“The Chinese challenge to the United States is more serious for both economic and demographic reasons. The Soviet Union collapsed because its economic system was highly inefficient, a fatal flaw that was disguised for a long time because the USSR never attempted to compete on world markets. China, by contrast, has proved its economic prowess on the global stage. Its economy has been growing at 9 to 10 percent a year, on average, for roughly three decades. It is now the world’s leading exporter and its biggest manufacturer, and it is sitting on more than $2.5 trillion of foreign reserves. Chinese goods compete all over the world. This is no Soviet-style economic basket case.”
While labor is not cheap as it used to be in China and costs may soar twofold or even threefold by 2020, some predict that if China’s currency and shipping costs were to rise by 5 percent annually and wages were to go up by 30 percent a year, by 2015 it would be just as cheap to make things in North America as to make them in China and ship them there. While labor costs are often 30 percent lower in countries other than China, this is typically more than offset by other problems, especially the lack of a reliable supply chain. Further, while increases in land prices, environmental and safety regulations and taxes all play a part, the biggest factor is labor. So while Chinese wages may be rising fast, so is Chinese productivity due to major investments in productive capital. Chinese workers, like American workers, see the ownership class getting richer and they want income growth that reflects Chinese productivity growth.
If cheap China is fading, what will replace it? Will factories shift to poorer countries with cheaper labor? That is the conventional wisdom, but it is wrong. Instead, China will automate more processes in its factories, replacing as many workers as possible with machines to increase productivity efficiencies.
But as with the United States, China will make the classic mistake of concentrating ownership of the machines (productive capital) in a minority and thus limit consumer demand for products and services produced by the machines because the worker labors are being replaced by capital worker owners and thus have declining earnings to purchase what is being produced.
The solution is to bolster investment in new productive capital simultaneously with broadening ownership of the productive capital assets with full dividend pay out to workers and others in the society to empower them to be fully productive through their capital worker input.
This is why it is critical that United States policy shift to broaden productive capital ownership simultaneously with economic growth. If not, further development of technology and globalization will undermine the American middle class and make it impossible for more than a minority of citizens to achieve middle-class status.
New capital formation investments must broaden ownership of new productive capital assets. If we continue without reforming the “system,” the result will be further concentrated ownership and as the “system” denies opportunity to the American majority to participate in the future wealth creation of the American economy.
http://www.foreignpolicy.com/articles/2011/01/02/think_again_american_decline
