31 October 2015

Bet on America, not China


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In the great panic of 1857, which is sometimes termed the world’s first global economic crisis of the modern era, Karl Marx detected the beginnings of the collapse of the capitalist order. The father of Marxism, the brains behind the catastrophic communist experiment that ended up costing the lives of hundreds of millions around the globe, was to be disappointed.

America recovered from the effects of 1857. Even though it was then plunged into civil war, and successive global financial crises, in 1866 and 1873, which presaged downturns across America and Europe, it was soon the most important economy on earth, when from the perspective of 1857 it might have looked as though the US had fatally over-reached itself. The coming country of international affairs, with its seemingly limitless natural resources and an optimistic attitude to expansion, appeared to have taken a serious tumble.

Yet, within a few decades, the US had begun to eclipse the old economies of Europe. Why? The answer is not just the First World War, which came later and sapped the European powers of blood and treasure, and in the case of the City of London destroyed its advantage as the primary financial centre.

The United States underwent a boundless economic revolution following its Civil War. The results of the great American expansion in the late 19th century and early 20th century were imperfect – what is not in human affairs? – particularly in terms of race relations. Still, the pace of innovation was electrifying, literally, as electricity super-charged American manufacturing and improved domestic conditions for tens of millions of citizens from the 1880s onwards.

The US undertook its expansion in a noisy, unforgiving, disputatious spirit, that could turn at points to bloodshed in the industrial sphere. But the peaceful arguments in the late 19th century and early 20th century, about freedom, democracy, accountability of powerful interests and monopoly were not incidental to the rise of the US. They were essential components. This was a highly competitive society in which ideas – political ideas, business ideas – were vigorously tested in the public square.

This sounds like the worst nightmare of the Chinese Communist party, which is still doing its best to tightly control the country’s development. Even the relaxation of the “one child” rule by the Party this week, a historic decision, only allows Chinese urban families to have two children. The government still wants to stay in the bedroom and regulate the family home, dictating the pace of procreation. This is, to put it politely, not a governing class that has really got a grasp of the dynamic effects of human freedom.

Perhaps China’s demographic time-bomb, down to an ageing population, can be defused and the slowdown in China’s economy will turn out to be merely temporary. Perhaps both are a small diversion on the road to Chinese economic dominance and soon China will rev up again and power ahead, leaving the US as a shrunken former superpower.

That is certainly the bet that the UK government seemed to be making earlier this month, when it chose to side so publicly with China in the battle for inward investment.

But is America in decline and China irresistably on the rise?

No. The US has a debt addiction ($18trillion and rising) but it also has numerous advantages. As a chart by Business Insider demonstrates, the age profile of China’s population is on track by 2031 to look like that of Japan in 2013. That’s not good.

In contrast, the population of the US is surging thanks to immigration. A report by Negative Population Growth, Inc suggests that on current trends, immigration will add another 100 million people to the United States in the next 50 years.

This is politically highly problematic, as any reading of the polls in the US shows. Yet, it is a problem of success in a country that is still highly attractive to newcomers. In that context, even the US’s crumbling transport infrastructure is a business opportunity, if someone smart can find a way of making it a good investment for those with American wealth that currently sits off-shore.

Best of all, the US has led the technological revolution of the last half century and continues to lead it. Silicon Valley benefited from a cluster of educational excellence, but the driving force was the good, old American competitive spirit, updated. Now, there are perfectly legitimate questions to be asked about the potentially excessive commercial and political power of internet giants in their pomp. It is manageable though, and another problem born of extraordinary success.

There are other reasons to be optimistic about the United States, not least of which is the ongoing Presidential race. This, I accept, is an unfashionable view right now. The buffoonish frontrunner Donald Trump claims to want to make America great again, but his efforts on the campaign trail have been the best imaginable advert for holidays in Europe, or indeed for living in Europe.

Trump is fading, mercifully, and against expectations something interesting is happening. Contrary to the expectations of some of the Republican Establishment, the race for the party’s nomination is not falling into the lap of Jeb Bush. Indeed, the candidacy of the son of George H.W Bush and brother of George W Bush appears to be doomed. He was crushed in the televised debate this week, by Marco Rubio, the fresh-faced son of Cuban immigrants, and may have to withdraw soon as big donors lose faith.

While Rubio is untested, the Republicans just may have found the man to take on Hillary Clinton. On his visits to London he has certainly looked like a highly plausible candidate, someone who has thought deeply about globalisation, taxation, education reform and foreign policy. He thinks the West needs to stick together much more closely in the face of challenges such as ISIS. He’s right.

For all those reasons, I say: bet on America rather than China. The US has a robust Presidential system, a competitive environment (although it could be even more competitive), innovation by the barrel load and lots of people want to live there. Almost no-one, not already in China or born in China, wants to live in China.

Iain Martin is Editor of CapX