When the Dow Jones Industrial Average plummeted by more than 1,000 points moments after the opening bell, it must have felt for many investors like it would never find a bottom. But it did, and after a bit of drama the market found its way back to lose a mere 600 points on the day.
It was a lousy show to watch, and investors are clearly scared right now. China’s economy is imploding, and the effects are spilling over worldwide. Chinese overproduction is driving down prices for manufactured goods, which affects everyone. And Chinese demand for American products and raw materials weakens as their buying power wanes — their market accounts for about 7 percent of U.S. exports.
Still, it is both simplistic and inaccurate to say, as Bernie Sanders did almost immediately, that this happened because the U.S. has a robust trade relationship with China. It happened because Chinese officials share far too much in common with Bernie Sanders when it comes to thinking about their national economy.
The carnage that occurred Monday — and that has actually been occurring for months in Asian markets — is happening for reasons strikingly similar to the ones that drove the American downturn in 2008. In both cases, government policy either created huge incentives for malinvestment or made direct malinvestment, creating unsustainable bubbles. The only difference is that this time, it’s a different government, and the level of money wasted on unproductive pursuits for which there is no demand is even more mind-blowing.
In 2008, the chief culprit was the U.S. government’s reckless boosterism of homeownership, which drove investors from Wall Street to Main Street to engage in otherwise irrational behavior. American real estate prices shot up to unsustainable highs, and the rest is history. Of course, no lesson was learned from this, and U.S. government policy continues to create bubbles in higher education, renewable energy and yes, even housing once again.
In 2015, China’s government has done something much more ambitious. It has reached the tail end of its own mind-blowingly large campaign of malinvestment. It goes beyond just the enormous ghost cities of empty apartment buildings and shopping malls that the regime has financed. According to one government report, between 2009 and 2013, nearly $7 trillion was simply wasted on useless projects for which there was no demand.
Do not blame President Obama for poor decisions by the Chinese government. But remember that America might be in the same boat today if, instead of wasting a mere $1 trillion on a stimulus package, he had taken the advice of his party’s progressive wing and pursued a stimulus package several times as great.
The first U.S. casualty of China’s implosion is Obama supporters’ argument that a boom in the U.S. stock market signals that five years of stagnation will soon come to an end. Obama was recently quoted crediting himself with restoring people’s 401(k)s, a claim he might live to regret.
The second casualty, one can at least hope, will be the ignorant rhetoric on trade that comes from Sanders, Donald Trump, and the other blowhard politicians who constantly abuse China as the source of America’s economic ills. To whatever extent America suffers, it will be because trading partners tend to flourish together rather than at each other’s expense. As China’s stature in the world economy declines, these demagogues will finally get the “victory” they wanted, and Americans might discover it is not so sweet.
