Peter Schiff: "China has a freer economy than the U.S."

Economics Economics Questions
1

To Peter Schiff radio listeners, he said something like that on Tuesday. Someone called Wednesday to challenge him, and he explained that it was because of China’s manufacturing base, size of government, taxes, ease of starting a business, trade surplus, etc. Basically he said since China produces more manufactured goods, in terms of quantity, than the U.S. it is more free market. I wanted to get your take on this. I think Peter is way off base. I am no expert on China, but from what I understand, China has high tariffs, heavily regulated business creation (where you have to lobby for and seek permission from the government to start a business, kind of like here but to the extreme), etc.

The caller also mentioned the various indexes of economic freedom which have the U.S. in the top 10 and China around 80. Peter replied that he thought those rankings were politically motivated, and unreliable.

Your thoughts?

2

When it comes to freedom of speech, clearly China is not the freer, so one cannot run a business like google or fox news there. The CCP has loosened its grip on businesses over time, but they still maintain oversight and try to make sure that the top people for strategic companies are loyal to the party.

However in the USA, one probably faces more red tape in terms of environmental laws like what chemicals one can use. Also US hiring practices are probably less free, as I doubt that China has as many rules regarding ethnic and gender hiring/firing rules. I know of an insurance company entering China, it could not do the same in the US and their new socialist medical laws.

In some ways China is freer, in others the US is.

3

Peter Schiff is a demagogue.

The most brilliant people in the stock market don’t make media appearances, don’t give any advice publicly, and don’t bother with politics.

4

demagogue: a leader who makes use of popular prejudices and false claims and promises in order to gain power. [online merriam webster]

Can you provide an instance where Peter made use of popular prejudices and made a false claim or promise?

demagogue: 1. A political leader who seeks support by appealing to popular desires and prejudices rather than by using rational argument. [doctionary.com]

Any irrational arguments you can quote?

Your second paragraph tells me that Warren Buffet and Peter Schiff are not the most brilliant people in the stock market. OK, even granting that, so what? Are only “the most brilliant” worth listening to? Are you the most brilliant person in the stock market? Are you worth listening to?

5

Economic freedom just means the degree of absence of intervention in the economy. Since there are numerous different types of intervention, there’s really no one single metric that can sum them all up and compare them in aggregate. To some degree it’s subjective. So there’s no way you can definitively say that Schiff’s claim is “wrong”, though you can disagree. I think he’s really just saying it for shock value, since most people unthinkingly assume that the U.S. is a free market economy while China is centrally planned communism, and he wants to point out that this perception is false, that the U.S. government, through regulation and taxation, is doing just as much if not more to stifle business growth.

6

On a social level, and poblic policy level, parts of China are more capitalist than America. Of course, people don’t have to believe that. People crap on me all the time when I make that point. They fail to point out how China is more interventionist and controlling of the economy. They just assume their assumptions are correct and aren’t able to suspend disbelief.

7

The Index of Economic Freedom uses ten parameters:

  • Business Freedom
  • Trade Freedom
  • Monetary Freedom
  • Government Size
  • Fiscal Freedom
  • Property Rights
  • Investment Freedom
  • Financial Freedom
  • Freedom from Corruption
  • Labor Freedom

That’s reasonable enough in my book.

The big problem is where these data come from: the World Bank, the IMF and The Economist Intelligence Unit (now, that’s a name!). The first two are well known and deserve little presentation. The latter is owned by Pearson plc, which has more than a few connections with HM goverment (mostly through its board of directors). So Schiff may be justified in calling the Index politically motivated.

8

But now how do you measure each one of those things and how do you rank them based on these things? Is labor freedom more important than financial freedom? Are these things counted in units, or utils? In the end, what the heck does all this data mean?

I have to entirely reject the study because I don’t know the parameters in detail, or the methods or functions they used to come up with their table. Their results are just a matter of opinion, because their test is designed as a matter of their opinions. If China is around 80th in their opinion to begin with, then it’s no wonder that their test would put China in 80th. They designed the test after all!

9

China is low in all such indexes. Investor’s probably look at a smaller picture.

10

We talked about this here a few days ago. The SEZs are important to look at, I guess. Especially considering we’ve turning into an import nation rather than an export one.

11

You make it sound like Ron Paul would be a demagogue, too. I feel like the term denotes someone who doesn’t know what they’re talking about.

12

Something like 21 out of China’s 22 largest corporations are state run. I just read an article in the Wall Street Journal the other week that the Chinese are going to force car companies that are manufacturing electric cars in their country to partner with Chinese companies in order to get their hands on the technology. Those are just a few examples I can think of off the top of my head but China is definitely not as free as the United States.

13

When someone in China actually invents something, instead of copying something invented in the US, Canada, UK or Germany, then I will be impressed with their economic freedom.

I think Schiff confuses capacity to produce, with capacity to innovate. The Soviet Union produced. It didn’t innovate.

Economic freedom breeds competition, competition breeds innovation.

14

I think Schiff is way off here, and his arguments are extremely questionable. China is plagued with severe malinvestments (ghost cities, empty giant super malls, etc), its trade surplus is the result of continuous currency manipulation, and the vast majority of its citizens are trapped in extreme poverty. The Chinese government attempts to hide the fact that there is a 24% unemployment rate. China has, in my opinion, the most structurally unsound economy in the world (worse than America and Great Brittan), literally built on forced saving. There are many people getting rich in China, but only at the expense of other Chinese citizens, and only because of arbitrary government privileges by the CCP. I wont deny that China is better off today than it was 40 years ago, but that’s only because of the partial liberalization of its market economy–partial being the key word. China is the ultimate fascist state; it’s what liberals want for America.

15

I think a lot of people are having an emotional reaction. For some reason there is emotional investment in not having an economy less free than that of CP run China.

16

Indeed you have a point. According to the Index Denmark has higher economic freedom than Luxemburg and The Netherlands… yet where are all the big corporations located? Also Botswana ranks among the most free economies, again according to the Index, yet I have never even heard of somebody considering investing down there.

17

Those indexes were critiqued heavily years ago at lewrockwell.com. I’ve been trying to digg up the articles but with no luck.

18

China gets a zero in EFW 2010 for 53% Government Enterprises and Investment and Capital Controls. They’ve been rising on the overall list every year, though.

So? Luxembourg and Netherlands have bigger transfer payments than Denmark. Denmark has improved substantially. Those other two just keep going downhill.

19

I remembered this being discussed on the LewRockwell blog. Btw, is there any point to me posting LewRockwell blogs? I feel like everyone already knows about Lew’s blog. Though on the other hand some people post questions here like “what is the Austrian view of zoning laws?” Typing “zoning laws” into the Mises search brings up “Zoning Laws Destroy Communities” and “Zoning is Theft” and “How Zoning Rules Would Work in a Free Society,” all with their own blogs for commenting. I honestly don’t get it.

### The People’s RepublicPosted by Lew Rockwell on September 10, 2009 02:10 PM

My old friend David Franke has recently made two long trips to China, and found it far more capitalist than the US. Indeed, says David, the whole place is a land of entrepreneurs, and safe besides. Unlike David’s DC climes, Beijing has virtually no crime. We both agreed that Jim Rogers has it right: the future is in Asia. True, David notes, China has a fascist government, but so does the US. The one difference: they don’t drape the fraud-cloth of democracy on theirs. Meanwhile, notes David Kramer, Chuck Baldwin can’t bear to see a capitalist flag flown over the white house.

re: The People’s Republic

Posted by Lew Rockwell on September 11, 2009 01:08 AM

Writes Rob Esposito:

In response to your blog post, I also recently returned from a trip to China. In addition to being more capitalist, they are far less authoritarian than us. I saw only one armed officer during my entire two week stay. I wasn’t required to strip down for airport security. Conversely, I was greeted by dozens of armed officers as soon as I landed in the U.S. and told to put my cell phone away or it would be confiscated. I just laugh when people say we live in the freest country on earth.

re: The People’s Republic

Posted by Thomas DiLorenzo on September 10, 2009 03:01 PM

Several years ago a very bright undergraduate student of mine (who attended Mises University) spent his junior year studying in China. When he came back he said, “There’s more freedom to be an entrepreneur in China than there is here.” After he graduated he worked here for several years, saved his money, learned Chinese, and went back to China where he is trying his hand at entrepreneurship today.

20

Someone called Wednesday to challenge him, and he explained that it was because of China’s manufacturing base, size of government, taxes, ease of starting a business, trade surplus, etc. Basically he said since China produces more manufactured goods, in terms of quantity, than the U.S. it is more free market.

I used to work for a Lighting Company that manufactured products in China,and purchased products from Chinese Manufacturers. I did visit China, and found it to be a very exciting place, something like England would have been like in the 1870-80’s industrial revolution, burgeoning cities filled with people eager to take a chance and work for a living. People seemed fairly free to take a job or leave a job, education past a certain point was not free, but there was a range of classes, working, middle, etc.

In any case I emailed this post to friend of mine who still works in china in product development and manufacturing up to 3 months at a time, and here is what he had to say.

see below, it is a bit rambling, but he has been spending extensive time in china so I thought it might be informative…

from what i gather, it’s easy enough to start a business, but you need to clearly define what your business is… you then get a license to do just that.

if you start to operate outside of that business you get taxed heavily.. for example, steve(hs business partner) is licensed to do sourcing and international export.. he has many relationships with factories, and his company even owns controlling shares in several of them, but he is not licensed to manufacture.

this means that any money that he spends on things outside of his licensed business is taxed quite heavily.. so if he wants powdercoating material, he would not be wise to buy it himself, rather he needs a factory to buy it, and declare it.. otherwise he needs to pay cash.. which often happens.. (every company has a few offices with safes stuffed with cash…)

the big competitive advantage that china has had, beyond the obvious (inexpensive labour, lax environmental and working standards etc..) is the export tax refund.. for everything a factory exports, they can get up to 18% back from the government.. this is how many factories make their sole profit.. most factories operate on margins of only a few percentage points, sometimes even operating at a loss, because they know that they get a sizeable chunk back from the government at the end of the year.

this is what has been really pissing people off.. no one honestly cares about child labour, sweatshops, unsafe working conditions, low wages or whatever.. it’s the fact that a factory can sell something for less than it’s raw material value and still make money year after year. obviously this can’t go on forever. and the government has been scaling the refund back slowly, but the damage has already been done.. in a one party system you can take a 50 or 100 year view on a problem… has it’s advantages doesn’t it?