Over the past year or so, I have written a lot of posts on how the United States dollar is doing internationally, which gets us into a discussion of how the United States economy is doing internationally, in a relative sense.
Especially when I discuss how China economy is doing relative to that of the United States, I often get comments that have to do with China stealing the ideas of the United States, with China copying the United States – and so on and so forth. This, it is argued, is why the China is doing so well against the United States.
People also produce similar comments about my discussions of other countries – it is just that writing about China seems to produce more comments and seems to raise more emotions.
Comments concerning China are particularly vocal, especially where there are titles around like the one that accompanies the opinion piece of Michael Moritz, a partner of Sequoia Capital in the Financial Times: “China is Leaving Trump’s America Behind.”
Mr. Moritz writes, “A week in China is enough to persuade anyone that the world has spun back to front.“ So much, he continues, is “flourishing in China at the very time that they are being maligned belittled or ignored in the US by Donald Trump.”
And, the response?
Well, China has manipulated its currency, and it is stealing “American ideas.”
Two responses to this comment. First, the Chinese currency has been relatively strong in recent years and has risen in value since around the time that Mr. Trump became president of the United States.
In addition, a study released this spring by the International Monetary Fund indicated that the Chinese Yuan was trading about where it should be trading. According to this study, the United States currency is not the one that can be considered priced close to where it should be.
Anyhow, I find it difficult for the United States to point the finger of currency manipulation at others when it deflated the value of the dollar from the early 1960s up until the Great Recession and benefited greatly from a cheaper and cheaper value for the dollar.
My second response is that in this modern world, information spreads more rapidly and more completely than ever before. In terms of invention and innovation, the news gets around.
In the past, patents were a legal means of protecting an inventor by giving the creator of an innovation time to reap rewards from his or her discovery.
However, as time has marched on, this protection has fallen in value as information spreads, and the law is unable, even within the United States, itself, to sustain any kind of protection over time.
The economist William Baumol gave us some idea of how this type of patent-protection provided an inventor with less-and-less time to take advantage of the law’s benefit. In Baumol’s book “The Free-Market Innovation Machine” (page 76), there is a chart showing the “interval between the introduction of an innovation and competitive entry.”
- In the 1887-1906 period, this interval amounted to almost 33 years.
- In the 1947-1966 period, the interval had dropped to 5.75 years.
- In the 1967-1986 period, the interval was 3.4 years, and this was just within the United States, itself.
What do you imagine that the interval might be in the 2007-2016 period? Two years, maybe?
The point is, as mentioned above, information spreads, and information spreads faster and faster. Whether or not there are patents – and whether or not people are stealing secrets – the information is going to get around, and it is not going to stop the decline in the interval examined by Baumol.
People from the United States cannot use this argument as an excuse for the fact that the United States economy is not growing as rapidly as they would like it to grow. The blame rests with current technology more than anything.
One other point, I believe, can be added to this discussion. That is the point that during the almost 50 years the United States relied upon a declining value for its currency to support exports, the productivity of United States manufacturing declined substantially over time.
In the period following the Great Recession, labor productivity has been roughly stagnant – it has not grown by much at all. This seems to be why the United States economy has not been growing at the pace it did in the 1960s, 1970s, and 1980s.
US manufacturing seemed to rely more upon a falling value to the US dollar during this time to gain it more sales globally and thus generate faster growth internally than upon the improvement in labor productivity. And, the discussions about US policies by the Trump administration point to more and more efforts to provide the American economy with more of the same – a falling value to the dollar.
And, what is it that the Chinese are doing, according to Mr. Moritz that the United States is not doing? The Chinese are gaining from “the benefits of immigration, the quest for fresh discoveries, the desire for education, the recognition of the benefits of stability, purpose and enterprise….”
Remember the argument that the Chinese think in terms of decades rather than years – the number of years being determined by the next election American politicians face. It is this longer-term focus that produces “the benefits of stability, purpose and enterprise” that Mr. Moritz writes about.
“The Chinese government has decided to expand a program that allows qualified foreign graduates to obtain work and residency permits. It also floated the possibility of expanding the program to provide for permanent residency.”
“In China, the central and provincial governments are building thousands of new schools in rural areas. The thirst for education accounts for a disproportionate amount of household spending. You have only to look at the burgeoning after-school tuition market to see the consequences. Millions of Chinese children are being prepped for tests.”
“While Mr. Trump barks about wanting to restore the manufacturing jobs of the 1950s, the Chinese are taking the opposite tack. Instead of placing more people on assembly lines, the government wants to install millions of robots over the coming decade. It has set itself the more audacious challenge of raising literacy levels rather than pretending it is possible to return to the past.”
And, so on. Let the United States stop relying upon currency depreciation to raise economic growth and focus more on raising productivity and maintaining competitiveness. Stop arguing that the answer is for China to stop stealing ideas and create an even more competitive environment for producing more invention and innovation in the United States, itself.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.