To Understand the State of the Union –Understand the State of Our Relations with China

If last night's State of the Union speech should remind us of anything it is that we are in a time of crisis. A political system in Washington still deadlocked along partisan lines, still the plaything of special interests and mounting deficits that it will take generations to pay down. The President of course tried to put the bravest possible face on it all and appealed in that slightly corny Reaganesque way to the American can do spirit to get us through.

But for those of us who are concerned about the deeper structural reasons as to how we got here—we must be prepared to look globally beyond just the bank bail outs and the the crazy version of casino capitalism that led up to the fiscal meltdowns. If we want to know why insurance companies like AIG could leverage half the planet in speculative deals—we need to examine our relationship with China. At the core of the key issues facing the US is our unbalanced relationship to that country that used huge surpluses to chase ever higher interest rates after Fed Chairman Greenspan decided to keep borrowing rates low. We also need to understand that although China (as are many Asian societies) more savings than consumer led economies-- the Chinese rate of domestic spending and investment is extremely low. Other Asian societies are much stronger than China on the consumption index—and as James Surowiecki pointed out in the New Yorker several weeks ago during the 1980s China was consuming 50 percent of GDP—it is now down to 35 percent,and as Surowiecki points out the price for keeping the value of its currency low is that Chinese consumers find it tough to find credit and outside of that countries' largest cities there are few stores and products available for sale. There is also an irony in a society that supposedly is still Communist there is no health insurance, unemployment benefits, moreover, Chinese workers can look forward to small pensions, few student loans No wonder the Chinese save so religiously--it is more a survival instinct than a choice. As in the west wages during their economic boom wages were kept low and GDP gains have gone into the pockets of relatively few. Something like one third of our debt is held by the Chinese who arguably now have an effective veto over our foreign policy—witness the extreme reluctance for the Chinese to back UN sanctions against Iran.

What needs to happen? We are in a strange dance with an enormous power that will only gain in economic strength over the next decades. Dance partners do not have to be locked together their entire lives however and there clearly needs to be a debate about the future of this relationship and strategies devised by which China can be persuaded to invest more in its people and their quality of life. China is a late 19th century version of the US—and the UK—poor social conditions for the masses of working people, environmental damage all under-girding the mask of success-- enormous economic power. Rather than maintaining our passive business as usual stance--we need to look at our own crisis as partly a function of the dysfunctional relationship. If we fail to do this could be on a collision course. There is only so much of our debt that the Chinese will buy and only so much unemployment we can politically tolerate. We cannot keep expanding a consumerist and carbon hungry economy. It is time to put this discussion front and center and avoid the tea party distractions and the usual run of celebrity scandals.