Sunday, August 30, 2015

The Chinese Way or the American Way? ... Socialism or Capitalism? ... Zombie Factories Controlled by Government Elitists or Free Markets Controlled by We the People?

There is a distinct tendency for too many of today's Americans to prefer socialism and embrace greater government control in the pursuit of fairness and under the misguided goal of broad based income equality.

That march toward socialism, assuming it continues unabated, necessarily will result in a society discarding the inherent benefits associated with an educated citizenry, self reliance, individual freedoms, self determination and overall societal prosperity.

Of course, today's big government advocates and supporters are working diligently to encourage the widespread belief that income inequality is unfair and that only 'selfless' leaders like Hillary Clinton (government) and Jonathan Gruber (academia) who have acquired great wealth by 'serving' We the People, aka Sheeple, are capable of teaching us how to right these perceived 'wrongs.'

They fail to mention that in a free, fair and prosperous society, income inequality is a good, natural and inevitable outcome --- as is widespread knowledge about how things really work.

Nobel prize winner Milton Friedman said this: "A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both."

Today's lessons coming from China and the United States clearly and unmistakably prove Friedman's point.

Zombie Factories Stalk the Sputtering Chinese Economy has this to say in part about elitist government control and the resulting and debilitating effects on the country's citizens, aka Sheeple:

"Miao Leijie loses money on each ton of cement his company produces. . . .

Changzhi and its environs are littered with half-dead cement factories and silent, mothballed plants, an eerie backdrop to the struggling Chinese economy.

Like many industrial cities across China, Changzhi, which expanded aggressively during the country’s long investment boom, has too many factories and too little demand. That excess capacity, many economists indicate, will have to be eliminated for the Chinese economy to return to healthy growth.

But rather than shut down, Lucheng Zhuoyue and other Changzhi companies are limping along in a kind of march of the undead.

To protect jobs and plants, the government and its state-owned banks sometimes keep money-losing businesses on life support by rolling over or restructuring loans, providing fresh credit or offering other aid. While this may seem like an odd business tactic, it is part of a broader strategy to help maintain social stability, a major goal of China’s leadership. . . .

Similar strategies have been tried before, with little success. In Japan, such businesses, known as “zombie companies,” are blamed for contributing to that country’s two decades of economic stagnation. 

As China allows its own “zombies” to stalk the economy, the situation is clouding the country’s outlook, making it difficult to predict where growth is headed. If the leadership doesn’t address the underlying problem, the economic weakness could be prolonged.

Concerns have already been rising that China’s slowdown is worsening and its problems are becoming harder to overcome. . . .

Far from the sparkle of Shanghai or the export zones of Shenzhen, Changzhi is a modest city of three million people who live in low-rise apartment complexes and work in boxy factory compounds. The local economy depends on steel manufacturing and other heavy industries that girded the country’s decades-long era of high growth. As the property market grew and the government plowed money into roads and other infrastructure, cement factories sprouted on the city’s outskirts to capitalize on the bonanza, creating hundreds of well-paying jobs. . . .

Empty apartments built during the boom are now weighing down the property sector. Businessmen in Changzhi complain that construction projects supported by the local government have also been scaled back.

As a result, Changzhi’s cement plants are saddled by excess capacity. Companies in the province can produce three times as much cement as what was actually needed in 2014 . . . .

Such conditions have turned once promising companies into zombies. While trucks are still parked outside the sprawling industrial compound of Changzhi’s Huatai Cement Clinker Company, there are far fewer than just a couple of years ago, and they have less to haul. The money-losing company has produced a mere 200,000 metric tons of cement this year, even though it is able to make one million.

As a state-owned enterprise, Huatai has been kept running with the help of special assistance. Huatai gets coal on credit and access to cheap loans from its parent company, which is owned by the provincial government. That has allowed management to keep all its 300 workers on the payroll — the company’s top priority. “Our employees need to eat, they need to live,” said one manager, who declined to give his name.

Such measures may help sustain employment, but they also delay the much needed overhaul of Chinese industry. A study of China’s labor market by the International Monetary Fund released in July noted that state-owned enterprises tended to keep workers that they did not need. From an economic perspective, it would be better for such businesses to downsize or even close, releasing their trained staff to work at companies or in sectors with stronger prospects. That would shift resources away from less productive parts of the economy, helping get growth back on track.

Without such a shift, the economy could suffer in the future. Raphael Lam, deputy resident representative at the I.M.F. in Beijing, says Chinese policy makers should move more forcefully to enact pro-market reforms and allow state-owned enterprises to restructure. If not, he says, “Over the long term, there would be an increasing likelihood of a sharper slowdown.”. . .

The situation is also complicating matters for workers not lucky enough to keep their jobs. Though unemployment has remained low nationally, workers in troubled Changzhi complain that good jobs are hard to find.

At the Changzhi Cement Group, where the only sound is a barking dog, a former company electrician, Zhao Liwei, 43, watches TV inside a decrepit room for janitors at the compound’s entrance. Two years ago, as production at the state-owned plant ground to a halt, her paychecks stopped coming. Most employees were left to fend for themselves.
Ms. Zhao has not worked at all. The only jobs in the area, she says, are sweeping floors and waiting tables, for as little as 500 renminbi, or $78, a month. She earned twice that working at the factory. “We were promised an iron rice bowl” — the Chinese term for lifetime employment — she said. But now “it is like we’ve been left on an eternal, unpaid vacation.”
Some of these idled workers have faced biting hardship. Sitting outside a nearby deteriorating residential complex, Du Jianping, 45, says that she has to rely on handouts from her parents to put food on the table for her 12-year-old daughter. She and her husband lost their jobs at the Changzhi Cement Group, and ever since, Ms. Du has been earning a pittance selling women’s clothes and children’s toys at a stall outside a train station.

She feels trapped, fearing she would be unable to get better work elsewhere. “We are too old to find jobs in the cities,” she said. “I hope the government could help lift up the cement industry so that it can recover.”

Beijing is sensitive to such pleas. Fearing that joblessness could lead to social instability, the government has made maintaining employment a primary goal of its economic policy. Premier Li Keqiang said during a news conference last year that the lowest growth rate acceptable to the regime “needs to ensure fairly full employment and realize reasonable increase of people’s income.”

That helps explain why Beijing is taking stronger action to prop up the economy. . . .

Still, such steps may do little more than keep zombie companies alive — to the detriment of the overall economy. By pumping up growth with fresh credit and stimulus, the government might temporarily revive some factories, but also exacerbate the economy’s problems of excess capacity and high debt.

The consulting firm IHS Global Insight estimates that debt relative to China’s output will reach 254 percent in 2015, nearly double the level of 2008. Such debt levels can pose substantial risks to an economy if borrowers are unable to repay them and a wave of defaults follows. “The size of debt only accumulates,” said Grace Wu, a senior director at the rating agency Fitch in Hong Kong. “That doesn’t help with the underlying economy. It doesn’t help create jobs.”
Over the long term, Chinese policy makers are trying to decrease the economy’s dependence on excessive investment for growth and allow household consumption to play a bigger role. That means the factories in many heavy industries, like cement, may never run again at full tilt."

America is a different story. We have a relatively free market society and economy where free choice driven consumer spending accounts for two thirds of the nation's economic activity.

Solid Consumer Spending Expected to Help U.S. Push Past Market Sell-Off offers this timely and optimistic overview of the developing good news scenario:

"Consumer spending rose in July as American households stepped up vehicle purchases, but consumer sentiment dipped in August. Though confidence remains at levels consistent with solid spending growth, many households have been fretting over a recent stock market sell-off. . . .
Economists say that underlying strength — also highlighted by a rebound in business spending, and buoyant housing and labor markets — gives the economy muscle to weather the fallout from the market rout.

The economy grew at a 3.7 percent annual rate in the second quarter, according to revised data released on Thursday. The consumer spending data was the latest report indicating momentum in the economy as it confronted global market turbulence, sparked by concerns over a slowing Chinese economy . . . .

Consumer spending should be supported by steady income growth and higher savings. Last month, personal income increased 0.4 percent in July. Income has risen by that same percentage for four straight months. . . .

“The economy has built up a huge amount of steam to push it forward in the months to come with the substantial cash reserves that consumers are holding,” said Chris Rupkey, chief financial economist at MUFG Union Bank in New York."

Summing Up

China's socialist and elitist government controlled chickens are coming home to roost.

In the end, Chinese citizens, aka the Sheeple, will pay the price for all this government provided 'protection,' as the citizens of an elitist government run society always and inevitably do.

On the other hand, America's still relatively free market oriented chickens are beginning to lay lots of edible eggs for U.S. consumers, aka We the People.

Yet I wonder why many of my fellow Americans choose not to see what is easily seeable.

Could the explanation be as simple as what journalist Edmund R. Morrow once said, "The obscure we see eventually. The completely obvious, it seems, takes longer." It seems so.

So that's my take --- as well as my hope.

Thanks. Bob.

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