Remember When Conservatives Used To Despise Industrial Policy?

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Posted: Dec 27, 2019 9:59 AM

In the late Robert Novak’s autobiography, The Prince of Darkness, the great conservative columnist recalled how he was a Democrat in the 1960s. As many readers know, the Democrats were the party of tax cuts back then, while Republicans fought to maintain headline tax rates of 90% given their naïve belief in “balanced budgets.” Someone of limited knowledge convinced them that budgets in balance correlated with limited government. Some conservatives support that which has nothing to with limited government to this day.

But that’s a digression. The main thing is that Democrats used to be for tax cuts. Larry Kudlow and Brian Domitovic even wrote a book about how the Kennedy/Johnson tax cuts of the 1960s came to be. To this day, conservatives occasionally lament how different the Democrats are today. They almost uniformly shun tax cuts. Remember when they cheered them? Goodness, it was a Democrat-led House of Representatives that passed the Reagan tax reductions of the early 1980s…

About the Democrats’ lurch toward incoherence when it comes to taxation, conservatives and Republicans shouldn’t be so smug. There was a time during which they mocked the industrial policies of other countries. Japan in particular was the target of conservative criticism in the 1980s. Back then members of the right knew that state support of Japanese companies weakened them. And for obvious reasons. When government actors subsidize businesses, they blind them to market realities. Most cruel of all, they enable a delayed rush to errors; this delay blurring the clear lessons wrought by mistakes without which there can be no progress.

Which brings us to Hudson Institute senior fellow John Lee’s recent opinion piece about China. Lee’s flawed analysis is yet more evidence that modern conservatism isn’t your father’s. It’s paranoid, rather alarmist, and by extension a rejection of how conservatives used to view the world.

Lee writes that that the “only way Beijing has of maintaining adequate growth is to support its companies with cheap credit.” Implicit in Lee’s thinking is that the Soviet Union failed, and Haiti fails today, because the bureaucrats in each country didn’t and don’t realize they have access to printing presses that miraculously summon copious goods, services, and most crucial of all, labor. Sorry, but underlying any loan is an exchange of products. If Beijing were printing money to line the pockets of Chinese corporations, the act of doing so would in no way result in resource abundance for the allegedly favored businesses.

Governments can’t issue cheap credit any more than New York City’s politicians can decree apartments in the world’s greatest city cheap and abundant. Lee seems to ignore that the borrowing of money is the borrowing of real resources of the goods, services and labor variety. That in mind, he might explain how “Beijing” is capable of making inexpensive what isn’t.

And if Lee's point is that “Beijing” makes credit by taxing away wealth only to lend it inexpensively, what he’s saying is that Beijing is confiscating wealth only to act as allocator of same. And this stimulates China’s economy? There was a time when conservatives knew better.

At one point Lee's opinion piece asserts that China's economy has been weakened by some combination of "over-investment." Henry Hazlitt once observed that he couldn't believe even the ignorant could believe what's so absurd. Remember, investment is what powers economic growth precisely because it generates the  information without which there can be no advance, along with enhanced production techniques that enable the production of more with less. Not according to Lee, it seems. Supposedly growth springs from a scarcity of experimentation. I guess Silicon Valley didn't get the memo. 

Lee then asserts that China’s economic model is one that “showers state businesses with subsidies and stolen intellectual property, and shields them from foreign competition.” Ok, but if true, what’s the worry? Why is Lee cheering President Trump’s alleged exploitation of “China’s Relative Weakness” if the Chinese state is so clearly neutering its commercial sector? Businesses that are blinded by market realities, subsidized such that they don’t need to realize mistakes quickly, and that are not exposed to competition are hardly a threat to companies in what is a mostly free U.S. economy. It’s as though Lee is cheering an 8th grade bully smacking around a 1st grader. Unless what Lee presumes is total nonsense.

In contemplating nonsense, readers might ask an obvious question: If China’s commercial sector is truly an over-subsidized, over-protected fraud, then why is it that the Chinese people represent such a huge market for U.S. businesses? Why does Apple generate 1/5th of its iPhone sales there, why is China the 2nd largest market for Nike and McDonalds, why does Boeing sell a quarter of its planes there, why is Starbucks expanding from 3,400 stores to 7,000 in China if its economy is bereft of the market competition that generates copious supply on the way to demand? Lee naturally doesn’t say. Really, what could he say? It seems the scholar believes he knows something about the country’s economic viability that the best, most dynamic businesses in the world don’t. Whom are you going to believe on the matter? Conservatives used to believe businesses over scholars with no capitalistic experience, but who knows now?

About the previous paragraph, some may ask how yours truly knows Lee has no real business or investment experience. That one’s easy. It’s already come up. Lee claims the Chinese state showers businesses “with stolen intellectual property.” What a laugh. Lee doesn’t seem to understand that even if it’s true that the Chinese are IP thieves, the lifting of worthy property is an extraordinarily difficult concept. Lest readers forget, the world’s greatest innovators of the Bezos and Gates variety freely acknowledge that just about every experiment they’ve conducted has failed. And the ones that have succeeded? The window of opportunity to profit from what works is exceedingly small, which explains why Bezos rarely focuses on the business of the present. While Alexa thrives at the moment, Bezos is working feverishly to figure out how to stay ahead in the future. In short, even the theft of what’s valuable rarely remains that way for long (does anyone remember when Blackberry dominated the mobile phone market, and Motorola before it?), at which point we’re supposed to believe Lee’s assertion that actual Chinese government officials know what’s valuable now, and better yet, what consumers will desire in the future? Oh please. There was a time when conservatives knew those in the employ of government hadn’t a clue about the future.

Lee’s confusion has him casting “China” as a threat while unwittingly explaining why it isn’t one. In truth, China’s growth is an opportunity for every American. Not only are the country’s consumers voracious buyers of all things American, their production that makes their consumption possible is enabling greater and greater specialization stateside. Conservatives used to understand the genius of labor division, but now they give a limp fist to the individuals who’ve shed a tragic, collective past.

Lee concludes with some laugh line about President Trump the trade expert artfully handling negotiations as laid out in his ghostwritten classic, The Art of the Deal. Oh come on! There’s much to cheer Trump about, but an ability to negotiate trade deals is likely not a strength of the 45th president. But the greater truth is that just as conservatives used to shun industrial policy, they also used to decry managed trade. Remember when conservatives believed in markets?

This article originally appeared on RealClearMarkets.