(W.E. Talk) Can China and the U.S. Escape the Thucydides Trap?(3)

Root Cause of America’s Problems: Silicon Valley and Wall Street

Is China’s development the root cause of America’s problems? Most developed countries are reluctant to admit that the causes of their problems lie in themselves. Instead, they blame others and look for scapegoats.

Since 2008, China has contributed over 30 percent of global economic growth every year. Western countries can also develop well if they can seize the opportunities in China.

For example, Germany, the most developed European country, has been called a “miracle.” American economist Michael Spencer, joint winner of the Nobel Prize in Economic Sciences in 2001, once said it was the rapid development of China that contributed to the German miracle after the 2008 crisis. China was undergoing industrial and technological upgrading and massively imported new technologies and equipment from Germany, helping Germany revive.

On the other hand, the situation in the United States is a study in sharp contrasts. The American middle-income group has shrunk, the income of general workers has not significantly increased, and the polarization in U.S. society has worsened. A lot of research shows this was caused by Wall Street and the Silicon Valley.

After the U.S. dollar’s direct convertibility to gold was terminated in 1971, the U.S. took advantage of the dollar’s status as the world’s reserve currency to advocate financial liberalization. This allowed Wall Street to enter developing countries and speculate for profit with the dollar’s status and U.S. capital accounts. The large sums of dollars that flowed into the stock markets and bond markets of the emerging economies and then quickly withdrew caused consequent financial instability in these countries. One study shows that in 2007, a handful of Wall Street companies controlled as much as 40 percent of the overall corporate profits in the United States.

Let’s now look at the role of the Silicon Valley. The United States is at the forefront of the global technology and continues to invent new technologies. The Silicon Valley, where most of the tech companies are located, enjoyed patent protection on new technologies, which enabled it to straddle the whole world as its market and derive an astronomically high income.

From the 1970s and the 1980s, those two have been the two major contributors to American growth. But they created only a limited number of jobs, which resulted in U.S. manufacturing hollowing out. Some of the industries that still remain in the United States are general services companies with very low value added. The service industry does create many jobs, but the income is very low, and the wealth stays in the pockets of a small number of people on Wall Street and in the Silicon Valley. That is the root cause of the United States’ domestic problems.

The United States’ wealth is unevenly distributed. So it needs to hike taxes. After taxation, the wealth brought by technological innovation or financial liberalization should be invested in improving infrastructure and education, so that more better-paid jobs can be created.

Unfortunately, that is not what Washington is doing. Instead, it’s attributing its domestic woes to China’s rapid development and globalization. It should look for the causes within itself and find solutions to benefit not just itself but other countries in the world as well.

Edited by Wang Zonghan