As most of you probably have figured out, I am very concerned about the future, both short-term and long-term. I decided to set forth my thoughts for comment.
In 1992 Ross Perot said something that I had been thinking for quite some time by then, “In the post-Cold-War era, economic power will be more important than military power.” China has, unfortunately, learned and applied that lesson better than we have. While we are tied down trying to impose our will militarily on a Mideast that has been fighting each other for thousands of years (“My brother and I will fight my cousin, my cousin and I will fight the world”), China has made us economically dependent on them and has outflanked us economically in South Asia and Africa with the Belt and Road policy, and is starting to make inroads into Latin America.
State Capitalism is basically fascism. As long as it is easier for us to depend upon them than to develop and grow our own free market economy further, we will lose that economic battle. So we need an economic policy that, simultaneously, 1) eliminates or minimizes the economic advantages that China has, and 2) develops and enhances the advantages that a free market offers. My fear is that the tax and regulatory policies being advanced by democrats will accelerate the offshoring to China of essential production.
At the same time, we need a military policy that focuses on protecting us from threats while avoiding entanglement in matters of low or no concern to us. There seem to be two areas where we have tended to get involved militarily—things that are direct threats to us, and other humanitarian areas where things just aren’t quite right. My thinking is that the first requires application of military force, and overwhelming force, while the second is better addressed diplomatically.
Make no mistake, we are in Cold War II, and this time China is the enemy. China is a formidable opponent, but not without feet of clay. One, they are an alliance of people who don’t like each other very much—the warlike north doesn’t get along well with the commercial Shanghai/Yangtze Valley, and neither really wants much to do with the Cantonese south, not to mention Tibet and the Uighurs in the west. So their approach has been to export cheap consumer goods, and use the cash flow to underwrite projects with little or no economic value (the empty cities, for example) to keep the underlings too busy to revolt. A hiccup in the economy and it all falls apart. When natural forces overcome the ability of state capitalism to manipulate results, their economy crashes and their people starve. Two, that economy is hugely dependent on imported oil. China produces about 4MMBbl/day, and falling, and consumes about 12MMBbl/day, and rising. So there’s 8+MMBbl/day that has to come from somewhere. About 2MMBbl/day comes from Siberia, and a new pipeline promises to double that. That leaves 4MMBbl/day to come from the Mideast, and until somebody figures out how to build a pipeline over the Himalayas, and protect it from Uighur and Tibetan terrorists, that means a sea route through the Straits of Hormuz, around India, through either the Malacca or Sunda Straits, and across the South China Sea. Their budding alliance with Iran should help them on the Hormuz end, and they have a pretty fair shot at controlling the SCS end. But they are in a world of hurt protecting the middle of that supply chain. Right now, the guarantor of safe passage through those middle steps is the US Navy. Withdraw that, and the problems protecting that supply chain become overwhelming for PLAN. If you look at what they are doing, they are taking major steps to gain more control of this essential supply chain—the alliance with Iran, the artificial islands in the SCS, and the port deals that they are making in south Asia and Africa are all aimed toward that objective.
So, how do we respond to this situation? I have several thoughts:
1) Make the changes to our tax system that Europe has made over the last 20-40 years to become more competitive
a. implement a consumption tax (that has mild protective impacts, because we get to charge it on imports, and refund it on exports [“subsidizing” them], without it counting as a tariff under WTO rules); as long as we don’t have a consumption tax, but everybody else does, we will always be at a structural disadvantage in any trade negotiation;
b. restructure our income taxes toward a lower, flatter, and broader (fewer/no non-business exclusions and deductions) tax structure (both Bowles-Simpson and Domenici-Rivlin recommended this as a way to increase tax revenues while promoting economic growth); and
c. set tax levels to balance the budget while i) providing universal private health care on the Bismarck model and ii) implement a subsistence-level universal basic income (UBI) based on Milton Friedman’s negative income tax (NIT) or the Boortz-Linder prebate/prefund, to replace our current welfare hodge-podge (which can be farmed out to the states on a voluntary basis with the money they save because Bismarck makes Medicaid redundant).
Doing those things would simultaneously provide a more comprehensive welfare safety net while making the USA a far more attractive location for investment, growth, and middle-class jobs. In doing international tax work, I have always been amazed that Europe has figured out how to provide both. We can do it too.
2) Curb the power of our unelected and unaccountable regulatory bureaucracy by
a. Requiring congressional consent to new rulemaking, including all rules with an economic impact greater than, say, $1B/year, and any other rules upon petition by 20% of congress,
b. Conducting sunset reviews of each agency and all its rules and regulations every 10 years, and
c. Replacing the current process of adjudication by captive Administrative Law Judges (ALJs) who report ultimately to the executive director of the agency, by establishing Article III administrative law courts in each Federal Judicial District, with appeal up through the District Courts and Circuit Courts of that Circuit rather than directly to the DC Circuit
Again, this is basically a European approach.
3) Consider subsidies or other incentives to bring back essential industries (primarily medical, IT). Perot talked about identifying key industries and providing focused incentives to bring/keep them in the USA. We can do that.
With these changes in place, we would be in a far stronger position to compete, not only with China, but with other countries. A lot of people don’t realize that China is but one component of massive trade deficits that we have with the vast majority of foreign countries.
There is also a military component to our cold war with China. I would propose that we make some changes there, too:
1) We need to reorient our military. We currently spend 16% of our defense budget on combat, 7% on combat support, and 77% on administration/overhead, per consulting firm McKinsey’s analysis at
https://defense-aerospace.com/dae/articl...ce_VF.pdf. Out of a $700 billion defense budget, that’s roughly $110B on combat, $50B on combat support, and $540B on admin/overhead. We could increase combat by 25% (to $138B), increase combat support by 25% (to $62B), and cut admin/overhead by 25% (to $405B), and save roughly $100B, while producing a more capable fighting force. We can spend part of that $100B on some of the economic and diplomatic efforts to execute this strategy, and save the rest. In addition to spending cuts, we need to define better the roles of each branch, and avoid duplication by having each branch stay in its lane.
2) Get out of the Mideast militarily and never fight another war that we don’t intend to win. I see two viable objectives in the Mideast, 1) in Iraq, fix the problems generated at San Remo by dividing the country into three parts, Kurdistan in the north, Shia Mesopotamia in the east, and Sunni Iraq west of the Euphrates, and 2) find a solution for the Israeli-Palestinian crisis (and there is no viable two-state solution within the current footprint of Israel) and try to work some sort of Tom Clancy approach to exchanging an open Jerusalem to Arab recognition of Israeli sovereignty. Those are both more diplomatic than military objectives, although some military force might be required to implement them.
3) Recognize that there are three potential world hot spots—East Asia (with China), Europe (with Russia versus western Europe), and the Mideast (with Iran versus Saudi versus Turkey versus Israel). I don’t think we can invade and solve any of them, but if we can contain them we should be okay. Truman bribed up an alliance to contain the Soviets and Reagan applied economic pressure to bring down the Evil Empire. I think we can still contain Russia in Europe, and I think we can reprise the Truman/Reagan approach to bring China down eventually. The Mideast is a tougher nut to crack, but none of the 4 parties poses any sort of existential threat to the USA.
4) With respect to containing China, I see several pieces to the puzzle:
a. We already have an alliance with the Quad—USA, Japan, Australia, India—which comprises the four countries with the ability to make any sort of dent in China militarily, so do all that we can to strengthen that alliance and bring it closer together.
b. Canada, Australia, New Zealand, and the UK are considering a CANZUK economic and possibly military alliance, both to counter China and to make Brexit less painful for the UK. We should do everything we can to foster and support that alliance, and we should enter some sort of trade and military association with it. My thought would be to bring UK into NAFTA/USMCA. That gets us aligned with two of the four CANZUK countries (and we already have the Quad militarily with Australia). Bring Aussie and NZ in, and we are in a pretty powerful position.
c. Expand that alliance to include the whole British Commonwealth. There has been a proposal out there to form a combined Commonwealth military. That would be no worse than the 4th strongest military in the world, and the 2nd strongest navy. We could get them to take over a significant portion of our worldwide policeman duties—UK in Europe/Atlantic, India in South Asia/Indian Ocean, Canada/Aussie/NZ in the Pacific. In particular, India, Malaysia, and Singapore would pose a serious threat to China’s oil lifeline. We wouldn’t shut it down, but we would have significant leverage in any negotiation.
d. Do some sort of revised TPP/SEATO with both economic and military aspects to bring Indonesia, Vietnam, Thailand, and the Philippines into the fold. We can basically make the same bribe that Truman made to western Europe after WWII—access to our consumer markets, military protection (but we have to show up enough to make this serious), and one additional thing—finding a way to move the industry and manufacturing that we don’t need to repatriate from China to them.
This is clearly not an easy agenda. But it is doable, and if we can execute it we can reverse the current trends that are leaning China’s way. All we need to do is find someone in a leadership position to implement these approaches. Unfortunately, I don’t see anything approaching that in either major party.
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Thoughts about China, the USA, and the world
