China and U.S. in new global faceoff between economic planning and deregulation: Don Pittis

The strugglebetweeneconomiesbased on government planning and the unhindered free market was supposed to have been settledyears ago when the Soviet Union crumbled.

Now it appears the battle between planning and the invisible hand may be back on and it's still not absolutely clear which side will win.

This week China announceda new set of governmentplans to boostits economy. By contrast, the U.S. movedtowarda new round of deregulation with the same intent.

Planning loses Round 1

With the collapse of the Soviet Union in 1991, the triumph of free market, laissez-fairecapitalism seemed complete.

Although the Soviet Communist system had demonstrated transformational successes, like catching up to the West in heavy industry, nuclear science and space technology, thetop-down command economy proved unsustainable.

As dissident Yugoslav politician Milovan Djilasrecognized as early as the 1950s, the system of Soviet planning was damaging many parts of the Eastern Bloc economies.

Food production was falling. The Communistelite lived in luxury, observed Djilas, while ordinary people had to line up for bread.

But even as the former Soviet Union broke up into its constituent nations, the contradictions between the planned and the free market economies wereas much about ideology as fact. Both sides planned. Both sides used the market. It was a question of degree.

This week it appears the clash between those two ideologies is facing another bout.

At the opening of the National People's Congress, Chinese Premier Li Keqiang announced the government is once again getting deeply involved in the country's economic progress. At the same time,members of the Trump administration were announcing a new round of hands-offpolicies.

One clear point of contrast this week is on the environment.

Blue sky proposal

In response to growing public outrage over choking air pollution, Li pledged the Chinese government would "work faster" to clear the air.

"We will make the skies blue again," Li declared to the thousands of delegates inthe Great Hall of the People.

Meanwhile in the U.S., there aresharp cuts planned for the Environmental Protection Agency. Various reports saythe Trump administration ison the verge of relaxing U.S. automobile fuel-economy standards.

"The U.S. auto industry is happy with Donald Trump," Business Insiderreported yesterday.

The contrast between pollution levels in China and the United States has an obvious bearing on the two strategies. But pollution wasn't the only area of divergence.

Planningfor success

During his speech, the Chinese premier also outlined a $300 billion USplan to transform his country's economy, reducing its dependence on foreign markets. Instead, China wantsto produce and consume its own technology.

"We will fully implement our plan for developing strategic emerging industries," Li said of the plan, whichthe New York Times reports hasWestern businesses worried."We will accelerate R&Don and commercialisation of new materials, artificial intelligence, integrated circuits, bio-pharmacy, 5G mobile communications and other technologies."

The U.S. has taken the opposite tack.By cutting taxes and deregulating, the Trump administration insists it can boost theeconomy by letting the free market rule.Although the president has been willing to intervene on trade and push companies to make products at home, business leaders aregenerallythrilled.

"After a relentless, eight-year regulatory onslaught that loaded unprecedented burdens on businesses and the economy, relief is finally on the way," said ThomasDonohue, the head of the U.S. Chamber of Commerce.

While business leaders may dislike what they describe as"red tape"and be happy about the short-term benefits of deregulation, not everyone agrees that the freest market is always the best for a country's economy.

Critics have observed thatthe success of U.S. business, including the dominantposition of its high-tech sector, has less to do with laissez faire thanU.S. government cloutin international regulatory bureaucracies.

Apple's boost from government

As the biggest playerin the regulatory game, the U.S. can actually use rules to boost investment in areas where it has an advantage. By forcing all companies to comply, there is evidence from the auto industry thatsetting industry standards can launchnew waves of investment in innovation.

Similarly, there is a strong case to be made that the success of suchU.S. corporate stars asApple was only possible because of U.S. government investment in world-leading technologies, says Mariana Mazzucatoin her book,The Entrepreneurial State.

Mazzucato says not only is government direction essential to business success, but governmentis often more daring, willing to take risks when the private sector is too cautious. The space race is a single obvious example that createdhuge industries, including everything to do with satellite communications.

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There is the argument that by "picking winners," governmentsoften distort the market. But as William Berksonwrote last year in Washington Monthly, that can be overcome."When programs fail, effective governments terminate them and try something else."

It has been well-documented that bad regulations and government spending on unproductive boondogglescan createinefficiency.

But the question of whether the best economic strategy is to let the market decide or if it's best for governments to steer business in the right direction is no less disputedthan it was before the collapse of the Soviet Union. With China and the United States taking opposite paths, the world can watch asthetwo strategiesfacea rematch.

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