Musings on a Wednesday

So many things astonished me today – not because I was surprised at them but because I was so accurate in the expectation of their occurrence. But before I launch into that discussion perhaps we should review the liberal establishment in general. The most basic thing about the liberal establishment is that they love people and want to help them no matter how much they hurt them. Take the black community for example. Under Jim Crow they had intact families and a cohesive community. While this isn’t a plea to return to segregation, the reality is that the death of Jim Crow brought white guilt to the surface. Suddenly we had affirmative action, busing, handouts, and government programs aimed at redressing past wrongs. Then the professional racists like Jesse Jackson emerged along with the Reverend Wright who saw racism in any attempt to enforce the law or expect civil behavior – the result has been a generation dependent on welfare and government handouts along with the demise of the nuclear black family and a cohesive community. The liberal community continues to fight poverty and injustice within the black community no matter how morally destructive their solutions are, because they are convinced they are right. Now we have the Occupy Wall Street movement, endorsed by the liberal community in the form of the President, Nancy Pelosi, the SEISU, Acorn (under various names), and of course George Soros. On May day – the International Communist Holiday – the OWS die hards were out once again – rioting, destroying property, but only on the bastions of liberalism on the West Coast and of course NYC. The turnout was pathetically small but the participants – when interviewed for TV – demonstrated such ignorance of even basic economics that it was astonishing. One young man – representative of them all – came down squarely against any idea of personal responsibility. He wasn’t actually against capitalism because it wasn’t clear that he even understood the term, but he was for government programs. He felt the government should give “free stuff” like food, shelter, healthcare, and “other stuff”. Nothing was mentioned about employment or who was going to pay for all of this stuff – it was the government’s responsibility to just give this “stuff” to the people. This really demonstrates the essential liberal philosophy which is that the government should take care of all people and that the rich should be forced to share their wealth through confiscatory taxes. The of course we have that genius in the White House who has just committed $2B to Afghanistan even though that country is a country in name only and one of the most corrupt in the world. He has just announced his campaign slogan of FORWARD which I presume is intended to prevent people to look backward and to evaluate his track record. That track record is littered with broken promises, unfulfilled promises, and failures. This is a president whose track record is even more pathetic than Jimmy Carter’s. It was easy to predict that he would ignore his track record and simply promise to do better while his opponent will undo all of the giveaway programs and entitlements. The only surprise was that he didn’t blame George Bush as part of his campaign.

The Chinese Bubble

The socialists and communists never seem to learn that central planning and government control is a failure, is expensive, and never seems to accomplish any of their objectives. Currently the feeling seems to be that China (formerly known by the politically incorrect but accurate title – The People’s Republic of China) is taking over the world. Everything seems to be made in China and the PRC seems impervious to the economic woes of the world. But is this real? Is the PRC the economic success that they want you to believe or are they practicing the tried and true strategy of the USSR, which is that if you say it’s true then it must be true?

It is important to understand that there is no private capital in the PRC and that everything is controlled by the government. This means that all new construction, production volumes, and imports are strictly controlled and subsidized by the government. Given this strict control and oversight by the government the PRC must be a booming success but alas – it is looking more and more like the PRC may have created a bubble that is nearing a tipping point.

The Central Planning philosophy seems to be “if you build it they will come”. Meaning that if you build a mall or apartment complex the consumption will follow which has left the government holding empty buildings, empty malls, and ongoing construction projects which will yield even more empty buildings and malls. You must remember the bedrock philosophy of socialism is employment not efficiency so the harsh rules of capitalist supply and demand are ignored and not viewed as relevant. The result is that there is a housing glut with substantially more housing available that is needed, but that really only applies to the coastal region. The interior of China continues to be rural with a standard of living equivalent to most third world countries.

But this problem of excess capacity isn’t limited to housing but is prevalent in manufacturing as well. Chinese manufacturers continue pumping out huge amounts of steel, cement, aluminum, and other products to the point that it is unlikely the economy can absorb the output. When the world economy took a down turn China did not cut back but continued churning out massive amounts of product. Now the world economy has cut back and the domestic Chinese market cannot absorb the surplus. In a capitalist economy the individual businesses would simply reduce output, eliminate inefficiencies, and reduce headcount but these solutions are not possible with central planning, because employment is the objective. Furthermore, Chinese industry is heavily subsidized and relies strongly on imported raw materials. The pressure on the Chinese government is tremendous and the question is – how long can they maintain this drain on their economy?

China – A Strategic Threat?

Apparently in an effort to cover up the total failure of Communism and the growing failure of Socialism, the popular press has chosen to forget that China is actually the People’s Republic of China and that it is in fact a troubled communist country. Instead we are treated almost daily to the glowing reports of China as an economic powerhouse that is rapidly taking over the global market. Unfortunately the popular press is not noted for its objective reporting or critical thinking so perhaps it is time to look behind the press releases.

While China is a large country with a huge population, it is not a homogenous population in economics, culture, or ethnicity. Historically China has been a series of fiefdoms or provinces that have not always been comfortable or even friendly with each other. Imperial China was more or less stable but hardly rich and hardly a military threat. But also the coastal regions of China have always been economically stronger than the interior and have prospered at the expense of the agrarian interior regions. It was this economic disparity that allowed Mao Tse Tung to overthrow the Chinese government and to establish what Communist China is today.

However, the reality seems to be that nothing has changed under the communists and the same economic divisions remain. In fact what appears to be a strong and competitive Chinese economy is more of a veneer than a reality. The reality is that two thirds of the Chinese people have incomes equivalent or below third world countries. While the Communists unified China they also once again demonstrated the weakness of communism, which is universal poverty. The current government recognizes the growing instability of their government and has sought to achieve greater stability through mass employment. But mass employment requires industrial growth, subsidies, and expansion of consumption either domestically or via exports. But with central planning – the mainstay of communism – there is no thought given to markets or margins – just to employment. The result is exports become a necessity because the domestic market cannot absorb the output. Therefore, China must export their goods in order to maintain political stability through salaries and the revenues necessary to support the agrarian majority.

The economic downturn has affected the economies of virtually every nation but with its dependence on exports China has been hit particularly hard. China depends on the American and European markets to absorb their exported goods, but with their declining economies the law of supply and demand has taken over. The demand for Chinese goods is down and the competition for those goods is up. China is caught in a dilemma – they cannot reduce their output nor can they reduce their subsidies to the interior and their manufacturing base. They cannot layoff workers because employment is key to their communist principles, but they cannot sustain their current production levels either. The Chinese government is trapped in the inherent flaw of Marxism – central planning and government ownership rather than private ownership. Maintaining stability is dependent on goods flowing overseas while raw materials flow in, but maintaining this flow is a growing challenge because the Communist system ignores profitability in favor of employment which in turn breaks the self regulating law of supply and demand. This problem is further aggravated by inflation, which not only raises the cost of subsidizing the interior but it drives up the cost of the manufacturing output which reduces their competitiveness with other global suppliers. An alternative might be to produce higher cost products like automobiles, which China is attempting, but this requires a different workforce – one with more education and training than what is available today. But even if they are successful in making this transition they will come face to face with Germany, Japan, and the United States. The Chinese government is caught in a situation they cannot control. They are coming face to face with the fatal flaw in socialism, which is employment as the priority rather than efficiency.