Premier Wen Jiabao's Chicken

When I was growing up in New York, there was a very popular dish on many Chinese restaurant menus. It was called General Tso’s chicken. Research shows it was a fraud. There is no documentation that this dish existed in China or was ever prepared for or by any Chinese general. However, the recent decision by the Chinese to play chicken with America over chickens and ban imports of the lowly bird reveals another fraud, that of a modern China looking to take its place in the world.

Here’s how China’s place in the modern world of free trade, at least as told by academics, was supposed to work. China was to produce high quality, low cost goods that would save Americans thousand of dollars a year. Sold in big box discounters, these goods would usher in a utopia of cheap merchandize. Living standards of the middle and lower classes would rise because they could spend their saved dollars elsewhere.

However, this displaced well-paid American workers, who formally made all this stuff, and shuttered the factories that now overwhelm the landscape. The academic free traders said we would all go into service industries or high margin fields like biotech and quantum physics. Knowledge industries and less price-sensitive goods would expand as the economy became more “efficient.” We would be like Switzerland, and not make anything but money. The Chinese would be like Switzerland’s domestic Muslims -- they would do everything Americans didn’t need to do.

Like the academic studies that proved mortgage risk could be managed by algorithmic assumptions, this belief in free trade and acceptance of massive trade imbalances proved to be utter nonsense. Ivory-tower academia has no appreciation of the real world with currency manipulation, industries targeted with dumped goods, and corporate greed both here and abroad. Academia did not understand the difference between Chinese nationalistic predatory policies, now retitled “mercantilism”, vs. true free trade. Academics never anticipated that the Chinese would not spend. They would hoard their dollar reserves. They could not imagine that China would not open its economy to Western companies, so as to mitigate and alleviate the imbalances.

The result, brought to you by both parties, is a new economic cycle that goes something like this: Leading industrial companies, leading retail companies, and union leaders, not to mention the legal establishment, all in search of lower prices for every known object has de-industrialized America. People who just had average skills and average ambition used to show up at a factory and get paid a living wage. There was work for those willing to do it. They spent their paycheck at local stores buying things made by other workers who lived down the road or in the next state.

These decent wage jobs have disappeared. Things are all made in China. Factory workers now flip burgers, clean bedpans or guard ATMs. Drained of all purchasing power, they and their neighbors are forced to buy things from giant discounters who have no community ties and who source EVERYTHING in China. This drains more money from the economy, erodes the tax base, and creates an overhang of dollars in China’s banks, which lowers the value of the remaining dollars in American’s pockets.

Suffering from the above, their only recourse is to buy cheap Chinese-made goods, which accelerates the cycle, creating a cyclonic effect. Every day, more people are sucked into this vortex of wealth destruction. The big box retailers are gleeful. Everyone is trading down. Formally middle class people: teachers, academics, civil servants, middle-ladder corporate execs, and the unemployed, are forced to buy from them. This is a self-inflicted deflationary cycle of income and purchasing power.

Now, having drained America’s prosperity and having transferred it to Asia, the industrial and capital class, even the big box retailers, have announced they will expand all their efforts in China to take advantage of the growing prosperous middle class there. So long suckers! Only politicians are forced to physically remain here and their answer to this flight of capital and industry is higher taxes and more debt on the left- behind fools.

China, the land of cyber-spying, trade warfare, stolen industrial secrets, technology transfers, opposition to our foreign policy initiatives on Iran, restricted trade, predatory currency policies, and opposition to anti-global warming legislation, economic threats, Tibetan rape, internet censorship, dissident jailing, and now a game of trade chicken over chicken.

The fraud behind General Tso’s chicken is emblematic of our make-believe thinking about the political kitchens of China.

Java Jag thinks the free-trade academics, the free-trade political class, and the free-trade industrial/retailing class that dominated economic policy thinking for the last twenty years and got us in this mess, should be treated as the Chinese treat their failures. They should be tried in a secret court and then, in true Chinese style, executed.