In my last issue, I commented briefly on the misguided comments of Treasury Secretary Snow in “talking down” the dollar and blaming China’s trade and currency policies for the loss of U. S. manufacturing jobs. Since then, we have witnessed the domestic political payoff in the form of new U. S. quotas on Chinese textiles. Subsequently, in a wiser vein, I was pleased to read Federal Reserve Chairman Alan Greenspan’s remarks in a speech to the Dallas World Affairs Council, in which he notes the futility of singling out the Chinese exchange rate as a significant cause of American job loss. In fact, the issue is much more complex, and Greenspan notes that much of our manufacturing job instability is due to the dynamic nature of global competition, which is producing greatly accelerating turnover of employment and capital equipment in order to respond to market demand (my summary of his words). In short, it’s Schumpeter’s “creative destruction”, the lifeblood of capitalism, which, largely due to China’s entry into the world trading system, is being applied worldwide for the first time in history. It is a concept that is prone to demagoguery in an election year and, without appropriate discipline, lends itself to destructive protectionist policies. Further, as former President of Mexico Ernesto Zedillo points out, China’s monetary policy seems more than fair to the U. S. in the sense that it is helping to finance the U. S. fiscal deficit through large investments in U. S. Treasury bonds, and that this new interdependence in trade and finance, whether we like it or not, is positive for global peace and prosperity. Make no mistake, creative destruction is a good thing, and, as David Henderson of the Hoover Institution notes, the loss of manufacturing jobs is a sign of economic health—“the history of economic growth is the history of people making more with less and shifting into new jobs that were unheard of in the previous generation”. When we talk of jobs, I worry more about our leadership in technology, innovation, and management, and the degree to which our long-term competitiveness there is directly tied to our world leadership in educating our youth. Now there is a scary thought.
