America vs. China

The lead article today on is by Fred Reed.  If you've read much of his stuff, he is very witty and certainly puts things in an interesting perspective.  I agree with much of what he says in this article today, but I would like to focus on a few things where I disagree.

First, he says that "if a country does not manufacture things, it does not have an economy, and manufacturing has fled American shores."  This really isn't true on several levels.  Manufacturing perhaps has declined in the U.S., but it is not like it has vanished.  But even if it had completely vanished, this doesn't mean that there isn't an economy and that there isn't wealth.  We often make this mistake of drawing these artificial lines around countries as if they matter.  If what he says is true of a country, would it also not be true of a state or a city?  New York City has very little in the way of manufacturing and I wouldn't say that NYC has no economy.

He speaks highly of China, but Hong Kong is far richer than mainland China (per capita) and Hong Kong is not a big manufacturing country.  These are the benefits of free trade and comparative advantage.  You don't have to make all of the food you eat.  In fact, you really don't have to make any of it.  You don't have to make the car you drive and the car doesn't have to be made in your country of residence.  There is nothing wrong with providing services.  There is nothing wrong with having doctors, therapists, hair stylists, salesmen, financial planners, athletes, singers, etc.  This is a sign that we are a rich society.  We only need a small fraction of people to produce food now because of capital investment and technology.  We don't all have to work on a farm because it is not necessary.  We don't all have to work in a car factory because other places can do it cheaper or at least in comparison to other things.

The CEO of McDonald's might be the best burger flipper there is, but does it mean he should be in the kitchen flipping burgers all day?  This is comparative advantage.  He is better off doing more important things and letting other people flip burgers, even if they aren't quite as good at it.

The second thing in the article that I don't agree with is his view of competition with China.  He seems to imply that a gain in wealth for the Chinese is detrimental to America.  He does not directly say this, but it is implied.  We certainly don't want China to overtake the U.S. in wealth because the U.S. gets poorer.  But if China simply becomes wealthier, this is not a loss to the U.S.  It benefits everyone for China to open its markets and become wealthier.

There is one more thing to point out in this article.  He says that "America is the world's greatest debtor nation, China the greatest creditor."  I agree and the national debt is a serious concern.  But the one thing I would like to point out is that the Chinese people are subsidizing Americans because of this.  The game will not last forever, but the Chinese are going to get stiffed on all of the U.S. bonds that are held.  As Reed says, "we must either default or inflate."

Fred Reed is a great writer and I don't mean to nitpick his work.  I just want to make sure that people understand some basic fallacies that are out there.  America has a lot of problems, but it has little to do with manufacturing or China.