an open environment with a bunch of government grants that funded labrats in universities and hospitals, in NASA type government agencies, and in highly regulated government monopolies like Bell Labs.  What was wrong with that model? What’s wrong with the models of Norway and Sweden?  I don’t think that China has any kind of special insight to offer us.  After all, we can point to on time trains in Italy, Sputnik, and early German rocket science as great 2oth century advances and notice that the government and economic systems that supported these advances didn’t turn out to be long lasting.  Japan’s corporate/government coziness has brought us and them Fukishima. China may have some nifty infrastructure but I sure wouldn’t want to be a Tibetan right now or a young person working in an Apple manufacturing plant or a citizen  with asthma or a Chinese coalminer.  We may not need rampant 18th century freemarket fundamentalism or 19th century capitalism, but let’s not get all excited about this revamped 20th century central planning and corporate/government enterprises either.

It’s best to look at the fundamentals of the individual market then decide if circumstances say cage the beast or set it free or find a middle path that incorporates a combination of both.  The government’s role is not to partner with private enterprise.  It’s not to create a central plan. It’s to ensure that no one player in the market gets an unfair advantage or creates undue damage to any other and it’s to provide public goods as necessary.