Why Peter Schiff Will Argue that China’s Capitalism Is Better Than America’s at the Slate/Intelligence Squared Live Debate on…

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March 9 2012 1:21 PM

Excuse Me, But Your Democracy Is Ruining My Capitalism

Why Euro Pacific Capital CEO Peter Schiff will argue that China does economic policy better than the U.S. at the Slate/Intelligence Squared live debate on March 13.

Peter Schiff.
U.S. Economist Peter Schiff

Bartek Wrzesniowsk/AFP/Getty Images.

Peter Schiff, a one-time adviser for Ron Paul and the best-selling author of Crash Proof: How to Profit From the Coming Economic Collapse, blames “one man, one vote” democracy for the United States’ waning prosperity. He thinks the Chinese should pull their trillions out of American bonds immediately. And while he has no doubt that free market capitalism is a country’s best recipe for economic success, he turns conventional wisdom on its head by suggesting that Adam Smith’s spirit may have relocated from Washington to Beijing.

Katy Waldman Katy Waldman

Katy Waldman is a Slate assistant editor. Follow her on Twitter.

Schiff, the CEO and Chief Global Strategist for Euro Pacific Capital, will argue that China does capitalism better than America at the Slate/Intelligence live debate in New York on March 13. We recently spoke about Chinese and American economic policies. The conversation was surprising. Read on for Schiff’s take on U.S. tax codes, Chinese creativity, and why the protests inflaming the Middle Kingdom aren’t so different from Occupy Wall Street.  

Slate: You’ll argue on Tuesday in support of the motion that China does capitalism better than America. What do they know that we don’t?

Peter Schiff: First of all, I don’t think either the United States or China does capitalism all that well. America did capitalism a lot better in the 19th century than China does it now, but today, China does it better than we do. Though both countries have far too much government involvement in the economy, we have more. They’re Communists, supposedly, and we’re not, but our government screws up our economy more than the Chinese government screws up its.

Slate: What are we doing wrong?

Schiff: Taxes are significantly lower in China. If you earn money, the Chinese government lets you keep much more of it, particularly if you’re a corporation. In America, the government takes money out of the private sector to spend it. Then, in terms of regulation, we try even harder than the Chinese to micromanage our economy. The Chinese certainly try, too. They do a lot of central planning and there are many businesses the government favors. But we do it on a bigger scale here, with the way we tax and subsidize.

Think about how the government tries to influence behavior through the tax code, so that things happen that wouldn’t happen in a truly free market. When Washington directs capital or labor in certain directions, that’s central planning. It’s stateism. If you start a business in the U.S., not only do you keep a smaller percentage of your income than you would in China, but more of your time is devoted to complying with complex government rules. Even litigation—you’re more likely to be sued frivolously in America and have to spend a fortune defending yourself as a businessman. Don’t get me wrong: Neither the U.S. nor China is a free-market capitalist paradise, but we’ve drifted further away from it than China has.

Slate: Your debate opponent Minxin Pei wrote in Foreign Policy last summer, “Although Asia today may have one of the world’s most dynamic economies, it does not seem to play an equally inspiring role as a thought leader.” Do you agree that China falls short on innovation?

Schiff: No. There’s a lot of creativity coming out of Asia, a lot of patents. The big problem for countries like China and India is that they still subsidize the U.S. They buy our Treasury bonds and lend us all this money so we can keep consuming. That’s a big subsidy and a heavy burden.

Slate: Doesn’t China need to lend us money so we’ll buy Chinese exports?

Schiff: No. They can use their money to develop their own economy, produce better and more abundant products for their own citizens. It’s a farce to think that the only thing China can do with its output and savings is lend it to the U.S. government, especially when we can’t pay it back.

Slate: How would you advise China to proceed with the United States, keeping in mind diplomatic concerns along with economic ones?

Schiff: I would tell it to decouple. Absolutely. Although, the sooner China does that, the sooner we’re going to have to deal with the consequences, which are going to be truly horrific.

We’d have to immediately cut government spending dramatically. Diminish our consumption. We wouldn’t be going to the malls and buying stuff. The whole U.S. economy would have to restructure along the lines of Americans being frugal, saving their money, and working harder. A lot of government workers would have to lose their jobs. Those who didn’t would suffer big cuts in their pay. People who worked in the service sector—in banking, health care, or education—would also struggle if China stopped subsidizing us.

Slate: Do you think that day is coming?

Schiff: It’s definitely coming.

Slate: What lies ahead for China politically?

Schiff: I think there will ultimately be more freedom than there is today. Will China ever become a one man, one vote democracy? Hopefully not, for the sake of the Chinese. Doing so has certainly not served our interest. We enjoyed a lot more freedom and prosperity when we were less democratic. In the 19th century we were quite undemocratic in the way government ran, and we benefited from that lack of democracy. But as we became more democratic, we grew less free and therefore less prosperous. If they’re wise, the Chinese won’t follow that example. They’ll try to model their government after what America used to be, before we screwed it up.

Slate: In 2010, there were 180,000 “mass incidents” (protests) reported in China. That’s almost 500 a day. The Communist Party spent $95 billion on “internal security” in 2011, more than it spent on national defense. Aren’t the costs of state capitalism, or of an authoritarian system that makes state capitalism possible, pretty high?

Schiff: People are dissatisfied in this country, too. We’ve got protesters—look at Occupy Wall Street. There is a great deal of inflation in China right now, which frustrates a lot of people. That is the cost of subsidizing the U.S. economy. If the Chinese simply allowed the renminbi to rise, instead of propping up the dollar, then you’d see far less unrest in China; the people would enjoy their prosperity and productivity more.