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Democracy Is Ruining Capitalism – Does China Do Capitalism Better Than America?

Slate/Intelligence Squared appears to be planning an interesting live debate on March 13 – with Orville Schell and Peter Schiff arguing for the motion in the title and Ian Bremmer and Minxin Pei against.

Details of the debate can be found at the slate and intelligence squared websites. The intelligence squared site – in particular – features a good and interesting set of articles linked under its research in depth section.

In anticipation of the debate, Schiff had this to say in an interview with Slate titled “Excuse Me, But Your Democracy Is Ruining My Capitalism”:

Slate: You’ll argue on Tuesday in support of the motion that China does capitalism better than America. What do they know that we don’t?

Peter Schiff: First of all, I don’t think either the United States or China does capitalism all that well. America did capitalism a lot better in the 19th century than China does it now, but today, China does it better than we do. Though both countries have far too much government involvement in the economy, we have more. They’re Communists, supposedly, and we’re not, but our government screws up our economy more than the Chinese government screws up its.

Slate: What are we doing wrong?

Schiff: Taxes are significantly lower in China. If you earn money, the Chinese government lets you keep much more of it, particularly if you’re a corporation. In America, the government takes money out of the private sector to spend it. Then, in terms of regulation, we try even harder than the Chinese to micromanage our economy. The Chinese certainly try, too. They do a lot of central planning and there are many businesses the government favors. But we do it on a bigger scale here, with the way we tax and subsidize.

Think about how the government tries to influence behavior through the tax code, so that things happen that wouldn’t happen in a truly free market. When Washington directs capital or labor in certain directions, that’s central planning. It’s stateism. If you start a business in the U.S., not only do you keep a smaller percentage of your income than you would in China, but more of your time is devoted to complying with complex government rules. Even litigation—you’re more likely to be sued frivolously in America and have to spend a fortune defending yourself as a businessman. Don’t get me wrong: Neither the U.S. nor China is a free-market capitalist paradise, but we’ve drifted further away from it than China has.

Slate: Your debate opponent Minxin Pei wrote in Foreign Policy last summer, “Although Asia today may have one of the world’s most dynamic economies, it does not seem to play an equally inspiring role as a thought leader.” Do you agree that China falls short on innovation?

Schiff: No. There’s a lot of creativity coming out of Asia, a lot of patents. The big problem for countries like China and India is that they still subsidize the U.S. They buy our Treasury bonds and lend us all this money so we can keep consuming. That’s a big subsidy and a heavy burden.

Slate: Doesn’t China need to lend us money so we’ll buy Chinese exports?

Schiff: No. They can use their money to develop their own economy, produce better and more abundant products for their own citizens. It’s a farce to think that the only thing China can do with its output and savings is lend it to the U.S. government, especially when we can’t pay it back.

Slate: How would you advise China to proceed with the United States, keeping in mind diplomatic concerns along with economic ones?

Schiff: I would tell it to decouple. Absolutely. Although, the sooner China does that, the sooner we’re going to have to deal with the consequences, which are going to be truly horrific.

We’d have to immediately cut government spending dramatically. Diminish our consumption. We wouldn’t be going to the malls and buying stuff. The whole U.S. economy would have to restructure along the lines of Americans being frugal, saving their money, and working harder. A lot of government workers would have to lose their jobs. Those who didn’t would suffer big cuts in their pay. People who worked in the service sector—in banking, health care, or education—would also struggle if China stopped subsidizing us.

Slate: Do you think that day is coming?

Schiff: It’s definitely coming.

Slate: What lies ahead for China politically?

Schiff: I think there will ultimately be more freedom than there is today. Will China ever become a one man, one vote democracy? Hopefully not, for the sake of the Chinese. Doing so has certainly not served our interest. We enjoyed a lot more freedom and prosperity when we were less democratic. In the 19th century we were quite undemocratic in the way government ran, and we benefited from that lack of democracy. But as we became more democratic, we grew less free and therefore less prosperous. If they’re wise, the Chinese won’t follow that example. They’ll try to model their government after what America used to be, before we screwed it up.

Slate: In 2010, there were 180,000 “mass incidents” (protests) reported in China. That’s almost 500 a day. The Communist Party spent $95 billion on “internal security” in 2011, more than it spent on national defense. Aren’t the costs of state capitalism, or of an authoritarian system that makes state capitalism possible, pretty high?

Schiff: People are dissatisfied in this country, too. We’ve got protesters—look at Occupy Wall Street. There is a great deal of inflation in China right now, which frustrates a lot of people. That is the cost of subsidizing the U.S. economy. If the Chinese simply allowed the renminbi to rise, instead of propping up the dollar, then you’d see far less unrest in China; the people would enjoy their prosperity and productivity more.

For our readers in New York, this looks to be an interesting event.  If you attend, please write us about your impressions.  We’ll try to see if we can follow this from afar.

[Editor: Following video is added here on 3/22/2012]

A video of the debate can be viewed below:

China Does Capitalism Better Than America from Intelligence Squared U.S. Debates on FORA.tv

  1. jxie
    March 10th, 2012 at 22:31 | #1

    Minxin Pei is living in a bubble. My guess of his age is about 50. So long as there is no systemic failure, he can play his one-string banjo with an OK-paying job until his retirement. If in 2012 China’s nominal GDP in dollar term goes up another 20%, and China’s tax revenues become 30% larger than the US’, China is still having a bad year as far as Pei is concerned.

    Ian Bremmer is a whole lot more interesting. He is a political scientist (an oxymoron) by training, and founded the Eurasia Group — very much like George Friedman, who founded Stratfor. To me, both Friedman and Bremmer are fully of disagreeable ideas. Friedman suffers a great deal of self delusion. For instance, he (through Stratfor) has been predicting the collapse of China since the founding of Stratfor in the early 90s. It seems to him it’s a personal duty to bend the reality to fit his prior predictions. In 2008, he called for the crash of Chinese exports, like many others. Anyway, due to a host of reasons, it didn’t happen — China’s exports actually have grown faster than any other major economies’. The quirk (or the beauty) of Friedman is, he acts as if his predictions have come true and the reality of this universe is just an inconsequential minor annoyance. He would actually write something along the line that China’s exports had suffered since the Great Recession (contrary to the ground reality). PS. Stratfor was hacked recently and its internal emails were released by Wikileaks. Relevancy? Very little.

    On the other hand, Bremmer is quite realistic. Don’t waste your time on Friedman or Stratfor, but pay attention to Bremmer or the Eurasia Group.

    Peter Schiff is a legend. He dissected the American mortgage bubble with superior clarity long before it became a full-blown global crisis. Personally just don’t see how Pei and Bremmer can match Schiff intellectually.

  2. jxie
    March 10th, 2012 at 22:59 | #2

    BTW, I am having trouble with the whole concept of China spending more on “internal security” than national defense, which both are at low 1% of GDP. It doesn’t tell you what they think it’s telling you. What’s called the “internal security” spending covers the costs of policing, prisons and the whole judicial system. China’s unique that lumps all these costs together in one basket. In the US, a large part of the equivalent costs is provided by the states or localities. Even at the federal level, policing (CIA, FBI, DHS), prisons (Federal Prisons), and judicial systems are budgeted from many different baskets.

    For instance, the Federal Prison System houses 2% of the total American prisoners and spends about $6 billion annually; California houses 170k inmates and spends about $10 billion annually. Based on my back of envelope calculation from sampling a couple of states and federal agencies, the costs of policing and prisons alone in the US are 150% to 200% of China’s, compared to their respective GDPs.

  3. March 11th, 2012 at 10:30 | #3

    So tell me; why does Mr Schiff believe that transforming China into a 19th-century, Gilded Age version of the United States is somehow better than transforming it into a 20th-century, Washington Consensus version of the same country? Isn’t this just another form of Western imperialism? And even granting Mr Schiff’s idea that ‘freedom’ and ‘democracy’ aren’t the same thing (an idea he apparently copped from Fareed Zakaria), how does he expect such a monstrous construct as he desires to be politically, environmentally or socially stable? The Gilded Age economy was none of the above; it suffered massive instability and a boom-and-bust cycle that makes our current economic crisis look like a family picknick, and it was only stabilised by the adoption of conservative state controls on credit, economic protectionism and direct intervention in the economy (first by the public works programmes, and afterwards by WWII). The era that followed was financially the most stable and self-sustaining in American history.

    As a whole, China’s government must think long and hard about which concepts and which institutions to borrow from the West, as it has done in the past. And it must do so on its own terms; not by borrowing from the destructive, imperialist, experimental political-economic philosophies of Marx (as in Lenin’s Russia) or of Friedman or Hayek (as in Chile, as in Yeltsin’s Russia, as in Thatcher’s Britain). Schiff’s undergraduate understanding of political economy is no better than other liberals who would raze China to the ground for the benefit of the West; and a good deal worse, since his ideology (if carried to its extremes) would do significant harm to the West as well.

    I would be interested, however, in what Ha-Joon Chang has to say on the issue…

  4. jxie
    March 11th, 2012 at 13:22 | #4

    @Matthew Cooper

    First, a disclaimer. Among the blog owners, regular commenters to semi-regular commenters, I (a semi-regular commenter) am quite possibly the rightest one. The followings are my views only.

    There are a lot of revisionist myths out there portraying the “Gilded Age” in a rather negative light. The topic deserves a much longer discussion. In short, during those 3+ decades, the US was transformed from an agrarian economy to an industrialized economy with the highest living standard in the world. If we may call the 2+ decades after the end of the Cold War as the “Washington Consensus” era in which the US has run a different set of fiscal, monetary and foreign policies from the past, the landmark of the era is the US being transformed from the largest creditor nation to the largest debtor nation. Now each year the US borrows roughly the same amount of money as its non-Social Security tax revenues. According to the Pew survey, only 21% of the Americans are satisfied of the country’s direction. If China has to learn from the US — quite frankly China is on a path like nothing in the Western history — it certainly should NOT learn from the “Washington Consensus” era.

    Schiff doesn’t advocate transforming China to anything, and he seemingly is having a lot of issues with China’s policies. He is first and foremost a very successful investment adviser who often ponders and elaborates his investment theses in public. He compared China to the 19th-century, post Civil War America for mostly where the debts are spent at: roads, bridges, infrastructure, etc., i.e. ventures that drive future productive capacities; contrary to the US today where debts are spent on things having very little to do with future productive capacities.

    BTW, Schiff is an Austrian follower. In the Austrian school of thoughts, boom and bust cycles are created by central bank. If you go by their thoughts, Keynesians are going down the right path and only making things worse.

  5. XiaoXiao
    March 12th, 2012 at 01:49 | #5

    @jxie
    That because the biggest threat to China right now came from the foreign intel agencies, not military threat. From foreign orchestrated ethnic tension to foreign funded and helped anti-government activists. Right now, these kind of things are very very hot in China.

  6. March 12th, 2012 at 06:55 | #6

    US’s capitalism has a lot of socialism built-in, while China’s capitalism has a lot of central planning built-in.

    Both have good and bad areas. They both need to improve their systems.

  7. pug_ster
    March 12th, 2012 at 07:52 | #7

    The problem is not democracy or capitalism or that matter. In the US there’s crony capitalism and US is a plutocracy and not a democracy.

  8. LOLZ
    March 12th, 2012 at 09:54 | #8

    Minxin Pei’s piece can also be found on slate.
    http://www.slate.com/articles/news_and_politics/intelligence_squared/2012/03/why_minxin_pei_will_argue_that_america_s_capitalism_is_superior_to_china_s_at_the_slate_intelligence_squared_live_debate_on_march_13_.html

    After reading both pieces I think the notion that one nation’s capitalism is better than another’s is a bit absurd. This is because what works in one nation may not work in another. At the end of the day it’s better for each nation to learn and adapt.

    Some of Schiff’s arguments are shaky, arguing that “US should learn to tax like China because China’s taxes are lower than that of the US” for example. Minxin Pei’s comments on the other hand are mostly silly ideological projections.

  9. Charles Liu
    March 12th, 2012 at 10:41 | #9

    [I have to say a fair word here, sorry guys.]

    If “China does it better”, then perhaps it is because what we have in the West now isn’t really capitalism. The notions of socialism like welfare, equal rights, protection of the underclass are pretty much incompatible with pure capitalism and it’s extreme freedom in utility, exploitation, classism.

    China has a long way to go in improving itself in terms of social justice and equal rights. For a self-proclaimed socialist country and dictatorship of the proletariat, perhaps excelling in pure capitalism isn’t the best thing. However I am hopeful that China too, will evolve beyond capitalism – more rapidly and charting it’s own path rather than emulating the West.

  10. Wahaha
    March 12th, 2012 at 18:20 | #10

    It is not democracy, it is the understanding of human right.

    In 19th century, hardworking people (and slaves) were indeed mistreated or brutally exploded. (With such power, government was able to push the (SCIENTIFIC) plans down to anyone’s throat, you like it or not. ) So the human right was what it was supposed to be in 19 century.

    But it all changed since TV became popular, the time media and journalists started taking control of information. they twisted the understanding of human right to such extent that greediness and selflishness became acceptable. (so that no government can regulate, actually, no politicians dare to say anything they don’t like, otherwise his political career is over. THAT, IS POWER.)

    What can a government do when one hundred people can block a government plan that would benefit 100,000 people ?

    The current understanding of human right makes scientific planning impossible, but that is not an obstacle in China. The miracle in China in last 30 years is because government has such power to forcefully carry out long term plans. As they made plan scientifically, vast majority of chinese have benefited greatly. Of course, the least happy people in China are journalist and media.

  11. Wayne
    March 13th, 2012 at 02:03 | #11

    Minxin Pei is a repulsive sell out to the West. I would not waste one microsecond of my life reading any of his usual nonsense.

    By the way I read news from the various labour movements around the world. Apart from most Marxist Leninists, the Left is becoming every bit as anti-China as the right, perhaps even more so.

    For example here is a classic ‘yellow’ peril article from New Zealand:
    http://thestandard.org.nz/china/

    You guys should go to different sites, not just this one and make your voices heard. We need to spread the message out far and wide.

    I have done my bit at several sites, but end up banned at times.

  12. LOLZ
    March 13th, 2012 at 07:42 | #12

    Baz :
    “I have done my bit at several sites, but end up banned at times.”
    You ever stop to wonder why……maybe your racist, threatening, misogynistic and abusive comments are only welcome here?

    It seems that every week some sock puppet makes a statement like “XXXX’s racist comments are only welcomed here” and/or “you guys on this site are such a bunch of classy guys”. Anonymity is great and all, but why can’t some people just stick with the same handle?

    Also, Wayne is really the only person on this site who regularly makes prejudiced statement against white/asian relationships. Those who whine about Wayne on the other hand tend to make prejudiced statements about the regulars on this board and Chinese people in general.

  13. Hong Konger
    March 13th, 2012 at 10:24 | #13

    LOLZ — It’s not just sock puppets. I’m a regular reader and rare commenter. I like reading, but I don’t like arguing. I just pipe up when it starts to make me uncomfortable. These comments bring down the site, especially if HH wants to reach out to new readership.

    I have no problem with “politically incorrect” comments. I think people have a right to be racist or sexist. But inciting violence goes too far, especially when someone writes repeatedly about hurting women and children in graphic detail.

    The arguments don’t even work if you are a Han supremist. If you care about preserving a race, you’d care equally whether it was a black man and a Chinese woman, or a Chinese man and a white woman, or any other combination. This sounds like personal vendetta. Personally, I don’t care about racial issues. I’m just pointing out that it’s not logical and it’s not good for HH.

    LOLZ, I agree that most commenters are not like this. I hope HH’s excellent moderators will find a way to deal with extreme comments. I think some have been removed in the past.

    Anyway, this post is supposed to be a comparison of capitalist systems!

  14. March 13th, 2012 at 10:42 | #14

    Folks – I’ve put the few Baz-Wayne exchanges above into the spam queue.

    Baz is baiting.

  15. March 22nd, 2012 at 15:28 | #15

    A video of the debate is added above in the post.

  16. March 22nd, 2012 at 18:18 | #16

    I thought the most interesting part was pointed out by the audience in Q&A where Orville Schell and Peter Schiff were seemingly at odds with one another in their ‘for’ positions.

    Orville Schell paints this idea that Chinese leaders are great captains at directing the economy.
    Peter Schiff says the Chinese are more free from top-down government regulations, and that freedom makes for more room for capitalism to exercise.

    The American psyche is ‘authoritarianism’ or ‘freedom.’ They don’t have a mindset for something in between.

    To them, Schell and Schiff have opposite positions while on the same team – which makes their case weak.

    For Ian Bremmer and Minxin Pei, I thought they complemented each other much better. You have Bremmer attacking China on ideology such as human rights and freedom. Then you have Pei attacking the government about corruption and the state of the Chinese economy. Pei was armed with a lot of data supporting his position.

    I am not surprised Bremmer and Pei won.

    For me personally, I am not sure which country does capitalism better. China’s circumstance and America’s are vastly different. In this debate, they are all measuring China using an American frame of reference as the yardstick.

    I would argue the Chinese government has been much more effective given China’s circumstance as oppose to the U.S. government’s America’s.

    Capitalism as represented by American corporations – Bremmer’s point – is the most dominant on the planet. Indeed, I think no country can come close to America’s corporations competitiveness – and the rewards they reap.

    China has more effective governance whereas America is way out in the front right now with her corporations. As Schell said, if America doesn’t find a way to ‘reason’ within the political class, then I am sure China will over-take.

  17. pug_ster
    March 22nd, 2012 at 22:37 | #17

    @YinYang

    When you say American Corporations are dominant is a paradox. Corporations operate around the world, and thing American about them is that they are headquartered in America. The biggest difference between American Corporations and Chinese Corporations are many large Chinese Companies are partly state owned and most large American Corporations are privately owned.

    So the Chinese government is controlling many of these Chinese SOE’s so these SOE’s are helping to build the Chinese economy at the expense of these SOE’s not making much money or become unprofitable. On the contrary, the American companies basically dictate the American government how to run things to these superpacs, ballooning the American debt, greatly benefiting the American Companies at the expense of the American economy.

    I do agree that China shouldn’t be propping America’s economy by buying its debt, because it indirectly benefits American companies. Also, once when American economy goes on a real freefall, so will the American Companies. Don’t think that these big companies like Microsoft, Apple, Google will be big forever. It could very well change in the next 20-30 years when these American companies’ influence wanes and Chinese companies rise. Who knows, maybe these American Companies could switch allegiance.

  18. March 22nd, 2012 at 23:00 | #18

    @pug_ster
    I think it is true that U.S. corporations play games to minimize taxes. Also, your view that American corporate interests may even end up trumping the state/public’s (as Eric Li also said too recently) is fair. I am not sure how pervasive it is.

    Take a look at this summary – by in large, American corporations are paying tons of taxes:

    (And there is no question most of the salaries for companies like Apple are paid to Americans – by far.)

    http://www.taxfoundation.org/blog/show/27746.html

    NOVEMBER 2, 2011

    Government Takes a Greater Share than Shareholders

    by William McBride

    While the corporate income tax code – like the personal income tax code – is complicated by too many credits and deductions that benefit a narrow set of taxpayers at the expense of the many, it is wrong to conclude that corporations in general pay little or no tax. Besides paying corporate income taxes to the U.S. federal government and foreign governments, corporations pay a litany of other taxes, including state and local corporate income taxes, sales, property, and payroll and social security taxes.

    The graph below tells the story. It shows 15 years of IRS data, 1994 to 2008, on all corporate income tax returns. It indicates that on average, and in all but three of those years, total taxes paid by corporations exceeded after-tax profits.

    After-tax profits peaked in 2006 at $780 billion, and then collapsed with the recession to $607 billion in 2008.

    In blue are federal income taxes, which also peaked in 2006 at $315 billion and fell to $208 billion in 2008. That’s an effective tax rate of 26 percent of taxable income (pre-tax profits), averaged over 15 years (see this report for more).

    In red are foreign taxes paid on the foreign income of U.S. corporations, which continued to climb through the recession, amounting to $98 billion in 2008. (This is an underestimate of foreign taxes paid, based on the foreign tax credit, as discussed in detail here.) Including these taxes on foreign income yields an effective rate of about 33 percent of taxable income, over 15 years.

    Finally, in green are all other taxes* paid by corporations that are deducted as business expenses. This number peaked at $357 billion in 2007 and fell to $331 billion in 2008. Adding this to corporate income taxes, both domestic and foreign, brings the total taxes paid by U.S. corporations to $740 billion in the peak year of 2006, and $637 billion in 2008.

    That means in 2008, as in most years, taxes paid exceeded after-tax profits, or in other words, government took a greater share than shareholders.

    *Details on other taxes: This includes state and local corporate income taxes, property taxes, sales taxes, social security and payroll, unemployment insurance, excise taxes, import and tariff duties, business, license, and privilege taxes, and income and profit taxes paid to foreign countries or U.S. possessions unless claimed as a credit against income tax. This does not include state and local taxes paid in connection with an acquisition or disposition of property. Additionally, not all corporations include sales taxes.

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