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October 23, 2009
Untouchables and substitutables

Thomas L. Friedman has a particularly good editorial in today's New York Times.

While the subprime mortgage mess involved a huge ethical breakdown on Wall Street, it coincided with an education breakdown on Main Street -- precisely when technology and open borders were enabling so many more people to compete with Americans for middle-class jobs.
He cites Harvard University labor expert Lawrence Katz who explains:
If you think about the labor market today, the top half of the college market, those with the high-end analytical and problem-solving skills who can compete on the world market or game the financial system or deal with new government regulations, have done great. But the bottom half of the top, those engineers and programmers working on more routine tasks and not actively engaged in developing new ideas or recombining existing technologies or thinking about what new customers want, have done poorly. They've been much more exposed to global competitors that make them easily substitutable.
An untouchable is someone who can imagine new services, new opportunities and new ways to recruit work. Untouchables are being retained, while substitutables are being laid off.

Friedman adds,

Bottom line: We're not going back to the good old days without fixing our schools as well as our banks.

October 30, 2007
Old School Kagan

Maybe it's a generational thing. But the U.S. is going to have to overcome some of its most deeply rooted Cold War notions if we are to develop effective new international strategies for the decades ahead. Robert Kagan's continuing assertion that Russia and China are menacing "autocracies" is a case in point.

As Ross Douthat, a conservative writer for The Atlantic, notes:

I've griped about this before, but he keeps doing it, so once again - Robert Kagan's column about "the surprising resilience of autocracy in China, Russia, Venezuela and elsewhere" is at least somewhat undercut by the fact that neither Venezuela nor Russia are really autocracies, as the word is actually defined, and China certainly isn't one.

Kagan's criteria for an "autocracy" are curious. For example, he writes that

Autocrats create state power over which they can exercise a monopoly, like the security forces.

Are there nations, even liberal democracies, where the government does not exercise monopoly control over its "security forces"? Maybe I misunderstand.

More broadly, China does not fit Kagan's template for liberal representative democracy. I'll grant that although there are millions of Chinese blogs and regular Chinese are more than happy to talk frank politics with me even within the walls of the Forbidden City, China surely has a way to go on all sorts of freedoms in the press, assembly, and the rule-of-law. But to call China autocratic in the tradition of Mao or even lesser dictators simply misunderstands the facts on the ground. In China, there are many factions within the government superstructure. Essentially the CCP is composed of a large number of competitive individuals and even "parties" -- small p -- within THE PARTY. There are liberals, hardliners, coastal westernizers, inland populists, intellectuals, entrepreneurs, capitalists, and socialists. What there is very little of any more is broad reverence for Mao and his reign.

The process of how China sorts out its political and policy decisions is still pretty opaque, but one thing's for sure: it's very competitive. Beyond the internal political architecture and dynamics of the top leaders, which are still difficult for us to fully grasp, Kagan dramatically underestimates the importance of economic freedom in China. After all, many of our important Western institutions of free speech and the rule-of-law, for instance, were important precisely because they helped protect our economic freedom from overreaching monarchs -- or even predatory democratic mobs. Most of our lives are fairly consumed with work -- production -- because it allows us to provide for our families, take advantage of life's enjoyments, and maybe even to create something. I do not demean or minimize the importance of free speech, but most of us are not political editorial writers. Economic freedom thus encompasses a huge proportion of what we enjoy as the traditional Western "liberties."

Kagan says you can't have the rule-of-law without elections. But China is innovating in a number of unconventional ways. Again, for example, at our Telecosm conference two weeks ago, an impressive panel on intellectual property highlighted the changing nature of IPR in China:

-- China was No. 3 last year in worldwide patents behind the U.S. and Japan (by nation).

-- Huawei, China's large telecom equipment company, was No. 3 last year in worldwide patents (by company).

-- There were more IPR lawsuits in China last year than the U.S.

-- Foreign companies win ~90% of the IPR suits they bring in China.

-- China has a very long way to go on low-end counterfeiting, but there has very recently been a "sea change" in China's attitude toward high-end technology IP.

At other times I have highlighted China's capitalist innovations in tax and monetary policy.

Kagan is frustrated by China's deft handling of its transition from Mao's Communism to the successful capitalism of Deng, Jiang, and Hu. He would rather THE PARTY had collapsed. Whether China would enjoy its current freedoms if the party had collapsed is an interesting question for another day. But Kagan is viewing China and the world from the perspective of 1960, not 2007. For now I'll happily take the combination of (1) a broad and deep economic liberalization and (2) a slow and steady march toward increasing political openness, competition, cooperation, and law within the current party that is "Communist" in name only.

Bret Swanson

September 26, 2007
Global Motors

Matthew Slaughter of Dartmouth highlights two major positive -- yes, positive -- effects of globalization on the U.S. auto industry.

First, competition:

For decades the competitive pressures of international trade and investment have forced the Big Three to innovate and boost productivity, starting with gains in fuel efficiency after Japanese car imports surged with the oil-price shocks of the 1970s. In 1998 GM averaged about 46 hours to produce a vehicle in North America. By 2005 that was down to just 35 hours.

And second, insourcing:

In 2005, foreign-headquartered multinationals in motor vehicles and parts employed 334,900 Americans -- at an average annual compensation of $68,125, fully 34% above the private-sector average. Over the decades that the Big Three have struggled with their American operations, foreign auto companies have rapidly established and expanded U.S. production through foreign direct investment.

I see insourcing first hand in my homestate of Indiana, where Toyota has two major plants, Suburu has one, and Honda is now building a large plant that will come online in the next few years. As the domestic companies and suppliers have struggled throughout the Midwest, most severely in Michigan, which is suffering through a one-state recession, the "foreign" companies have filled much of the void. Even closer to home, I've got two Toyota's in the garage -- both, coincidentally, built in Indiana.

-Bret Swanson

April 4, 2007
One Tech Company's War Effort

Unlike World War II, when Americans were asked to sacrifice a great deal in support of the war effort--think rationing, rubber and scrap metal drives and the iconic image of "Rosie the Riveter"--the War on Terror has demanded little in the way of citizen involvement. In fact, given the country's cultural obsession with Anna Nicole Smith and American Idol, one would be hard-pressed to know we're at war at all. As a result--and not surprisingly--few individuals or corporations have gone out of their way to directly contribute to American military success (or if they have, did not receive coverage in the media for doing so.) One notable and poignant example--highlighted in this Associated Press article--is the recent commitment by IBM to provide $45 million worth of Arabic-English translation software to the Pentagon to better facilitate communication between American soldiers and Iraqi citizens.

According to the report--which appeared on page A13 of The Seattle Times--the offer came about as a result of an explosion in Iraq that gravely wounded the son of an IBM sales specialist. The story eventually made its way to IBM Chairman and CEO Samuel Palmisano, who contacted President Bush directly offering the software at no charge to the Department of Defense. Of course this being America, the offer is under review by attorneys seeking to ensure the legality of the donation!

That hurdle notwithstanding, IBM is to be commended for its leadership and for recognizing that its corporate success is intricately connected with a successful outcome to the war--one that would undoubtedly result in greater global stability. It also creates an incentive for other companies to consider ways in which they can contribute to the war effort--not for any potential financial gain, but for love of country. That's what characterized the citizens who gave of themselves in World War II, and it's something that is sorely needed today.

As for the soldier who was injured in that terrible explosion, presently recovering at Walter Reed Medical Center, he's delighted. While acknowledging that the software would not have prevented his own injuries he commented, "Communicating with the locals is difficult. This technology that IBM is going to offer is really going to help."

I hope to read many more of these stories in the months and years ahead--hopefully closer to the front page of the newspaper.

January 12, 2007
Malpass's Global View

Go read this, the best magazine column of the young year. Those of us who have long followed the economic analysis of David Malpass, chief economist at Bear Stearns, are thrilled he will now write a semi-regular column in Forbes magazine.

His first installment takes on the "triple deficits" -- budget, trade, and savings -- and shows they are either innocuous or in fact virtuous. David writes

The U.S. has a powerful, growing economy, yet we project the "wrong path" image of an aging society drowning in debt and burdening the world with risk. This gloomy fiction distorts our domestic and international economic policymaking. We should reject it and launch a more energetic vision of global prosperity built on economic freedom and dynamism.

Malpass echoes a theme I've been writing about these last few years, encapsulated nicely in the Chinese currency issue. By falsely accusing the Chinese of yuan manipulation, of foreign reserve hoarding, or of trying to steal our energy (see CNOOC-Unical), we imply a fear of competition, of change, and of the future. Societies acting out of fear often make the wrong strategic decisions. Instead we should act like the colossus we are -- with a quiet but robust confidence that can shape the world to our liking over the long-term. Lashing out in zero-sum fashion only makes other nations suspicious of our motives and less willing to accept and cooperate with the American economic imperium -- our entirely beneficial "empire of wealth."

But we are also too hard on ourselves.

Or as Malpass puts it,

In one of the ironies of economics the U.S. apologizes profusely for the global trade imbalance. We accept blame for growing our economy and population faster than our trading partners (which draws in imports) and providing more attractive investments (which brings in foreign capital). Rather, the primary burden should be on the trade-surplus, capital-outflow countries to enhance their economic climes, not on us to diminish ours.

Malpass also agrees with Discovery's George Gilder, who last week wrote in The Wall Street Journal that conservatives should not try to solve the Social Security "problem" through inevitable tax hikes but should instead pursue the opportunities of global growth that are the only way to pay for our own retirements and health care.

Entitlement reform is also distorted by this mistaken image of U.S. financial collapse. An increase in the Social Security tax burden proposed by austerity advocates would slow the economy without adding one iota of the external funding needed to protect retirees and add to their rate of return. Let's shelve this "reform," which is a disguised tax increase, and instead expand tax-preferred savings vehicles.

Malpass richly deserves Forbes's elevation as one of the world's top economic and strategic thinkers.

-Bret Swanson

October 13, 2006
Ten steps forward...One leap back?

Just as IBM massively increases its bet on China, the Middle Kingdom today signaled it might attempt to pacify unions and labor with severe new restrictions on employer flexibility. The giant employment and wealth boom of the last 28 years owes much to the flexible labor laws that were first instituted in the Free Zones and then spread across much of the nation. When employers know they can fire a worker, they are much more likely to hire him in the first place. Thus the largest mass migration in human history with some 250 million peasants leaving the countryside for new and better jobs -- jobs, remember! -- in the Free Zones along the Coast.

But Beijing is worried about the so-called income gap and says it is shifting focus from Development & Growth to Development with more "Social" considerations. Let's hope this is mostly a political move and that the practice of leaving discretion of (un)enforcement in the hands of local leaders continues. Otherwise the law could be quite onerous:

"You could hire a sales manager, give him a quota and he doesn't sell anything, and you couldn't get rid of him," Mr. Lauffs said. "It's not easy to get rid of someone now, but under these rules it would be impossible."

The law is still in draft form and would not go into effect until May 2007, so there's still time to avoid one of China's first bad large-scale economic policies of the past few decades.

-Bret Swanson

Big Blue China Bound

IBM announced today it has moved its procurement division, which spends $40 billion annually, to Shenzhen, China.

-Bret Swanson

October 2, 2006
China Revealed

Last night the Discovery Channel (no relation to the Discovery Institute) premiered a wonderful new documentary, "China Revealed." Part of Discovery's "Atlas" series, this two-hour program accurately conveys the traditions, diversity, dynamism, high-energy, and challenges of the largest and fastest changing nation on earth.

The cinematography is terrific, with sweeping landscapes and skylines, but equally as vivid are the personal stories: 12 year-old Jin Yang who hopes to compete for the Olympic gymnastics gold in 2008; Master Liu who presides over the famous Fa Wang martial arts monestary; Yang Fuxi, the last of 17 generations of Imperial bow (and arrow) makers; Song Feng, the migrant window washer of Shanghai skyscrapers; the rice farming Liao family; and Vincent Lo, the billionaire real estate developer.

Though the documentary focuses on people and places, it even gets the political and economic stories largely correct. The smiling Liao's praise the 1978 privatization of land that increased their productivity some 1500% in just a few years. Mao's brutality is also briefly but pointedly exposed.

Critics of the documentary will fairly complain that current contentious issues of religious, press, and political freedom are barely addressed, if at all. But there's so much to talk about, so many stories to tell. This documentary tells some of these stories and tells them very well.

-Bret Swanson

Go Hank!

We've been critical of the Administration's China policy over the past few years, so we're happy to note Treasury Secretary Hank Paulson's successful effort to avoid a trade catastrophe. Last week, on the heels of his highly successful China trip, Paulson persuaded Sens. Smoot Schumer and Hawley Graham -- as Larry Kudlow calls them -- to drop their 27.5% tariff bill. Paulson has not only averted a trade war with relatively little blowback so far from America's anti-trade jingos, but he also appears to have set us on a new, strategic, "generational" course -- as he calls it -- vis-a-vis the Middle Kingdom.

I don't know that we're totally out of the woods on the dollar-yuan currency front, but I'll take the last two weeks of economic policy news. The stock market likes it, too.

-Bret Swanson

September 13, 2006
Dueling Starbucks Workstations

John Rutledge showed you his "workstation" at the Starbucks just down the drive where we've been downing espresso and getting work done. Here's my office:


The famous Starbucks music mix is pleasant -- the first few times around. Now it is burned on my brain, and everytime I hear those adult contemporary and light rock songs, I'm sure I will think of cosmopolitan Beijing.

Here's the view just outside our "office."


Not quite Chairman Mao's Beijing, is it?

-Bret Swanson

Silicon Valley East

For the last 20 years, many American states have attempted to duplicate the success of Silicon Valley -- they've tried Silicon Alleys, Praries, Swamps, Meadows, and Hills. It's a worthy goal -- emulating the innovation and entrepreneurship of SV -- but most places won't fully succeed. There's a place on the other side of the world, however, that might someday come close.

with John Rutledge (left) in Haidian, Beijing

It's the Haidian District of Beijing. With 80 universities -- including the nation's top two, Beijing U. and Tsinghua -- 400,000 undergrads and 30,000 graduate students, all the big American and Chinese technology companies, from Microsoft, IBM, and AMD to Lenovo, Baidu, and Sohu, and with Special Economic Zone status, including low tax rates and friendly regulations, Haidian is an emerging power. Did I mention it also will be host to 30 Olympic events in 2008 and the Opening and Closing Ceremonies? Or that it is home of China's beautiful Summer Palace?

Haidian keeps getting better. This week, Haidian's governor, Zhou Liangluo, named my friend John Rutledge its chief financial advisor. John's a fantastic economist who bears siginificant responsibility for two of America's most important recent economic acts -- the '81 Reagan and '03 Bush tax cuts. Haidian now needs to recruit the financial capital and talent to propel its students and technology companies onto the world business stage. John is the perfect person to help them do that.

-Bret Swanson

with Haidian Governor Zhou (left), Rutledge, and physicist Luyu Wang, Haidian's chief technology advisor

February 15, 2006
Mundell's latest on China

Nobel prize winner and China expert Robert Mundell continues to be optimistic about the Chinese economy but now also believes the U.S. has stepped down its intense pressure to appreciate the Chinese yuan. Good news all around.

-Bret Swanson

February 6, 2006
What's Fake and What's Real

Sebastian Mallaby's argument today that we face a "Fake China Threat" contains a number of true and important observations but in its overall effect is, I think, wrong. Mallaby correctly observes:

- The rise of Chinese science is positive-sum.

- Science tends to spread across the world, yielding new innovations and economic growth wherever the science is embraced and allowed to transform into commercial success.

- The U.S. has the world's best universities and has a big lead.

But Mallaby complacently writes that "the world's top researchers flock here; provided enough visas are available, it's hard to see why this would change." First of all, it's not automatic that we will indeed execute a sane visa policy. Second, with universities and economic opportunities around the world improving rapidly, the delta between the research opportunities here and abroad will shrink. Even with perfect visa policies, we will not attract the best scientists and engineers at the rates we did over the last century, when immigrant scientists helped build everything from the atom bomb to Silicon Valley. Further, even though science and technology spread across free economies, the location of the people founding companies and doing rigorous work is still crucial in many ways. Consider another important caveat to the fact that the U.S. has the world's best universities: it also has a vast array of mediocre schools, where soft fields have replaced useful studies. American males, moreover, are a falling proportion of college students -- 43% and headed below 40% -- reflecting both the poor preparation our K-12 schools offer and also the poor real-world job prospects inflicted by flimsy and irrelevant coursework at many colleges.

Mallaby's view that the U.S. has been a friendly place for innovation is true; the big question is whether we can remain on top in management, entrepreneurship, and finance even as our technical dominance inevitably fades, while we attempt to orient the next generation of Americans toward technological work. Mallaby seems to suggest that the science, technical, and business communities' efforts to boost American science and math education are some sort of special interest lobbying effort cynically exploiting a false crisis and that the status quo is just fine. Does he really believe that?

-Bret Swanson

January 19, 2006
Fragmenting the Internet

Proof that you can never have it both ways can be found in a report by Christopher Rhoads in today's Wall Street Journal, which notes that countries and organizations are erecting rival Internets. Internet pioneers such as Vinton Cerf are alarmed about a fragmentation of the Internet, according to Rhoads. But we should step back and give thanks for what this development is not. It is not U.N. control of the Internet. The U.N. is a sclerotic, and some say corrupt, organization that is full of strange notions about the importance of personal and commercial freedom. Were it to control the Internet, foreign dictators and bureaucrats would be able to influence how we can use the Internet in this country. Many foresaw the possibility of rival Internets--as well as the likelihood of their inevitability--in the wake of the Bush Administration's success in beating back the proposal for an Internet dominated by the U.N.

The advent of rival Internets will create challenges, but it will also increase interest and participation in what has always been a "network of networks." Rivals may also help to limit the impact of Internet abuses by repressive regimes, and will certainly limit the opportunities for control by world organizations. Your domain name may no longer be your domain name in every corner of the world, but with a bit of ingenuity there should be no reason that we can't continue to have as much order and stability as we want in the U.S.

Rival Internets will be an interesting test case for those who believe that government regulation is needed to facilitate network interconnection, such as the drafters of various proposals for telecom reform on Capitol Hill. My prediction is that interconnection between rival Internets will be the norm, not the exception. For one thing, the benefits of interconnection are disproportionately felt by the users of a smaller network, who gain access to more content and services than they would otherwise have. For another, interconnection can be direct or indirect. Years ago, when the old AT&T refused to interconnect with upstart MCI, the upstart was able to gain access to AT&T's customers by finding a small, independent local exchange carrier who was both interconnected with AT&T and who was willing to interconnect with MCI. The involuntary interconnection that MCI thereby achieved with AT&T through indirect means may not have been ideal from a network engineering perspective, but it worked.

It has been obvious for some time that the Internet is becomming too important culturally and politically for the status quo to continue indefinitely. The Internet appears to have outgrown places like Silicon Valley and Marina del Rey--perhaps making it less likely that the future will look like Star Trek, where Earth is a member of a Federation of Planets which is headquartered in San Francisco of all places.

January 18, 2006
CCP -- Chinese Capitalist Party

The Wall Street Journal Asia notes a new international poll (sub. req.) gauging sentiment on capitalism.

In a poll conducted for the University of Maryland's Program on International Policy Attitudes between June and August last year, fully 74% of Chinese citizens said they agreed with the statement "the free enterprise system and free market economy is the best system on which to base the future of the world." The Philippines, at 73%, and the U.S., at 71%, were second and third.

If you've been there recently, you know it's true.

-Bret Swanson

December 29, 2005
New Numbers for New China

China recently published data from its "first economic census," and the findings, as rough as they must be in a nation so large and dynamic, are interesting and encouraging, though I can't say I'm surprised:

1) China's economy in 2004 was almost 17 percent larger than previously thought, larger, in fact, than Italy's, putting China in fifth place globally. Growth over the last 10 years was more like 10.5 percent than the previous estimate of 9.5 percent;

2) the service sector is far larger than previously thought, accounting for almost 41 percent of the economy, up from the previous estimate of 32 percent;

3) manufacturing accounts for 46.2 percent of the economy and agriculture for 13.1 percent, both lower than thought; and

4) 93 percent of the additional, previously "unknown" output came from the private sector.

Li Deshui, head statistician and chief of the project, acknowledged large-scale economic data cannot be exact and that some enterprises were found to have been exaggerating numbers, but he believes the new numbers are much better than the old ones.

-Bret Swanson

November 22, 2005
Energy is not Zero Sum

My friend Rich Karlgaard's latest post at his Forbes Digital Rules blog reminded me of another major debate consuming the U.S. and China right now: energy. Karlgaard laments the disease of zero-sum thinking, which presumes one party's gain is necessarily another party's loss. Zero-sum thinking, more than anything else, is history's chief culprit leading to war and depression. For some reason, it has infected untold generations of economists and politicians, and now it infects the debate over U.S.-China trade and the supposed world-wide race for the globe's supposedly finite supply of energy. First the U.S. this summer blocked China CNOOC's attempted acquisition of Unocal, an American company with mostly Asian petroleum assets, and now it seems that Beijing is resisting entreaties by BP (British Petroleum) to acquire a majority stake in China's large 80-percent-state-owned oil company Sinopec. Some commentators see devlish designs on the part of the Chinese, who want "to build global dominance in core industries...."

Undoubtedly, 3 billion new people entering the modern economy will substantially increase world energy consumption. But does more energy demand mean there will be less energy to go around? Does wealth in Asia imply a lower standard of living in the West? Does energy have to be a source of international tension, or even a military flashpoint?

It does not. As Peter Huber and Mark Mills make clear in their pathbreaking book The Bottomless Well, more energy demand means more wealth. More wealth means better technology and more resources by which to find, extract, and process more and new forms of energy. The cycle repeats. We have reached the "twilight of fuel" and will "never run out of energy," Huber and Mills emphatically declare. Energy is decidedly not zero-sum. It is, in fact, infinite.

But this is only true if we heed their call. It will not be true if we restrain energy usage or discourage technologies and facilities that extract, refine, generate, and deliver energy. China is building some 50 new nuclear power plants over the coming two or three decades. The U.S. has not built one since the late 1970s, which is also the last time we built an oil refinery. Washington and the states are paralyzed. This summer's energy bill may have allowed for one new nuclear plant, but no new refineries. This effective ban on energy technology and investment is one of the very few things that actually could lead to a flashpoint, a self-imposed energy crisis. When supply is artificially constrained, then we suddenly do live in a zero-sum world, and potentially will face the horrors of zero-sum war and pestilence.

-Bret Swanson

November 17, 2005
Me and Mao

I spent last week in Beijing visiting with Nobel economist Robert Mundell, investor and all-around big thinker John Rutledge, other economists and scientists, and lots of everyday Chinese. It was an especially interesting time to be there right ahead of President Bush's visit this week.

-Bret Swanson

Nov 6-13 2005 010crop5.jpg

November 16, 2005
EU Threatens Innovation in Action Against Microsoft

Microsoft's work group server competitors claim they can't keep up with the complexity of Microsoft's product upgrades.

"We are, in many fields, ten years behind Microsoft. And the lag is growing with every new step Microsoft takes"

according to Volker Lendecke of the Samba Users Group, an organization dedicated to free software that anyone can copy.

Continue reading "EU Threatens Innovation in Action Against Microsoft" »

November 11, 2005
Universal Service for the developing world?

On the eve of a conference in Tunisia to discuss the management of Internet domain names, the U.N. Conference on Trade and Development has issued a 276-page report highlighting the existence of a digital divide between developed and developing countries. The report makes some useful observations about how Internet connections are over-regulated and over-taxed in many developing countries.

Continue reading "Universal Service for the developing world?" »

November 7, 2005
Telecom Reform Russian-style

Yuri Mamchur, Discovery Institute's foreign policy fellow for the Future of Democracy in Russia and Eastern Europe program, has a post here about the Russian Duma banning cellphone companies from charging for incoming calls. The prime beneficiary appears to be Megafon, an upstart firm that (surprise!) has many powerful patrons and board members in the Kremlin, including President Putin's wife Ludmila.

October 26, 2005
Andean Free Trade Agreement would spread harmful regulation

Word is the U.S. Trade Representative is prepared to capitulate to a South American country that wants to regulate mobile phone service like a state-owned monopoly. Colombia is pushing the plan, which flies in the face of all the available evidence that wireless is as competitive as you can get, and is contrary to recent Free Trade Agreements with Chile, Singapore and Central America.

Colombia wants language included in the Andean Free Trade Agreement defining CMRS as a "major supplier" that should be subject to confiscatory regulation that was in vogue at the FCC in the Clinton years. Bureaucrats at USTR reportedly like the idea.

August 26, 2005
Silicon Wars

Richard Chang, founder and CEO of SMIC, the top new silicon "fab" on the Chinese mainland, plans to give up his Taiwanese citizenship after Taiwan fined him for an "illegal investment" in SMIC in 2000. At a time when most Taiwanese and Chinese recognize and welcome closer ties and more economic integration, there are still many politicians on both sides who stubbornly insist on looking backward. It seems unwise for Taiwan to drive away key people like Richard Chang, who, even though he now operates on the mainland, still can be a friend and benefactor of Taiwan through all sorts of cooperative economic and technological arrangements. I think this is just a blip on a large radar screen showing mostly better, not worse, China-Taiwan relations, but with the semiconductor industry such a national point of pride for Taiwan and increasingly important to the Chinese, too, it could be a flashpoint of sorts. We will watch closely.

-Bret Swanson

July 31, 2005
McGregor on China

Good insights and advice on U.S.-China relations from James McGregor.

July 30, 2005
Mundell and China

This week the Bank of China clarified the world's understanding of its new monetary regime. Its small 2-percent revaluation of the yuan vis-a-vis the U.S. dollar, the BoC said, "does not in the least imply an initial move which warrants further actions in the future." Bottom line: we should not expect significant changes in the value of the yuan. This confirms my view that China is shrewdly dousing a political tinderbox, not fundamentally altering its successful sound money principles and policies.

Our friend John Rutledge, who was initially worried about China's move, now believes 1999 economics Nobelist Robert Mundell may be closely advising the Chinese, and Rutledge is relieved.

I agree there are lots of reasons to believe Mundell is working closely behind the scenes. Mundell has offered an unusually large number of public comments on the yuan-dollar question over the last few years, and last autumn China established the Robert Mundell University for International Entrepreneurship in the Zhongguancun science and technology zone of Beijing.

If only American policymakers would listen as closely to Professor Mundell.

-Bret Swanson

July 26, 2005
1 + 3 = 4

In a July 21 New Jersey speech Verizon Communications CEO Ivan Seidenberg observed that whereas a few years ago less than one billion people worldwide were connected to the global economy the figure today is nearly 4 billion. A major factor in this explosion is the Internet and other modern networked communications. Nearly all the growth has been (quite naturally) in the less-developed countries--China, India, the countries of the former Soviet Empire and to a lesser degree, Latin America.

With networked communications central to global economic prosperity the opportunity cost of policies that retard upgrade of the US's skimpy bandwidth will increase. The relative influence of Asian telecom leaders will increase as well. Broadband policy is an essential and growing component of advanced economic activity. The US has done remarkably well despite poor broadband policy, and likely will continue for some time to do very well. However, absent substantial further network infrastructure upgrade America eventually will face the consequences of policy stagnation: global economic leadership will transfer to Asia.

July 22, 2005
Rutledge on China

John Rutledge, a key economist in the early Reagan administration and since a super smart watcher of financial markets, doesn't like China's currency change. He and I agree that China's U.S. dollar peg has been a boon for both nations over the last decade. (I first wrote about the Chinese monetary issue and urged them to retain the dollar link after visiting China two years ago.) Our mild disagreement now hinges on politics. Were American politicians smarter about economics, and were our own Treasury Department not agitating for a Chinese currency change, I would be perfectly happy for China to continue its dollar peg. The idea that floating and flexible exchange rates are somehow "free market economics" is wrong. The floating currencies themselves are not governed by the market but are managed and manipulated by small groups of fallible humans known as central bankers. In my view, China's move was smart chiefly as a political matter, serving to let the air out of the bulging protectionist balloon without fundamentally changing its "strong and stable" monetary policy. If China's unhinging from the dollar truly leads to the "floating and flexible" monetary relationship U.S. policy makers say they want, along with a substantial revaluation of the yuan, I would join Rutledge in lamenting China's action. My judgment that this is a positive move on net stems from China's brilliant monetary management of the last decade and overall economic strategy of the last 27 years.

-Bret Swanson

Dotted Divider Line

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