The story of China is far from black and white.  It is a giant mix of a lot of good things and bad things.  China remains a communist country, at least in name.  In reality, it is some kind of mix of capitalism, mercantilism, and authoritarian.

It is not completely unlike the United States.  The U.S. is a mix of all of these things as well, but to a lesser degree. The U.S. government is more bureaucratic, which can be good or bad.  The Chinese economy is far more centrally planned, but they also don’t have as much red tape to go along with it.

The U.S. is obviously less authoritarian.  You can find horror stories and government abuses everywhere.  But the reality is that, in general, Americans still have freedom of speech, freedom of press, and gun ownership rights.  The same cannot be said for the average Chinese citizen/ resident.

It was recently reported that Jack Ma, the founder of Alibaba, has been a long-time member of the Communist Party. While the story is mildly interesting, it is not that big of a deal.  Again, he is a communist in name only.  He may have become a “communist” just for purely self-defense reasons.

Alibaba is a giant company that is comparable to Amazon.  In fact, many sellers on Amazon source their products from suppliers they find on Alibaba.  Alibaba is really a symbol of capitalism.  It is a demonstration of how millions of people voluntarily trade with each other to become better off.

China was once a truly communist country.  That is to say, it was a brutal totalitarian society.  Tens of millions of people were killed at the hands of the communists.  In 1979, Deng Xiaoping allowed markets to somewhat open up, particularly in agriculture.  China has since become a huge economic powerhouse with relatively freer markets.  It is centrally planned to a high degree, but this is a dramatic improvement from the socialist system it once was.  The relatively freer market has helped hundreds of millions of people escape extreme poverty.

With that said, economic growth in China seems to be struggling as compared to what it was in the previous couple of decades.  I am surprised the Chinese boom has been able to go on as long as it has. Some of the boom is artificial, and some of it is real.

The Chinese have never experienced a hardcore recession.  Prior to 1980, the entire country was in one big permanent recession.  It was an economic basket case with extreme poverty.  But since it began to experience exceptional economic growth, there has never been a large-scale economic decline, at least according to the statistics (which granted, aren’t probably that accurate).

The stock market has struggled in recent years in China.  You could say that the stock bubble has burst.  The Chinese government has continually tried to prop up that bubble, or at least prevent it from a further fall.

There is obviously a massive real estate bubble in China that is propped up by the Chinese central bank and the central planners.  It is incredible that prices have not fallen over a cliff at this point, but again, there is massive manipulation.  They are trying hard to prevent real estate prices from crashing.

As much as the U.S. economy is controlled by government, there is still far more room for corrections in the U.S. than what we see in China.

Some Malinvestments are Worse than Others

I have read or heard some people’s stories about visiting China.  They say that some of the infrastructure is incredible.  The main airports are modern, the highways are impressive, and the bullet trains are incredible to ride.

This isn’t a compliment to the central planners of China.  It is still malinvestment to a large degree.  But some misallocations are worse than others. At least when the Chinese bubble collapses, they will still have high-speed trains and some great infrastructure.

In the U.S., the government spends trillions of dollars, and for what?  The worst are the wars and the money spent to maintain an empire overseas.  It is completely wasteful, if not destructive.  There are massive entitlement programs (and other welfare) that serve to make people more dependent on government.  There is also other domestic spending that lines the pockets of the lobbyists and their industries.

Even in terms of debt, it is the Chinese buying U.S. government debt.  This is a malinvestment in itself, but from the Chinese point of view, at least they are collecting interest, while the U.S. government (the taxpayer) is paying out interest.  It is a short-term subsidy for American consumers to some degree, but it is a long-term liability, unless the government is actually going to default on the debt.

To be clear, I am much happier being in the United States than I would be China, at least by judging from what I know.  And I ultimately think the U.S. will be more resilient, especially when a hard recession comes.  Americans have been through hard recessions before.  In China, there are going to be violent revolts.

I think the general trajectory for China is up.  The people there have had a taste of a middle class lifestyle, and they aren’t going to easily give that up.  This should be beneficial for everyone.

Still, the U.S. has its advantages.  I already mentioned the liberties that Americans have that the Chinese do not. Most of the rest of the world does not have the same degree of liberty when it comes to speech, press, and gun ownership.  In addition, Americans are still very entrepreneurial.  This is good for economic growth.

The problem with the U.S. is the administrative state and all of the red tape.  It’s possible this may be a bigger problem than the unfunded liabilities.

I have said that we actually need a recession in a certain sense. We need the correction, which is the reallocation of resources.  It will help to make things more affordable for middle class America.

But even in the longer term, we need a recession to drastically scale back the government. It is going to be difficult when the government cannot fulfill all of its promises, particularly to senior citizens.  There will be pain involved.  The good news is that it will be an opportunity to correct some of the past mistakes.  Best of all, it will be an opportunity to dramatically scale back the U.S. empire overseas.

The hardest part will be repealing some of the red tape from the administrative state.  That will not likely come crashing down. Luckily, entrepreneurs are creative and resilient.  And with technology, we will find ways to go around the red tape and hopefully make some of it irrelevant.

I am still optimistic for both China and the U.S. in the long run.  But the paths to prosperity will not look the same. There will be short-term pains for both though.