FUNNY HOW THAT WORKS:

In the first part of his book describing and assessing "State Capitalism," Gregg addresses economic problems of state capitalism such as inefficiency, decreased productivity, slower innovation, worse products, and stagnant wages. State Capitalism describes both the status quo and the current trend of the American economy. It refers to the idea that markets should be managed by governments, particularly when it comes to matters of trade, industrial policy, and determining what kinds of investments companies should make. Gregg marshals compelling historical evidence of the detrimental effects of tariffs, of industrial policy, and of departures from traditional profit and loss incentive structures. Then he goes much further.

The Next American Economy recognizes that "Americans are not simply economic beings, and America is more than an economy." The deeper problem with state capitalism involves moral, political, and social corruption. Gregg rightly notes that tariffs make for bad economics and bad politics--encouraging businesses to devote huge resources to lobbying politicians and regulators for favors in order to charge consumers higher prices and face less competition. When companies lobby the government, they put fewer resources towards producing high quality products more efficiently: "Lobbying for tariffs to be applied to one's industry or business is not a cost-free exercise, but the potential payoff is very big." Political connections become more important than productivity.

Gregg argues that advocates of tariffs and industrial policy on the political right are gravely mistaken, not only about the efficacy of those policies, but in their interpretation of the times. With the rise of Trump, alarm bells have not stopped ringing about China. The former president argued that China has been "winning" at trade while the U.S. has been "losing." Not only that, but China has made impressive advances through their industrial policy while the U.S. sat on its hands. According to this narrative, the U.S. needs to get its act together quickly to deal with China's rise by creating significant trade barriers and engaging in constructive industrial policy.

This narrative has gained significant traction in recent years. Supposedly, U.S. policymakers were asleep at the wheel over the past two decades, lulled into somnambulance by the bromides of free market and free trade "extremism." In that time, China has vaulted onto the world stage as the primary U.S. rival--aided and abetted by naïve trade policy. To this narrative Gregg says, "No, no, no!" 

China's rise has been greatly overblown. Their economy has several serious problems: corruption, low levels of innovation, massive amounts of debt, significant misallocations of capital, horrendous demographic trends, and relatively bleak investment prospects. And this should not be surprising! Industrial policy has these effects. China's rise over the past 30 years has been driven largely by its openness to trade and its embrace of certain market principles in its special economic zones. The more China departs from those policies, as President Xi has indicated they will, the greater the problems their economy will face. Any narrative suggesting that emulating Chinese industrial policy will strengthen the U. S. economy is, to quote Macbeth, "a tale told by an idiot."

Yet many on the political right have bought into such a narrative. 

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