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It's America's economic system that's broken, not China's

By Robert B. Reich, Tribune Content Agency on

Chinese President Xi Jinping might possibly agree in the coming days on further steps to bring down China's trade imbalance with the U.S., giving Donald Trump a face-saving way of ending his trade war.

But Xi won't agree to change China's economic system. Why should he?

The American economic system is focused on maximizing shareholder returns. And it's achieving that goal: Last Friday, the S&P 500 notched a new all-time high.

But average Americans have seen no significant gains in their incomes for four decades, adjusted for inflation.

China's economic system, by contrast, is focused on maximizing China. And it's achieving that goal. Forty years ago China was still backward and agrarian. Today it's the world's second-largest economy, home to the world's biggest auto industry and some of the world's most powerful technology companies. Over the last four decades, hundreds of millions of Chinese people have been lifted out of poverty.

The two systems are fundamentally different.

 

At the core of the American system are 500 giant companies headquartered in the U.S. but making, buying and selling things all over the world. Half of their employees and contractors are non-American, located outside the U.S. A third of their shareholders are non-American.

These giant corporations have no particular allegiance to America. Their only allegiance and responsibility is to their shareholders. They'll do whatever is necessary to get their share prices as high as possible -- including keeping wages down, fighting unions, reclassifying employees as independent contractors, outsourcing anywhere around world where parts are cheapest, shifting their profits around the world wherever taxes are lowest, and paying their top CEOs ludicrous sums.

At the core of China's economy, by contrast, are state-owned companies that borrow from state banks at artificially low rates. These state firms balance the ups and downs of the economy, spending more when private companies are reluctant to do so.

They're also engines of economic growth, making the capital-intensive investments China needs to prosper, including investments in cutting-edge technologies.

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