Wednesday, March 24, 2010

U.S. Decline: We have Met the Enemy, and It Isn't China

by Charles Hugh Smith

It's always tempting to blame scapegoats rather than look within for the sources of decline.

The operant phrase this coming decade will be the comic character Pogo's declaration that "We have met the enemy and he is us." What's nascent isn't the U.S. recovery (dead on arrival once the Federal government ceases borrowing and spending 10% - 15% of our GDP) but a multi-pronged trade war with China, the supposed source of all our problems.

Before we pursue that folly, perhaps we should ground ourselves in a few bits of reality first:

U.S. corporations have profited mightily from their investments in China. This is a often-ignored fact I have covered extensively since 2005: China Trade Surplus: Gusher Profits for U.S. Corporations (August 13, 2005).

I reference a Foreign Affairs article, The Myth Behind China's Miracle, which states "Although China controls more of the world's exports than ever before, its high-return high-tech industries are dominated by foreign companies."

Bingo. The profit margins for Chinese manufacturers are razor-thin while the profits of companies having the goods made in China (such as Apple) are stupendous. Has anyone asked how companies like Apple maintain gross profit margins exceeding 50% while the companies making the iPod, etc. work with margins on the order of 1% to 3%?

China is extremely dependent on exports; there is no Plan B despite endless official pronouncements about building domestic demand. In U.S. Schizophrenia on China (December 23, 2008), a source stated, "Chinese per capita GDP was $1,231 for 2005, while the country's per capita foreign-trade volume was $1,000. Take away foreign trade, and Chinese per capita GDP would be $231, or 63 cents a day."

In A 1,000 Foot High Tsunami (October 21, 2008), I source data that shows 40% of China's GDP is direct foreign investment or government goosing of lending. The "China miracle" is trade-dependent and debt-dependent; to compensate for the recent slowdown in trade/exports, the Chinese government has spent the equivalent of three times the U.S. government's stimulus package and goosed lending to build projects of often-marginal value.

Is that a robust foundation for real growth,or a last-ditch effort to keep employment stable and asset bubbles from popping?

Let's turn our attention to the enemy within. Frequent contributor Michael Goodfellow made some astute observations on U.S. tech firms leaving Silicon valley for China:

This article about a Silicon Valley firm moving to China has been around the net the last couple of days:

China Drawing High-Tech Research From U.S. (NY Times).

Companies — and their engineers — are being drawn here more and more as China develops a high-tech economy that increasingly competes directly with the United States.

The Chinese market is surging for electricity, cars and much more, and companies are concluding that their researchers need to be close to factories and consumers alike. Applied Materials set up its latest solar research labs here after estimating that China would be producing two-thirds of the world’s solar panels by the end of this year.

Not just drawn by China’s markets, Western companies are also attracted to China’s huge reservoirs of cheap, highly skilled engineers — and the subsidies offered by many Chinese cities and regions, particularly for green energy companies.

They write the whole thing, and many commentors talk about it, without ever noting the obvious. First, Silicon Valley housing prices meant salaries had to be ridiculous -- 5 times what a foreign engineer would make. Second, California has been regulating all the dirty industries out of the state. Third, other places are hungry for the business and will give tax incentives, breaks on real estate, etc., to get it.

People blame this all on China doing currency manipulation or somehow playing the game better. The fact is, we are kicking these people out and not even noticing that we're doing it. (emphasis added, CHS)

Michael added these comments in a second email:

But there may also be a change in the business climate to blame.

If Sarbox (Sarbanes-Oxley) rules mean no one thinks they can create a big company any more, then the goal is to do some little thing that gets popular and get bought up. Same thing if you think the patent system is too expensive to navigate. Only the companies with huge patent portfolios and deep pockets can play the "innovation" game any more. So again, just do some tiny project and get bought up.

Well said, Michael, thank you.

These are the unintended and deeply pernicious consequences of our government's near-zero interest rate policies since 2001, and of a deep cultural disdain for production rather than consumption. Every local government in the U.S. touts that it is "business friendly," but this is just beggar-thy-neighbor propaganda; the kind of business every local government wants is "clean" industry such as movie-making.

Thus Hollywood has been gutted as firms leave its high-cost, complacent atmosphere for environs which are begging for "clean" film-making.

Too bad movie-making is a tiny slice of the U.S. economy. Ditto social media, sports, music recording, and all the other "clean" work Americans covet and coo over.

The sad truth is that the government at all levels has regulated and burdened productive business to death while freeing the rapacious dogs of finance to pillage as they please. The parasitic lending and financial transaction sectors (the so-called FIRE economy of finance, insurance and real estate) were deregulated to the sort of freedom that only the rapacious can fully exploit, while "real businesses" which actually produced goods and productive services were strangled under layers of business fees, permits, mindlessly counterproductive regulatory structures, legal costs, taxes, healthcare costs, etc.

The unspoken cultural attitude which pervades the U.S. is a high and mighty complacency--we don't need to do any dirty work, we are free to play around with our iPods and other toys and make fortunes flipping electronic transactions through various government-induced asset/credit bubbles.

While everyone claims to love "entrepreneurs" and new business, try starting a business and weigh the burdens placed on you to do so. The cultural assumption is that anyone in business is "rich" and "raking in big profits," so it is only fair and just to heavily tax and regulate all businesses.

Alas, while a handful of global companies who maintain their workforce and production overseas are minting profits (Apple, IBM, et al.), it's because they keep a mostly token design/management workforce in the U.S. and keep the bulk of their productive assets overseas.

We as a nation have created deep, structural incentives to financial gaming and plundering, while crippling, impeding and burdening productive businesses."Healthcare" a.k.a. sickcare, is in effect a 17% tax on the productive economy. That's how much we spend on sickcare as a percentage of GDP, which is twice what other developed nations spend.

Add in a high (again, compared to global competitors) business tax rate, an unfavorable, high-cost legal system which rewards exploratory lawsuits and often-mindless regulation (no, I'm not talking about worker safety--that is common-sensical) and fees, and what you have is a entire ecology of disincentives to starting and operating a productive business in the U.S.

This is why I predict that many of the remaining small businesses in the U.S. willopt out in the years ahead as their faith/trust in the system has faded under the disincentives which are now structural in the U.S. economy and culture. As Michael observed, the cultural politics of experience is so blind to these realities that the MSM and the various State organs of propaganda literally don't recognize them or selectively eliminate them from public dialog. (Please see Survival+ for more on the politics of experience.)

So boo-yah, hip-hop nation, where entertainment is "free" and we spend our last remaining strength congratulating our entrepreneural spirit and schizophrenically seeking scapegoats among our global competitors.

Care to wager the odds of this strategy bearing productive fruit? Bitter ashes of structural decline seem much more likely.

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