Chrystia Freeland

This fall, much of the United States seemed to have settled on a narrative for the country’s struggle to adapt, after a debilitating financial crisis, to a post-industrial and post-unipolar global economy: China and its undervalued currency are largely to blame.

Proof that this was a nationally compelling storyline came during the acrimonious midterm election campaign. U.S. politics have rarely been more polarized, but complaining about China was something both parties could agree on.

John Boehner, the presumptive new Republican Speaker of the House, attacked the Democrats for “a stimulus that shipped jobs overseas to China instead of creating jobs here at home.” Harry Reid, the Nevada Democrat who hung on to his Senate seat and his job as Majority Leader, accused his Tea Party opponent Sharron Angle of being “a foreign worker’s best friend” for supporting corporate tax breaks that helped businesses outsource jobs to China and India.

This rare bipartisan consensus is why Americans were astonished to discover, when the Group of 20 gathered in South Korea this week, that in much of the rest of the world, it is the U.S. that is seen as the world’s rogue economic player.

That sentiment erupted with particular intensity in the wake of the Federal Reserve’s decision to pump $600 billion into the economy, a measure emerging market leaders worry will release a flood of money into their countries and which Europeans fear will bring inflation. But the rest of the world’s complaints about the U.S. run deeper than Fed chairman Ben Bernanke’s resort to quantitative easing.

Chrystia discusses the Fed’s recent decision to launch a new round of quantitative easing on the PBS NewsHour:

You can read the transcript here.

Posted by Peter Rudegeair.

A favorite theme of American business and political elites at the moment is that authoritarian regimes—i.e., China—may be better at making hard, long-term economic decisions than are querulous democracies—i.e., the United States. There is plenty of academic research to suggest that, over the long term, this view is wrong. But in the shorter term—this week in fact—America itself offered a case study of this scary theory.

Consider: On Tuesday, Americans swung sharply to the right, giving their Democratic President a shellacking and handing control of the House of Representatives to the Republicans. The country’s most powerful elected Republican, John Boehner, who will be the new speaker, immediately declared it was a vote for “cutting spending” and “smaller, less costly government.” Most analysts, including happy ones on Wall Street, who are often most cheerful when the country’s elected officials are least active, decided it was a vote for gridlock, thanks to the Democrats’ continued control of both the Senate and the White House.

Then, on Wednesday, America’s most powerful unelected Republican, Ben Bernanke, the chairman of the Federal Reserve, swooped in with massive government action, announcing a plan to pump $600 billion dollars into the U.S. economy over the next two years. That is not much smaller than two of the big government interventions that earned the Democrats their shellacking—the $700 billion TARP program (never mind the pesky fact that it was actually a Republican Secretary of the Treasury who invented it) and the $787 billion stimulus.

Don Graham, Chairman and CEO of the Washington Post Company, visited the Reuters studio this morning to chat with Chrystia about the future of the company’s Kaplan subsidiary as well as its flagship newspaper. In addition to its popular test preparation courses, Kaplan operates 75 colleges and graduate schools, both online and through brick-and-mortar campuses, that serve 112,000 students. Earlier this year the Department of Education lashed out at for-profit colleges like Kaplan for misleading prospective students about tuition costs and salaries after graduation. The Department proposed new regulations on these institutions that would tie federal aid to the number of students who are repaying their loans.

Graham said that while the Department’s efforts to crack down on bad actors are right-minded, the current proposals will end up having an unintentional yet harmful effect on low-income students:

There is a 99% correlation between the number of Pell Grant students—the number of poor students a campus serves—and the repayment rate under the proposed Department rules… The Department has scored a direct hit on schools that serve poor students. They didn’t want to. They didn’t mean to. But that is what they did. And I hope they’ll reconsider that rule and propose something that in fact cracks down on bad actors but does not punish schools that serve poor students.

Tony Hsieh and Sanjay Madan wrote the program to create LinkExchange over a weekend. Before the following weekend, they had more than a dozen websites participating in their ad-sharing network. Over the next several weeks they worked frantically on the project. They refined their business in real time, learning—quickly!—from their mistakes. Less than a year later, the Harvard grads were offered $1 million (U.S.) for the company. Less than a year after that, they sold it for $265 million.

That was 1996. Since then, this story of development on the run has become commonplace. Hacker culture is now part of the broader culture: “beta test” is in the dictionary, and we accept innovative, albeit imperfect, beta releases even from multibillion-dollar global behemoths such as Google. We’re prepared to accept flaws because the tech revolution is progressing so quickly that it is usually better to be fast, and possibly wrong, than to try to be perfect and end up being slow. By the time your flawless product is released, it will likely be obsolete.

Technologists aren’t the only people operating in a rapidly changing, uncertain environment. Thanks both to the tech revolution and to globalization, that is true of all of us, including our governments. But, as Nobel-Prize winning economist Michael Spence argued at a private equity conference in Quebec City this week, emerging-market governments seem to be better at dealing with an unpredictable, volatile world than Western ones. They are like Silicon Valley entrepreneurs—willing to act swiftly, even if it means making mistakes. Leaders in the West are more like Detroit, reluctant to make bold moves until it is too late.

Following her chat with Glenn Hutchins at the Quebec City Conference about how globalization is changing corporate strategy, Chrystia interviewed NYU Economics Professor A. Michael Spence about how globalization is bringing about structural change in the world’s leading economies.

Spence, a 2001 winner of the Nobel Prize, chairs the Commission on Growth and Development, a multilateral effort to determine the practical conditions developing nations need to implement in order to achieve high growth. Given his expertise in emerging markets, it comes as no surprise that he thinks their future is bright. Spence was impressed with emerging markets’, especially China’s, brisk comeback following the capital flight and collapse in world trade that resulted from the financial crisis, and he thought they would be able to sustain their current growth rates:

American policymakers — and other Nobel Prize winners – are far less impressed with China’s resurgence, which they view as the result of the malevolent Chinese policy of keeping the yuan undervalued. Spence, however, argued that a one-off revaluation of the sort Washington demands will not only be bad for China, since it will destabilize most of the country’s export-oriented businesses. But it would also be bad for the global economy, since China is the engine for growth in large parts of the world. Instead, he said, China should focus on finding a way to make necessary structural changes while sustaining growth:

The theme of this year’s Quebec City Conference, a gathering of some of the world’s pre-eminent private-equity investors and venture capitalists, is innovation and globalization. Chrystia was in attendance earlier this morning and interviewed one of the event’s keynote speakers: Glenn Hutchins, co-founder of Silver Lake Partners, a $14 billion private-equity firm that focuses on the technology sector.

Hutchins’ remarks focused on the shift of economic power from the U.S. to China. He noted that as long as China grows much faster than the United States, multinational corporations will shift more of their business there. But his other insight was that for the first time businesses are tailoring products to the Chinese consumer rather than just selling the Chinese products developed for American consumers:

It used to be that to be a global company you had to forge your business model in the crucible of competition in North America–potentially Europe, but usually North America–where you define your business model, define your product set, define your customers, and then once you were successful there took it outside the world and essentially sold the same products and services to a strata of groups and people around the world who can consume it.  Today what you’re seeing is companies that are growing up–we talked a little earlier about Huawei being a very good example, but there are many, many others–whose business models are being forged in the crucible of competition in the emerging markets.

They call economics the dismal science, but Larry Summers, one of its pre-eminent public practitioners, is anything but dull. That penchant for intellectual controversy means he hasn’t always won popularity contests, but he is unfailingly stimulating, as he proved in a speech in India last week, when he hit on one of the biggest issues in the world economy today, and coined a snappy catch-phrase to describe it: the “Mumbai Consensus”.

The Mumbai Consensus, Summers said, is “people-centric.” He contrasted it both with the Washington Consensus, the U.S.-led, free-markets-and-democracy formula that seemed to have conquered the world after 1989, and with the Beijing Consensus, China’s state capitalist approach that today is winning fans in emerging markets and in some developed ones.

Summers thinks the real model to watch is India’s, the world’s largest democracy. Partly because of its political system, India’s economic rise has been powered as much by the voracity of its domestic consumers as it has by the country’s push into foreign markets. That’s a sharp contrast with China, where the focus has been on working for the rest of the world, while the Chinese people, who are poorer on average than those of Albania or Jamaica, nonetheless save more than half of their GDP.

On a recent trip to Hong Kong Chrystia recorded a podcast for the American Chamber of Commerce in China, about an op-ed she published in the Washington Post this summer that critiqued China’s economic system of state capitalism.  Chrystia, invoking a recent speech from Mike McFaul of the National Security Council, tells the Chamber that while the Chinese system succeeded in raising the country out of the lowest rungs of poverty, there is no historical evidence that suggests it can turn China into a rich nation:

My argument, and as it turns out quite independently, Mike’s argument, was we have to be really careful about thinking that authoritarian regimes are better at modernization, and one reason why we have to be careful is there is some historical evidence that says that authoritarian regimes can be quite good at the early stages of modernization.  They can be pretty good at that brute force moment when you’re dragging and economy out of being an agrarian society into industrialization.  What we haven’t seen yet—and as we look across the world, across histories—we haven’t yet seen that an authoritarian state is able to move an economy to the next level, and in fact what we’ve seen is that even in those countries where an authoritarian state successfully led an industrialization effort, as the country got richer and the economic transformation that needed to be achieved was more complex, what you actually have had happening is democratization.  There are some Asian countries that are a really good example of that.  I think South Korea is perhaps the best one.  […]  What we don’t have evidence of is that the state capitalist model… works in a really rich country.  All the countries that are really rich are democracies.

Chrystia also elaborates on a topic she touched on in her original op-ed, namely economic historian Joel Mokyr’s thesis that the same centralized, authoritarian decision-making process which foreigners marvel at today actually caused China to miss out on the Industrial Revolution centuries ago:

As the U.S. mid-term elections approach, it is easy to despair about the quality of this country’s political debate. Christine O’Donnell, the surprise Tea Party-backed Republican candidate for the Senate seat in Delaware, has captured the nation’s attention with her opposition to masturbation and a campaign ad in which she assures voters that she is neither a witch nor a graduate of Yale University. Here in New York, Buffalo businessman Carl Paladino, running for the governor’s office, has made his contribution to the carnival atmosphere by discussing his rival’s “prowess” and urging reporters to investigate whether he was a faithful husband.

Part of my job at the moment is appearing as a commentator on other people’s TV shows. Viewed from the green room or the studio, America’s political discourse can look particularly grim. I sometimes find myself in the role of finger-wagging, middle-aged scold calling for a discussion of global financial imbalances, rather than the latest juicy scandal or mockable example of political foot-in-mouth disease. TV producers, I’m afraid, find this schoolmarmish persona as unappealing as my kids do — and given the juicy alternatives available it is hard for me to blame them.

But the campaign trail has always been as much about providing a circus as it is about bread and butter issues. And, dipping just below the froth of the cable sound bites and the blogosphere, I’ve realized this campaign is actually revealing a country that is struggling seriously and passionately to come to grips with the very big issues it faces.