End the China Bashing
WASHINGTON -- Several Chinese readers have contacted me to express astonishment at the chorus of voices blaming China for the U.S. recession. They wonder: Is this the preamble of a protectionist backlash?
There is plenty that China deserves to be bashed for -- its political system and its backing of Sudan and Zimbabwe, for instance -- but not the U.S. recession. Yet although it is hard to see how China-bashing would translate into protectionism when Washington needs Beijing's financial help, one should never underestimate people's capacity to self-inflict damage in times of panic. The "buy American" provision barring the use of foreign steel and iron in the economic stimulus package approved by the U.S. House of Representatives is a stark reminder.
China-bashers maintain that Beijing cheapened its exports through currency manipulation, encouraging Americans to devour them; the Chinese then invested part of that money and other savings in U.S. assets, prompting the drop in interest rates that in turn fueled the housing bubble. With variations, this view is shared by the previous and the current secretaries of the Treasury, the chairman of the Federal Reserve, some members of Congress, not to mention some well-known commentators. They claim that the U.S. has been spending too much because China has been saving too much (I kid you not!).
Yes, in the last 10 years the real personal saving rate in the U.S. has been close to zero (although it is now going up in the midst of the recession), while that of China has been somewhere between 30 percent and 40 percent. If we add government and corporate savings, China's rate has been close to 50 percent, almost five times that of the U.S.
But China has been saving much of its income since long before U.S. home prices skyrocketed, and it continues to save more than two years after the bubble burst. The idea that China's savings caused the low interest rates that pumped America's housing bubble does not square with the fact that, according to the International Monetary Fund's World Economic Outlook, the savings of the underdeveloped nations continued to rise between 2003 and 2007, when mortgage rates rose steadily in the U.S. after their ridiculously low years earlier in the decade.
As economist Robert Murphy, the author of "The Politically Incorrect Guide to Capitalism," maintains in an article, when American consumers went on a binge because they dreamed that their houses would appreciate forever, the world's saving rate was actually lower than in the 1980s and much of the '90s.
The U.S. financial mess and the ensuing recession were home-grown. Whether one subscribes, as I do, to the view that the consumers' frenzy and Wall Street's lunacy originated in the Federal Reserve's policy of easy money and the lowering of lending standards or, as many others think, in financial deregulation, the key decisions were made by Americans who were (or seemed) perfectly awake. China did not set U.S. interest rates, increase the money supply and pass laws such as the updated Community Reinvestment Act or the Federal Housing Enterprises Financial Safety and Soundness Act. And -- if one subscribes to the other view -- China is not the one that deregulated U.S. financial markets through laws such as the Gramm-Leach-Bliley Act in 1999.
When a government -- as the Bush administration did -- engages in expensive foreign and domestic policies that feed on deficits and debt, and consumers decide to follow suit, you eventually run into trouble. The fact that another country decides to save half of its income and invest in the future should make Americans proud: The gospel of U.S. capitalism has finally spread to the unbelievers! Had it not been for Chinese, Japanese and British investors, the U.S. would have gone bankrupt. Given the amount of new debt that Washington is contemplating in order to "rescue"Americans from the smartest thing they have done in a long time -- save some money and try to adjust -- China-bashers should be aware that they will need foreign savers more than ever.
None of this means that Beijing's economy is above reproach. For one, China increased the money supply irresponsibly and is now facing an economic slowdown that, as The Economist showed this week, is not primarily due to the drop in exports to the United States. But Washington should not blame the wrong culprit for its mistakes.
Instead, Americans should accept that "the road of excess leads to the palace of wisdom" only in William Blake's prose. In real life, the road to paradise is that of hard work, thrift and creative investment.