China First
Sometime in the not-too-distant future, there will be a major news headline that goes something like this: China is rapidly approaching the US Gross Domestic Product (GDP) and will surpass it in five years. By the time we arrive at the five-year mark, no amount of short-term government stimulus can address this challenge because a change in our culture and an investment decline in economic growth opportunities over the last 50 years will have caused this to happen.
You might ask, when is it likely that China will surpass US GDP? It’s simple arithmetic. Before the pandemic, China’s annual GDP growth rate, about six percent, was more than two and a half times that of the US. Assuming these growth rates are restored by 2021, a simple calculation makes China First in about ten years or around 2030. That’s less than half a generation, which is not a long time.
As we approach the five-year mark, there will be impacts on US leadership worldwide simply because perception is truth in politics. Some countries will align themselves with the winner of the global economic power competition. This alignment can grow with time because the US will be perceived as growing weaker economically and wielding less global economic influence. The longstanding claim that an economy based on free-market capitalism is superior to all others will have fallen to a totalitarian state-run economy.
Ironically, US government policies have helped China achieve this goal by providing them with low-cost and low-risk growth opportunities through the transfer of proven business models, numerous technologies, and the exploitation of our university system and research capabilities. We have put ourselves in this situation through our government’s foreign policy, federal government spending priorities, allowing US companies to seek production cost reductions elsewhere, and a fundamental change in our national culture, e.g., https://johnparmentola.com/why-national-culture-matters-to-our-future/.
Over the last 50 years, we have managed to transition from a risk-taking culture that was once willing to take bold steps (think of landing humans on the moon in 1969) to a risk-averse one, mainly focused on process efficiency and incrementalism (think of incremental software and electronic hardware improvements). This change in our national culture is preventing us from creating our economic future.
You can see this aspect of our culture play out on the award-winning ABC television series Shark Tank. Here you have a group of business moguls with business models in their heads that listen to a five-minute business proposal. In the next five minutes, these moguls ask standard questions. Is the product unique and patented? Who are your competitors? What is your customer base, and how large is it, or could it be? How much in sales and profit have you already made, and over what period? Why do you need the money, and how would you spend it? These are all questions designed to assess risk and the time over which an investor can expect a return on investment. Depending upon the risk assessment, certain constraints can be put on the money to be invested to ensure that the investor can at least recover his or her original investment. This approach is not risk-taking but a rather elaborate exercise in risk avoidance.
The transition to China First will likely accelerate because our newly elected government will focus even more on government spending on short-term needs that have little or no effect on sustained growth. As in the past, they will neglect the longer-term investments required to create new economic growth opportunities. This path to our future is a simple example of risk-averse problem solving: If it works politically, don’t fix it.
The incoming Biden Administration has proposed $11 trillion in new spending over a decade. This increase is the largest proposed increase in federal spending since the Johnson Administration. About $4 trillion of this largesse involves expanding social programs, and another $3 trillion is an additional stimulus to help restore the economy to pre-pandemic levels. Both of these spending programs are intended to fulfill short-term needs and not future growth opportunities.
Another $1.5 trillion is intended to support education at all levels. This spending is just another example of politicians throwing money at a very serious problem that cannot be fixed without a fundamental change in how teachers are trained, the standards used to evaluate them, and the standards used to assess student performance. If anything, it will further politicize education in the classroom through government influence instead of teaching students the fundamentals they will need to make a life for themselves in a highly competitive world.
There is another $0.7 trillion in “Buy America” spending, which will very likely have political strings attached to fulfill special interests that contributed to re-election campaigns. Once again, this spending will satisfy short-term needs by providing free money to the risk-averse who expect a rate of return on their campaign contributions. The remaining $2 trillion of the $11 trillion will go to climate change and infrastructure.
This $2 trillion will replace portions of an already existing electric power system with another having inferior performance – “renewable” energy technology. This replacement strategy will increase the cost of living for consumers through higher-priced electricity and result in blackouts because of the intermittent nature of renewable technology electricity production. It will mainly cause financial damage to the middle class and poor; however, government subsistent programs will help those who cannot afford to pay their electricity bills.
Our risk-averse private sector will welcome government spending on all this infrastructure. Also, since China is the world leader in renewable technology production, we can expect that US government spending will benefit China as it did during the Obama Administration through its renewable programs.
So, what do ordinary Americans get out of this? Just more of what has occurred over the last 50 years. We will have more human dependency on government, a lower quality and more costly education system, more free money for a risk-averse private sector, the replacement of an existing electric power system with an inferior one at a higher cost, and more benefits to China. Making matters even worse, the interest on the debt from additional government borrowing to pay for all this will favor the wealthy and foreign holders of the debt, such as China. In the end, the American taxpayer will be responsible for paying off the growing national debt that has exceeded the GDP.
All of this will reduce the time it will take for China to become first in the world while US government spending produces short-lived results.
How do we prevent China First?
A strategic aspect of financial risk-taking is its importance for fulfilling an essential human need, economic growth. Spent wisely, investments in the future can translate into an increasing number of quality jobs, new products and services, and new industries that produce them. The right type of risk-taking can matter in peoples’ lives and livelihoods. However, such a strategy cannot guarantee additional economic growth on a prescribed schedule because of random and unanticipated events that affect outcomes. It’s just the way the world works. Despite this inherent uncertainty, a proven investment strategy has repeatedly produced economic growth and prosperity over the last 200 years. Unfortunately, our federal government no longer embraces this strategy, and, in fact, our government has been moving further away from it for the last 50 years.
This proven strategy involves federal government investment in research and development (R&D), which is required for a nation to grow economically because the private sector is unwilling to fund the risks of pushing out the frontiers of science, engineering, and mathematics. The private sector is inherently risk-averse. As Leonardo da Vinci said: “He who possesses most must be most afraid of loss.” The private sector fears losing what it values most: money!
If we are to secure a better economic future for our citizens, the federal government must create economic opportunities. A pro-growth strategy also involves quality education for all its citizens. The current system is badly broken and must be replaced with a much more egalitarian system of much higher quality. There are ways of accomplishing this by applying and developing technology, e.g., https://johnparmentola.com/revolutionizing-our-k-12-education-system/.
The US followed such a strategy after WWII, e.g., https://johnparmentola.com/the-great-mystery-of-economic-growth/. Federal investment in R&D increased by about 200 percent relative to GDP from around 1950 up to 1965 or 15 years. This spending was an investment in the American people through quality education and new scientific, engineering, and mathematical discoveries that expanded human imagination into what was possible, feasible, and practical. Every major invention, technology, and innovation the world exploits and enjoys today came from these investments and the investments of other nations. Without them, the US economy and the world economy would be far less productive compared to today. This strategy made the US the global economic and military power after WWII.
Despite the extraordinary success of our post-WWII investment strategy, since 1965, federal R&D investment as a percentage of GDP has fallen by an astonishing amount, 65 percent. Investments of this kind create new opportunities for future growth—their reduction results in opportunity loss that has serious consequences for a national economy.
The problem is politicians do not see a re-election opportunity from a government-funded R&D strategy that creates economic growth opportunities outside their election cycle. They care more about holding their jobs by rewarding those who fund their campaigns than they do the broader public good.
To fix this situation, our government must establish a measure of economic opportunity creation that is required by law, call it the future economic opportunity index (FEOI). FEOI is the amount of federal R&D spending that creates economic opportunities divided by GDP, which has historically increased from such spending.
Surprisingly, FEOI is at the level it was back in 1950, or about 0.6 percent. This fact has gone unnoticed. If we are to overcome China First, we must increase the FEOI by 200 percent over 15 years, as we did after WWII. This goal can be achieved by increasing the FEOI by 8 percent per year for 15 years, which is a few billion dollars per year that will grow as the US GDP increases. In the big scheme of things, this is small potatoes and our best bet to ensure that China will not surpass our GDP in 10 years.
Our future all boils down to how much conviction and courage our political leaders have to accomplish this for our children and grandchildren, so our precious youth can continue to make America an exceptional nation in the world. The fundamental question is: Do we care enough about this nation’s future to do something about it?