U.S. Fiddles While China Grows

Economist Simon Johnson has a recent post at The Baseline Scenario highlighting two great dangers to U.S. prosperity; one foreign and one domestic.

On the foreign side, Johnson encourages us to set aside the monetary relationship between the U.S. and China. The real danger he says, is from China's habit of investment with an eye toward productivity growth (e.g. infrastructure, education). This in and of itself might not be so bad if we in the U.S. were doing the same.

This is where the domestic part of the problem comes in. Johnson argues that the U.S. has not worked to increase productive sectors of its economy. Instead, our economy has seen a certain non-productive sector increase dramatically as a share of GDP. Specifically, the finance sector, which he spitefully dismisses as "rent-seeking."

No, rent seeking is not when Mr. Furley knocked on Jack Tripper's door on the first of the month and all of the 70's sitcom hijinx that such a scene entails; it is the practice of extracting benefits above and beyond what those they would receive under free market conditions, often by turning the political process to their advantage.

It's the combination of these two different approaches to economic development that represents the real danger for the United States. Here's Johnson [E.A.]:

Finance in its modern American form is not productive. It is not conducive to further sustained economic growth. The GDP accruing from these activities is illusory – most of finance is simply a tax on what is done by more productive members of society and a diversion of talent away from genuinely productivity-enhancing activities.

The rise of China does not necessarily imply slowdown or demise for the United States. But if they specialize in making things and we specialize in finance, they will eat our lunch.

Anybody know what the Masters of the Universe on Wall Street eat for lunch? Hope the Chinese like it.

Go read the whole thing.