China and its Discontents

The driving force behind the U.S. deficits and China’s surpluses lies not in exchange rates but in structural factors that built up over time. Three factors largely explain the emergence of China’s trade surpluses: surging U.S. consumption that fueled import demand, maturation of the East Asian production sharing network centered on China, and ratcheting up of China’s savings rates.

The story of the origins of the decline in U.S. household savings rates which was then exacerbated by growing fiscal deficits and together led to the excessive demand for imports is well known and still unresolved. This part of the story has little to do with China, but reflects the political gridlock in Washington.

Yukon Huang, of the Carnegie Endowment and former country director at the World Bank, writes at The Diplomat that the U.S. “must get over” the renminbi. While it is true that China gets the low-added value side of the production chain, and that if counted properly, our trade deficits with Japan, South Korea, et al would be much higher, I think he discounts the role of Chinese state policy in perpetuating the trade deficit. The Chinese, in effect, have subsidized our consumption: all dollars that flow into export businesses must by law be surrendered to the People’s Bank of China, which then invests it right back into U.S. treasuries because it doesn’t know how to spend its money fast enough (there are already questions about the quality of the infrastructure investments China has made). This is one of the primary reasons why the Chinese savings rate is so high–because it’s Chinese state policy. Sure, the average consumer has a high savings rate because of the volatility of the Chinese market (no social security/safety net, very few safe investments so much of those savings flows into real estate or low-interest savings accounts that don’t keep up with inflation–financial market liberalization is a topic for another day). But state-enforced savings far outweigh consumer savings. This investment in Treasury bonds, in turn, aids the U.S. in taking out more debt, and ultimately, for U.S. consumers to buy more things. It’s a vicious cycle of consumption.

Huang does give the right solution, however: increased Chinese consumption. But again, he seems to think this is mostly solved by individual consumers buying more things. He does suggest the Chinese state do one thing: relax the hukou residency permit rules, so that migrant workers can feel more secure in spending more money. This is all well and good (the Chinese hukou system is draconian; the lack of labor mobility is a huge drag on the Chinese economy), but the Chinese state can do a lot more: by spending more of the money it puts into Treasury bonds! If it’s having trouble disbursing the money in the form of infrastructure investments, fine! Use it to create a viable social safety net and universal healthcare! Pay school teachers more! Invest in the Chinese people, rather than trying to build the next big infrastructure monstrosity that will fall apart in five years anyway.

On the eve of SCOTUS potentially overturning the individual mandate portion of the ACA, Ezra Klein reacts to the sadness and resignation at the political polarization of the court coming from liberal legal scholars by saying: “Of course the Supreme Court is political!” Last fall I wrote a paper on the various civil rights cases basically saying that this is not just a modern phenomenon, but one that’s been around as long as the court has existed (or perhaps shortly after McCulloch v. Maryland), and that shifting interpretations of the Constitution are perhaps not such a bad thing given the shifting moral ground of society (EDIT: I should note that I do NOT support the overturn of the individual mandate). At the time I was very nervous about ever writing or publishing something like this, but I guess it’s become a common-place sentiment now! Read on:

Justice cannot be blind to morality; ultimately all decisions made by courts amount to moral judgments. This seems to run contrary to the most conservative notion of the law: fixed and unbreakable, to be treated only as the words exactly prescribe and in the exact intention of those who wrote it. But this belies the fact that we have progressed morally. To say that we have progressed morally is, I think, clear. One hundred and fifty years ago, it was acceptable for Justice Taney to declare: “He was bought and sold, and treated as an ordinary article of merchandise and traffic, whenever a profit could be made by it. This opinion was at that time fixed and universal in the civilized portion of the white race. It was regarded as an axiom in morals as well as in politics…” (6) In Dred Scott, Justice Taney’s conclusion that blacks cannot become citizens is grounded on a purely moral basis. The appeals to tradition and precedent are beside the point. If Taney had disagreed with this evaluation of all blacks, then he would have reasoned that since blacks were human after all, they deserved the rights and protections of the Constitution. Taney contorts himself trying to explain the Declaration of Independence: “The general words above quoted would seem to embrace the whole human family…But it is too clear for dispute, that the enslaved African race were not intended to be included and formed no part of the people who framed and adopted this declaration; for if the language, as understood in that day, would embrace them, the conduct of the distinguished men who framed the Declaration of Independence would have been utterly and flagrantly inconsistent with the principles they asserted; and instead of the sympathy of mankind, to which they so confidently appealed, they would have deserved and received universal rebuke and reprobation.” (9) The founders would have been hypocritical if they simultaneously owned slaves and at the same time declared those slaves were free human beings? Why yes, they were hypocritical! There is no way Taney can come to this conclusion unless he makes a prior moral judgment that blacks are inferior. In this case, the language is unambiguous and clear, as Taney acknowledges in the first sentence.

The Court in the Civil Rights Cases and Plessy v. Ferguson did the exact same thing, but in reverse. The Court in these cases use the 13^th and 14^th amendments to institutionalize racism and discrimination in this country, contra to the obvious intentions of those who passed those amendments. When it passed those amendments, Congress specifically gave itself “power to enforce, by appropriate legislation, the provisions” of the two amendments. And it did enforce those provisions! It passed civil rights laws that guaranteed equality in the use of public accommodations; it directed the army to occupy the South, enforcing political and social equality and voting rights for blacks; it established the Freedmen’s Bureau to provide emergency assistance to former slaves, public schooling for black children, and found what we now refer to as historically black colleges and universities with the hope that the social inequality that former slaves and their descendants faced could be eradicated.

But the Court in the Civil Rights Cases and Plessy v. Ferguson made a predetermined moral judgment, and conformed their legal reasoning to fit that judgment. In the Civil Rights Cases, Justice Bradley seems to believe that “There were thousands of free colored people in this country before the abolition of slavery, enjoying all the essential rights of life, liberty and property the same as white citizens…” (45) How can Bradley believe this in 1883, when surely he has read Justice Taney’s Dred Scott decision, written only twenty-five years prior? It certainly is not any close reading of precedent when Bradley decides to use this “fact” to support his argument that private discrimination should remain untouched by federal legislation.

Bradley later asks: “If it is supposable that the States may deprive persons of life, liberty, and property without due process of law…why should not Congress proceed at once to prescribe due process of law for the protection of every one of these fundamental rights…?” (36) And yet this alternative is exactly what happened when, in a series of decisions, the Court incorporated the Bill of Rights and applied it to the States! The Court in later decades simply made a different moral determination than Bradley did and used the Constitution to support that determination.

And the same thing happened when the Court ruled in direct opposition to the Civil Rights Cases in Jones v. Alfred H. Mayer Co. without explicitly overturning the earlier precedent. There is little difference in the facts of the two cases, and no difference in the legal issues presented! In the Civil Rights Cases, the Court denied that private discrimination constituted a badge of slavery per the 13^th amendment. In Jones v. Alfred Mayer, the Court did. The Court in every one of these cases interpreted the Constitution according to their individual ethical codes and contemporary public morality. How else can you explain the radical swings in Constitutional law, from Reconstruction, Segregation, and Civil Rights eras? Morality dictates law.

Nothing could illustrate this case further than the Court’s opinion in Plessy. I need only reference one overriding, and controlling fact to make my point. In the Civil Rights Cases, Bradley specifically stated that the 14^th amendment, “nullifies and makes void all State legislation, and State action of every kind, which impairs the privileges and immunities of citizens of the United States, or which injures them in life, liberty or property without due process of law, or which denies to any of them the equal protection of the laws.” (33) And yet Justice Brown in Plessy directly violates this ruling. Bradley meant that the 14^th amendment made unconstitutional exactly the same State-authorized Jim Crow segregation laws that Brown accepts as constitutional.

Any claim that the Court has always, and should always, retain a strict constructionist interpretation of the Constitution is a farce. We have progressed morally. Our interpretation of the Constitution has evolved dramatically over time. We haven’t maintained an Originalist interpretation according to the “Founders intent” (whatever that is), and we shouldn’t.

In Dred Scott, Taney derides: “No one, we presume, supposes that any change in public opinion or feeling, in relation to this unfortunate race, in the civilized nations of Europe or in this country, should induce the court to give to the words of the Constitutions a more liberal construction in their favor than they were intended to bear when the instrument was framed and adopted.” (24) But practically speaking, this is exactly what we have done. As we as a people have interacted with one another and discovered that we are human beings and citizens deserving of equal rights, we have changed our interpretation of the Constitution to fit the times. This is appropriate. Law is a codification of common morality. Any interpretation that insists we adhere to a puritanical eighteenth-century version of morality is wrong.