The U.S. will need to implement most of the $4 trillion in programs President Biden outlined on April 28 on top of the $1.9 trillion American Rescue Plan if it is to compete successfully with an increasingly hardline China. Failing this, if China continues to grow three or four times faster than the U.S. while we go back to only 2-3 percent growth after a faster spurt in 2021, the U.S. could lose this competition as China’s Xi Jinping believes it will.
The programs Biden outlined on April 28 are big enough to get the U.S. out of the 2-3 percent rut if Republicans let them pass the Congress. Over the long term, they could transform the U.S. economy, taking it to a new 21st century level of shared wealth and modernity. This would not only improve the lives of the struggling American middle class, but give Americans renewed confidence in the ability of our democracy to withstand the challenge of Xi and other authoritarians. The question is: will the Republicans allow Biden to succeed?
The president expressed confidence in his speech on the 28. All Americans, Democrats and Republicans should hope he is right. Certainly, there were times in the 1950s and ’60s when people believed the Soviet Union would overtake us. Later in the 1970s and ’80s it looked like Japan would do the same. Then these challengers fell back. China in 2021 however is a more formidable competitor and it would be risky to assume that the U.S. can continue to pursue the “supply side” slow growth policies of the past decades while China fades as the Soviets and Japan did.
Biden is saying that the U.S. can succeed in this competition with China only with a better mix of government and private actions. This was the view of Alexander Hamilton, the economic genius among the U.S. Founders, who wrote about America’s special advantage in 1787, and later as the country’s first Treasury secretary. Hamilton said then that the U.S. was a dynamic “commercial society” with more potential than its European competitors. (Federalist 11, para. 2). The U.S. still is that dynamic society blessed with all-important freedoms and agricultural, industrial, scientific and human resources that China will find hard to match, but taking advantage of its assets requires good policies as Hamilton understood.
The economic transformation that Biden is calling for will run into fierce opposition from old-line economic interests and a Republican Party that has grown increasingly hostile to the kind of active government that Hamilton pursued successfully, and indeed that all great presidents pursue. A serious problem is that many Americans have been convinced by anti-government ideologues that governmental economic activism is a negative and that low taxes on the wealthy are the key to growth. If that view prevails bad things will happen. Beliefs matter, and the Republican belief that government economic activism slows growth despite centuries of evidence to the contrary is a dangerously false belief.
Look at what China’s central and provincial governments have done to promote that country’s economic transformation. Government financing funneled through government controlled financial entities to private and state-owned projects has pulled hundreds of millions of rural Chinese out of pre-modern employment into urban workshops, high-tech industries and infrastructure development. Biden’s programs would use U.S. government investment in infrastructure and people in similar fashion to pull millions of American workers from blue collar sectors that have been struggling for 30-40 years into better jobs and to move unemployed, under-employed and low-wage workers into more productive better paying jobs in a more equitable American economy.
Again, economic beliefs matter. The Republican belief, as John Kenneth Galbraith, a key advisor to President John F. Kennedy, said in the 1960s is that “if you feed enough oats to the horses, some will pass (through their intestines) to the sparrows.” This is Republican supply-side economics in one sentence: Feed the horses to feed the birds. Republican tax cuts for the wealthy “horses” however, have failed over and over again to get the U.S. on the growth path that will be needed to compete with China, but this belief lingers.
Private U.S. investment without a boost from government is not going to match China’s state-aided efforts. It might have been enough when our main competitor was a Soviet economic culture shaped by Czarist autocracy and an all-controlling Communist Party, but the U.S. is now competing with a Chinese entrepreneurial culture that has succeeded in Asian countries like Indonesia and Malaysia as well as in China for centuries and that Xi will not want to incapacitate in his quest for political control.
Chinese governments since the 1970s have created markets and modern jobs by promoting exports and vast domestic infrastructure programs — roads, bridges, high-speed rail, ports twice as efficient as any in North America, power plants, state of the art communications, and education. They also bankroll jobs for Chinese workers overseas through Belt and Road projects across Asia and Africa. Some of these investments in empty apartment buildings and ghost cities for example, will never pay off. My bet though is that the Chinese government will step in and cover these loses. Why? Because there is less pretense in China than there is in the U.S. that financial institutions licensed by governments to create “credit-money” are really private, and not essentially one of the ways government can create money and credit.
China has let its banks and financial institutions make sketchy loans in order to create employment, so it is unlikely to let these institutions drag its economy down when debts go bad. Creating jobs and mobilizing resources is what is important for Xi and his party, not squeezing debtors to pay back money that the Chinese government like the American government can create with a few keystrokes on a computer.
The bottom line is this. If Biden can get most of his April 28 programs through, he can set American working people on a path toward a more secure future, create millions of better jobs, give believers in democracy renewed confidence, and meet China’s formidable challenge. This will be possible, however, only if he can persuade Republicans to allow the federal government to play a larger role than Americans are used to in peacetime.
Paul A. London, Ph.D., was a senior policy adviser and deputy undersecretary of Commerce for Economics and Statistics in the 1990s, a deputy assistant administrator at the Federal Energy Administration and Energy Department, and a visiting fellow at the American Enterprise Institute. A legislative assistant to Sen. Walter Mondale (D-Minn.) in the 1970s, he was a foreign service officer in Paris and Vietnam and is the author of two books, including “The Competition Solution: The Bipartisan Secret Behind American Prosperity” (2005).