Andy Stern suggests that America should emulate China

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.

For those of us who love this country and believe America has every asset it needs to remain the No. 1 economic engine of the world, it is troubling that we have no plan—and substitute a demonization of government and worship of the free market at a historical moment that requires a rethinking of both those beliefs.

I’ve seen a tendency on the blogosphere to dismiss Stern for the wrong reasons. Rebuttals tend to note the fact that China is engaged in catch-up growth, or that China is still poorer than the United States.

However, these miss the point. If China continues along its current trajectory it will almost certainly surpass the United States in GDP per capita and consumption per capita. There is also a fair chance that it will end up with a more egalitarian society. It will be both richer and more evenly distributed in wealth. Which is to say simply further out on the social possibilities frontier.

How will China be able to accomplish this?

Quite simply by extracting utility from its current citizens in order to pass on to its future citizens. The policies that China have in place are designed to induce a large degree of suffering on its people today in return for a more prosperous tomorrow.

This is not a tradeoff that people on their own would be willing to make. Indeed, simple back of the envelope calculations will show that China is devoting more resources to investment than could possibly be “socially optimal.” Socially optimal in this sense is an economists blackboard estimate of what an all-knowing benevolent dictator would do.

However, it is a tradeoff that will make the country wealthier.

I point this out because there is an enormous amount of confusion on this matter emanating from all circles.

From where I sit it looks as if people perceive that there are good economic policies which will produce good economies. However, like all things in the real world*, policies and economies unto themselves are not good or bad, they simply are. This is crucial because mechanical and logical relationships exist in the real world which is devoid of concepts “goodness.”

Goodness exists in the human sentiment, which is not subject to the same kind of mechanical and logical relationships. This is why mixing sentiment and reason, such as saying good economic policies lead to good economies, comes out garbled and wrong.

There are things you can do that produce growth but do not increase consumer surplus. There are things you can do which lower unemployment but do not increase consumption. There are things you can do which increase the total wealth of society and the present value of all future consumption but do not increase wellbeing.

Because of this you have to be specific about what it is you actually want to do. If what you want to do is grow your economy as fast as possible then adopting much of the Chinese model is the correct thing to do.

If you are concerned about maximizing consumer surplus then there are times when you wouldn’t want to do fiscal stimulus for example, where you would want to do fiscal stimulus if you were trying to maximize wellbeing. And, of course you would do it even more often if you were trying to minimize fluctuations in unemployment.

What we want to be careful to do is to lay out the consequences – as best we can see them – from our various actions and then pick the one that look the best. Sometimes this means that people will actually want to sacrifice consumer surplus in the name of lowering unemployment.

Indeed, I rail against China type tradeoffs on a near daily basis but it is in fact the case that most people seem to want to sacrifice wellbeing in the name of economic growth, in which case they will find themselves attracted to China’s model.

I am opposed to such a model, but not because I do not think it cannot achieve its own ends but because I think its ends are not worth achieving. Sacrificing the wellbeing of actual living people for some goal about the future, which itself may or may not be that important to the people living then, is something I am extremely skeptical about doing.

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*Some of my friends at home would insist that I be more specific about this real world of which I speak. This is a conversation I would love to have but it of course detracts from the economic point even further than I already have. In brief, however, I can say that there are sensory experiences and there is a a narrative written by the mind on those experience. The grammar of the narrative is logic. However, logic is not the grammar of sentiment.

So the sensory narrative can run in conflict with sentiment under the rules of logic. What is key is that the sensory narrative is dominant. For most people there are sensory experiences which no sentiment can overwhelm.

In less abstract terms one might say our capacity for self-delusion is limited and this is why it is practically speaking impossible to occupy a world built entirely in the language of sentiment.

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