Too big to fail statism is a killer every time.
Conservatives should prepare for China being the next big economic crisis. While they cannot stop it, they can prepare for the left’s predictable response. Liberals seek to use every economic crisis to tarnish capitalism and increase government control of the private sector. Because of China’s claimed duality of communism and capitalism, liberals will be particularly focused on steering blame from where it should lie.
Despite China’s latest quarterly economic growth coming in at 6.9%, there are troubles aplenty on China’s horizon. Government growth rates only mask China’s real problem — government’s direct participation in the economy.
Certainly, 6.9% growth seems robust. The U.S.’s latest quarterly rate was 2.1%, while Japan’s was 1.3% and the EU’s 1.9%. However, by Chinese standards, the economy is slowing. Last year it officially grew 6.7% — a 26-year low. This year’s projection is lower still: 6.5%.
Nor is confidence high in official figures. In general, government officials need the economy to do well and look for ways to show it is. This is especially so for China. A communist state, it has a far bigger stake in the economy — its economy.
So government growth numbers tend to be taken with more than a grain of salt — perhaps, a shaker’s worth. These numbers are not simply questionable, but often reflect unproductive investment as well.
China’s stake in the economy is also not just figurative — but decidedly literal. Despite the government’s “deal” with capitalism, much of the economy is state-owned. State-owned-enterprises (SOEs), and mixed SOEs — a combination of public and private ownership — account for a large percentage of the nation’s economic activity.
Unsurprisingly, corporations in which the government has a large share also get a large share of government largesse — access to credit and regulatory approval, both at favorable terms. Separated from market mechanisms on the input side, they are equally separated on the output side. SOEs’ average return on assets is often well below their cost of capital.
Together these pieces form a troubling puzzle. An admittedly slowing economy, in a communist government with an outsized incentive to produce data showing continued growth, where an extremely large part is in very unproductive enterprises.
Little wonder there is a pervading sense that more lies below the surface in nonperforming loans, speculation, and outright fraud. Think the U.S. housing crisis, except on a far broader scale. When the cracks finally appear, they will reverberate globally — and in China’s case, not just economically but ideologically.
Worldwide, the left will have an enhanced reason for the crisis trail to lead away from “the state” and toward the “capitalism” of “state capitalism.” Liberals will try to argue the tail is wagging the dog. As usual, they will claim capitalism is inherently predatory — not just to others, but to itself — and must be controlled. For them, China will not be contradiction but validation: Even here, capitalism unleashes forces too dangerous to control.
However, when China’s impending economic crisis arrives, the left’s arguments will not hold, and conservatives must be ready to show they do not.
In contrast to liberals’ argument that more regulation is always the answer, the epicenter of China’s economic crisis — the state-run part — will have had been nothing but state regulation at every level — in oversight, in lending, and in investing and managing. Only state actors will have been involved, with the state having unlimited ability to regulate every step.
China’s economic crisis will not have been due to the absence of the state, but to its presence — indeed, its omnipresence — and its diminution of the private sector. What is lacking and cannot be installed fast enough are the private sector’s checks on the economy. Instead because of the state’s pervasive presence and direct participation throughout the economy, moral hazard — isolation from economic consequences leading to increasing risk-taking — is endemic. Everyone not only had an incentive to take excessive risks, but all turned a blind eye to it.
China’s crisis will be a lesson in too-big-to-fail on a vast scale, and that regulation is no substitute for the ultimate private sector penalty: Failure. In China’s state-run economy, the problem lies not in being “too big,” but in “to fail’s” absence.
The left will ignore this, just as the communist state itself now turns a blind eye to China’s SOEs. It will be up to conservatives to tell the truth. Failures in capitalism are not the failure of capitalism. In true capitalism, failure is not simply inherent, it is imperative. It is as necessary a condition as giving individuals full control of their decisions and success — conditions China’s communist government refuses to allow and from which all its other problems spring.