Visitors look at a semiconductor device at the Semicon China semiconductor technology trade fair in Shanghai, China, March 17, 2021. (Aly Song/Reuters)

The week of December 6: China’s technological challenge, inflation, Build Back Better, and more.

The rise of an increasingly prosperous China has dented (and maybe even shattered — we’ll have to see) one or two happy stories. The first is the idea that as a country grows more wealthy it will eventually become more democratic. Many believed that a richer China would turn into a more democratic China. While Deng-era China was not only socially but also politically freer than its Maoist predecessor (to be sure, one of the lowest of low bars), the massacre in Tiananmen Square showed that that (very) partial relaxation came with strict limits. In more recent years, what political liberalization there was has gone into sharp reverse. Under Xi, China has moved to a system that can perhaps best be described as fascism with Chinese characteristics, something that helps explain, among other features, the regime’s increasingly explicit nationalism, its reining in of the tech sector, its growing willingness to restrict social as well as political freedoms and the emphasis on “common prosperity.”

Fascist economics (a far from monolithic concept) cannot be summed up in one sentence, but an integral part of it is what might be called harnessed capitalism, particularly where major enterprises and key sectors are concerned. That’s less self-defeating than some believers in the second happy story might like to think. That second story is, in many ways, the flip side of the first. The first made the connection between growing prosperity and increasing political freedom, the second is based on the notion that the most effective way of securing economic growth is through a mutually reinforcing combination of free markets, rule of law, and political freedom, a combination that, it should be stressed, has much more than utilitarian arguments in its favor. But that argument needs to be analyzed with considerable care. While its thesis generally holds true in developed economies, the key to growth may be found elsewhere in less economically advanced economies and can also be affected by history, geography, and the luck of the draw: an abundance of natural resources, say.

Asia furnishes several good reasons for questioning the universal applicability of this second story. To take one example, South Korea was neither an advertisement for democracy nor free markets between 1960 and the end of the 1980s, and yet it saw remarkable economic growth over that period (but note that it has since evolved into a democracy). And then there’s China’s astonishing trajectory. The pace of China’s growth may well be slowed by Xi’s adoption of a more tightly harnessed capitalism, but (notwithstanding some other major underlying problems in the Chinese economy) the momentum already built up is likely to last for a while. What’s more, while Xi’s model will mean that China misses out on some of its potential growth, there will likely be enough of it to increase and broaden the country’s wealth, even as resources are poured into the effort to secure technological hegemony: bytes and butter, so to speak. That’s not a reassuring thought.

Writing in the Wall Street Journal earlier this week, Graham Allison and Eric Schmidt described a report that highlights where this is going.

Here’s an extract:

Central Intelligence Agency Director Bill Burns announced in October that the agency is establishing two new major “mission centers,” one focusing on China and the other on frontier technologies. This action reflects his judgment that China is the “most important geopolitical threat we face in the 21st century” and that the “main arena for competition and rivalry” between China and the U.S. will be advanced technologies. The question Americans should be asking is: Could China win the technology race?

A new report on the “Great Technological Rivalry” from Harvard’s Belfer Center answers: Yes. The report isn’t alarmist but nonetheless concludes that China has made such extraordinary leaps that it is now a full-spectrum peer competitor. In each of the foundational technologies of the 21st century—artificial intelligence, semiconductors, 5G wireless, quantum information science, biotechnology and green energy—China could soon be the global leader. In some areas, it is already No. 1.

The U.S. still has a dominant position in the semiconductor industry, which it has held for almost half a century. But China may soon catch up in two important arenas: semiconductor fabrication and chip design. China’s production of semiconductors has surpassed America’s, with its share of global production rising to 15% from less than 1% in 1990, while the U.S. share has fallen from 37% to 12%.

In 5G, the Pentagon’s Defense Innovation Board reports that China is on track to replicate the economic and military advantages America gained from being the global leader in 4G. China has installed 950,000 base stations to America’s 100,000. By the end of last year, 150 million Chinese were using 5G mobile phones with average speeds of 300 megabits a second, while only six million Americans had access to 5G with speeds of 60 megabits a second . . .

In the advanced technology likely to have the greatest effect on economics and security in the coming decade—artificial intelligence—China is ahead of the U.S. in crucial areas. A spring 2021 report from the National Security Commission on AI warned that China is poised to overtake the U.S. as the global leader in AI by 2030. U.S.-born students are earning roughly as many doctorates each year in AI-related fields as in 1990, while China is on track to graduate twice as many science, technology engineering and mathematics Ph.D.s as the U.S. by 2025.

Turn to the report itself to find out more about the educational picture:

By total number of undergraduate university degrees in science and engineering, America was the global leader in 2000 with over 500,000 while China stood at just under 360,000. Today, China graduates four times as many STEM students as the United States (1.3 million vs. 300,000) and three times as many computer scientists (185,000 vs. 65,000).144 In international science and technology rankings for K-12 students, China consistently outscores the United States in math and science—in 2018, China’s PISA scores, which assesses math, science, and reading, were ranked number one while the U.S. ranked 25th.

On the other hand, the U.S., I imagine, is ahead of China in areas such as this.

KQED:

Every eight years, a group of educators comes together to update [California’s] math curriculum framework. This particular update has attracted extra attention, and controversy, because of perceived changes it makes to how “gifted” students progress — and because it pushes Algebra 1 back to 9th grade, de-emphasizes calculus, and applies social justice principles to math lessons.

So there’s that.

The report’s authors quote Xi:

“Technological innovation has become the main battleground of the global playing field, and competition for tech dominance will grow unprecedentedly fierce.”

And:

Emphasizing the need to “develop indigenous capabilities, decrease dependence on foreign technology, and advance emerging technologies,” the Chinese government’s most recent Five-Year Plan identifies key performance indicators, sets deadlines for outcomes, and holds provincial and local governments accountable for delivering results.

As the report’s authors observe, it has been widely believed that “advances in information technology could only be made in free societies by free thinkers, not under an authoritarian regime behind a firewall.” Where China now stands (even if it has been assisted by a great deal of “borrowing”), proves that that is not necessarily the case, as even a fairly cursory study of history reveals. The USSR was ultimately and comprehensively outplayed technologically by the U.S., not least when it came to IT. But, at the same time, the Soviets notched up some remarkable technological achievements in other fields, and it is, I think, a mistake to assume that success in information technology would forever have eluded them: After all, firewalls could always be rendered porous for those deemed important enough to see what was on the other side. Scroll back a little further in time to the Third Reich. When it came to economics, harnessed capitalism (click on the link and then compare what you read with what Xi is doing now) was very much part of its regime. And yet there was considerable technological innovation, innovation which, interestingly, included (in 1941) the development of the first programmable, automatic computer.

The full Belfer report makes depressing reading.

Take this (my emphasis added):

In quantum computing, quantum communication, and quantum sensing— three consequential subfields within quantum information science (QIS) traditionally led by American researchers—China is catching up and, in some cases, has already overtaken America. Pioneered 30 years ago, QIS is a field long seen in the scientific community as a potential catalyst for revolutionary advances in science and technology involving large computations, much faster communication, and precision measurement. Governments have only recently recognized that national security threats once considered hypothetical are becoming possible. Indeed, threats like the ability to crack existing encryption to steal state secrets, the creation of fully secure lines of communication, and sensors so precise that they could liberate operational platforms from their reliance on space-based positioning systems may not be as far off as previously thought . . .

[A] 2017 report by the U.S.-China Economic and Security Review Commission declared that “China has closed the technological gap with the United States in quantum information science—a sector the United States has long dominated.” Since that assessment, Beijing has doubled down, naming QIS a top tech priority second only to AI in its 14th Five Year Plan . . .

China has also demonstrated the ability to rapidly turn R&D into operational supremacy. In December 2020, only one year after Google’s 53-qubit Sycamore superconducting quantum computer achieved quantum supremacy, China reached the same milestone. That month, a photonic quantum computer created by the University of Science and Technology of China reached quantum supremacy “10 billion times faster” than Google for certain calculations in physics . . .

China’s milestones in quantum communication are impressive. . . . One expert expects Chinese government and military communications will go black in as little as two to three years, meaning the U.S. would no longer be able to listen in.

The news on other sectors, including semiconductors, isn’t good either, but I was struck, in particular, by this:

Though recent U.S. actions like sanctions on Huawei and SMIC’s inclusion on the Entity List have slowed China’s progress, completely cutting off China’s access to advanced semiconductors would be a self-sabotaging policy, since the Chinese market accounts for 36% of all U.S. chip sales.

That sentence gives an indication of some tough choices that may lie ahead. As things currently stand, cutting off China could do significant damage to our chip industry, and yet if we do not . . .

In that connection, this report from the Wall Street Journal earlier this week made interesting reading:

U.S. officials plan to ban American investment in Chinese artificial intelligence giant SenseTime Group Inc. and are looking to block China’s largest chip maker from buying U.S. manufacturing tools, in a broadening Biden administration effort against Chinese technology firms . . .

Separately, officials are planning to discuss this month a Defense Department proposal to close regulatory loopholes that have allowed Semiconductor Manufacturing International Corp. to purchase critical U.S. technology, the people said. SMIC, as the company is known, has been able to continue buying U.S. tools to make chips despite its inclusion on the Commerce Department’s entity list, which is designed to limit access to key U.S. exports.

The Belfer report is by no means all doom and gloom. Its authors are well aware of the Japan panic of the 1980s. That said, they also outline the structural reasons why today’s Chinese are more formidable competitors than the Japanese of 40 years ago. Moreover, Japan was an ally, and by no reasonable stretch of the imagination could it ever have been seen as a military threat. The same cannot be said of China.

So, what to do? That’s a discussion for another time (Schmidt and Allison call for “a national response analogous to the mobilization that created the technologies that won World War II”). Better precedents (for now) can be perhaps found in the steps taken in the U.S. after the Soviets took an early lead in space, and another in the public–private sector cooperation that worked so well with Operation Warp Speed. One thing, however, is abundantly clear (as has increasingly been acknowledged in Washington). Where China is concerned, there can be no room for business as usual.

The Capital Record

We released the latest of our series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, is designed to make use of another medium to deliver Capital Matters’ defense of free markets. Financier and NRI trustee David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.

In the 46th episode David is joined by Ryan Anderson, president of the Ethics & Policy Center in Washington, D.C. Ryan is one of the foremost intellectuals in the country in matters of political philosophy and social thought and has done significant work in applying his disciplines to economic rights. David and Ryan use this podcast time to dive into the present debates about markets prevalent in faith circles, where markets are increasingly looked upon skeptically by those flustered with the state of the culture war. David fears the horse is about to get out of the barn as many of the Right’s best and brightest abandon faith in markets, and Ryan brings the needed calm, sobriety, and wisdom that this pivotal topic desperately needs.

The Capital Matters week that was . . .

The Fed 

Bryan Cutsinger:

In just over a decade, the Federal Reserve has been called upon to fight a global financial crisis and pandemic. The monetary response to these events represented a radical departure from the status quo. While a great deal has been written about the technical aspects of these policies, there has been little consideration of their political implications. In Money and the Rule of Law: Generality and Predictability in Monetary Institutions, professors Peter W. Boettke, Alexander William Salter, and Daniel J. Smith argue that the lack of consideration for such implications has not only led to greater economic instability, but has also transformed our central bank into an institution unconstrained by the rule of law . . .

Supply Chain 

Dominic Pino:

The Biden administration is trying to spin a story of progress on the supply-chain crisis. It’s not working.

As Jim Geraghty highlighted in the Morning Jolt today, many businesses all across the country are facing shortages of a variety of products. As I pointed out last week, the supposedly shorter queue of ships waiting to unload at Los Angeles and Long Beach is the consequence of a different queuing system, not better efficiency. The line is actually longer than it was three weeks ago, and the timeliness of trans-Pacific freight is the worst it has ever been . . .

Dominic Pino:

In a time when supply chains are in the headlines for all the wrong reasons, what are some silver linings?

In a webinar today sponsored by supply-chain tech company FourKites, panelists discussed that topic, and there is some cause for optimism.

The consensus: Supply chains are getting more attention than ever before, and with that attention comes a demand for improvement . . .

Dominic Pino:

Whom are you going to trust to tell you the truth on port congestion? With news that the Biden administration is coordinating with the media to spin coverage in a more positive direction, it’s important to take what they’re telling you with a grain of salt.

Industry sources seem more trustworthy. The logistics industry is one of the most thoroughly international industries in the world, so the political concerns of any one country will have little effect on the information that they report. Plus, those people all around the world have large amounts of money on the line if information is wrong. That’s especially the case right now, when people are working harder than ever and facing higher costs in the face of limited capacity.

So when DHL says it expects ocean shipping to remain congested well into next year, it makes sense to believe them . . .

Dominic Pino:

Logistics company Freightos conducted a survey of over 300 importers who use its services. They sent the first survey in January, another in June, and the most recent one was from November. It’s not a scientific survey, so results can’t be generalized to the whole country. But it gives a useful perspective on how businesses are responding to supply-chain challenges . . .

Electric Vehicles

Andrew Stuttaford:

I’ve never been — how to put this — entirely convinced that the “sustainable” economy is going to be quite the jobs machine that its proponents like to claim. It’ll be good for regulators, and it will be a bonanza for the consultants who will be hired to guide companies through the maze that the regulators will create. But other than that, the case for job creation is . . . unclear. To take a key example, as currently envisaged, the transition away from fossil fuels is almost certain to increase the cost of energy (and, in all likelihood, decrease its reliability). That is not an obvious recipe for job creation . . .

Andrew Stuttaford:

Betting against human ingenuity is unwise, but the driveway deficit is an EV problem that may be both more pressing and more intractable than most (and imagine how it will be in more densely-populated Europe). Some greens, of course, will see this as a feature, not a bug. Public transit! Bike Paths! Walking!

Bob Dole

Steve Hanke:

I first met Senator Robert Dole when I was a senior adviser to the Senate’s Joint Economic Committee from 1984 to 1986. During that time, my good friend Senator Steve Symms (R., Idaho) introduced me to Dole. As it turns out, we hit it off immediately. I think that was, in part, due to us being three country boys (Dole from Kansas, Symms from Idaho, and yours truly from Iowa). We spoke the same language, if you will . . .

Charities

Jack Fowler:

It’s a longstanding practice that has become remarkably energized — the better word may be “exploited” — in recent years: the palpable, calculated, and extraordinary political use and abuse of (and by) nonprofits, and of federal laws relating to charitable giving, by leftist philanthropies and the partisan billionaires whose targeted largesse fill and pass through organizational coffers for the purpose of partisan mischief and ballot-box influence. The abuse is blatant — and surely deserving debate and reform by Congress, the guardian of America’s tax laws.

Could this abuse be so blatant that Congress might take notice? After all, formidable legislation addressing tax-exempt concerns is being raised up the Capitol Hill flagpole.

Alas, it’s a head fake: The bill’s promoters are intent on reforming anything but this practice of mixing sharp-elbowed partisan politics imbued with non-taxable dollars . . .

Build Back Better

Casey Mulligan and Tomas Philipson:

Seventeen Nobel prize–winning economists have declared that the reconciliation bill currently in Congress, known as “Build Back Better,” is an essential part of a “robust economic recovery.” They are violating the science they got a prize for by ignoring economic tradeoffs.

Build Back Better (BBB) is a 2,100-page exercise in redistribution and government-directed changes in energy markets. The Nobel winners believe that redistribution is the fair thing to do, and that the U.S. should do its part to reduce worldwide carbon emissions. While arguably worth doing, both of these activities would shrink the U.S. economy. Tradeoffs are one of the economic facts of life.

Perhaps the Nobel winners have adopted a new and different lexicon from the one you and I use. When they say “robust economic recovery,” we should understand that to mean “slower economic growth for the sake of fairness and the environment.”

More likely, they haven’t read the bill . . .

Pharmaceutical Companies

Andrew Stuttaford:

Pharmaceutical companies are certainly not angels, but it should be remembered that the super profits they make on some products also have to cover the cost of drugs on which they have spent a fortune but that fail to live up to the hope their development teams once had for them.

It should also be remembered that incentives work. I am unconvinced that Sanders is the right person to decide what represents “too much” of an incentive. Moreover, for all the profits that some companies have made from the vaccines, by limiting, however imperfectly, the damage caused by the virus, the financial value (and that includes jobs) they have preserved is far, far greater. There is also the small matter of all those lives saved . . .

Employment

Dominic Pino:

The most important thing to remember about the labor market right now is that the problem is the opposite of what we’re used to after a recession. We don’t need more jobs; we need more workers. After the last recession, the name of the game was job creation. This time, it’s not . . .

Spending

Brian Riedl:

More than eight months after its enactment, the $1.9 trillion American Rescue Plan (ARP) continues to reveal itself as the most damaging spending bill enacted in decades. ARP was initially promoted primarily as health-care legislation to finance Covid vaccines and treatments (even though just 1 percent of its cost went towards vaccines and only 5 percent had any direct relation to health care) and secondarily as a relief bill. Instead, the legislation became a large grab bag of giveaways and economic “stimulus” provisions that even left-of-center economists such as Lawrence Summers, Jason Furman, and Mark Zandi warned was too expensive, too inflationary, too unnecessary, and too wasteful. Congressional Republicans – who had already enacted a $900 billion relief bill just weeks earlier – made counter-offers desperately trying to negotiate this unnecessary $1.9 trillion proposal downward. Despite their empty rhetoric about bipartisanship and compromise, President Biden and congressional Democrats responded by cutting off negotiations without moving one inch off their opening proposal. As the economic case for the stimulus collapsed, the bill became a political “MacGuffin,” or a symbolic vehicle for Democrats to “resist Republican obstructionism” and show that they too were prepared to play hardball to pass their agenda. The details of the bill were secondary. Democrats passed the bill on a party-line vote and President Biden signed it . . .

Jonathan Williams and Nick Stark:

Tax cuts are not the reason for the debt trap. Irresponsible-spending growth has created the problem, and unfortunately the political drama surrounding federal debt ceiling will continue until Congress can learn to pass responsible budgets . . .

Shareholder Rights

Lawrence Cunningham:

BlackRock is making history with an innovative policy change: It will soon let its largest institutional clients vote on corporate proxy matters themselves. While critics note that this sea change from BlackRock voting its client’s shares is limited to a small group of well-heeled funds, the move could spark an overdue renaissance for shareholder democracy.

That would resolve a paradox that accompanied the spectacular rise of index funds since the 1990s. The wide availability of low-cost index products democratized share ownership, allowing every household unprecedented access to capital markets. But control of the resulting vote moved in the opposite direction. It is now concentrated in an elite group of insiders at BlackRock and two other funds, State Street and Vanguard, and poised to put practical control over much of corporate America in the hands of just twelve people . . .

Inflation

David Harsanyi:

“Inflation may linger in the U.S. because of the initial coronavirus assistance programs, researcher finds,” reads the headline of this Market Watch story today. In the United States, inflation — once transitory and now lingering — spiked 6.2 percent over the last year. In the euro zone, consumer prices were up 4.1 percent during that time. In Japan, it was 0.1 percent. Why? According to Hyun-Song Shin, head of research at the Bank for International Settlements, it’s in part because the United States relied on generous unemployment benefits and populist stimulus checks rather than saving existing jobs . . .

John Fund:

Today’s inflation report found prices rose 6.8 percent in November, making the fastest rate of inflation since 1982. Even before these new numbers were released, the latest Monmouth University poll found that in an open-ended survey question — meaning the pollster asked the question but did not provide multiple-choice answers — 29 percent of Americans said that inflation or rising prices was their biggest concern. This far outpaces Covid — which was named by just 18 percent of respondents — or any other single issue as the top worry in the country.

Things were a lot different as recently as August, when Monmouth found that a total of 8 percent of Americans cited rising prices as their chief worry . . .

Andrew Stuttaford:

And just like that, we’re back at the Volcker era — except there’s no Volcker in sight . . .

The Gas Price

Dominic Pino:

The Democratic Congressional Campaign Committee posted a graph on Twitter on December 2 that showed a two-cent decline in gas prices from November 15 to November 29. The caption said, “Thanks, Joe Biden,” apparently giving the president credit for the ever-so-slight decline in gasoline prices. It was widely mocked, even by many on the left, for being tone-deaf at best and dishonest at worst.

Somehow now it looks even dumber . . .

Agustin Forzani:

Recently, Americans have had to face a harsh reality: high gas prices. The president has been looking into ways to reduce the cost of fuel. His first solution was to ask the Federal Trade Commission to investigate whether oil companies were engaging in “price gouging.” His second move was to release federal oil reserves.

None of these decisions is adequate to reduce gas prices. Requesting that the FTC scrutinize oil companies is a waste of taxpayers’ money. The release of federal oil reserves only creates uncertainty in the market, and therefore distorts the regular operation of the economy. The core of the problem is that the president misunderstands the fundamental role prices play in our economy, which leads him to implement the wrong solutions . . .

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