Robert B. Reich: It's America's economic system that's broken, not China's

Chinese President Xi Jinping might possibly agree in the coming days on further steps to bring down China's trade imbalance with the U.S., giving Donald Trump a face-saving way of ending his trade war.

But Mr. Xi won't agree to change China's economic system. Why should he?


The American economic system is focused on maximizing shareholder returns. And it's achieving that goal: Last Friday, the S&P 500 notched a new all-time high.

But average Americans have seen no significant gains in their incomes for four decades, adjusted for inflation.


China's economic system, by contrast, is focused on maximizing China. And it's achieving that goal. Forty years ago, China was still backward and agrarian. Today it's the world's second-largest economy, home to the world's biggest auto industry and some of the world's most powerful technology companies. Over the last four decades, hundreds of millions of Chinese people have been lifted out of poverty.

The two systems are fundamentally different.

At the core of the American system are 500 giant companies headquartered in the U.S. but making, buying and selling things all over the world. Half of their employees and contractors are non-American, located outside the U.S. A third of their shareholders are non-American.

These giant corporations have no particular allegiance to America. Their only allegiance and responsibility is to their shareholders. They'll do whatever is necessary to get their share prices as high as possible -- including keeping wages down, fighting unions, reclassifying employees as independent contractors, outsourcing anywhere around world where parts are cheapest, shifting their profits around the world wherever taxes are lowest, and paying their top CEOs ludicrous sums.

At the core of China's economy, by contrast, are state-owned companies that borrow from state banks at artificially low rates. These state firms balance the ups and downs of the economy, spending more when private companies are reluctant to do so.

They're also engines of economic growth, making the capital-intensive investments China needs to prosper, including investments in cutting-edge technologies.

China's core planners and state-owned companies will do whatever is necessary to improve the well-being of the Chinese people and to help China become the world's largest and most powerful economy.

Mr. Trump thinks this is unfair, but it's working. Since 1978, the Chinese economy has grown by an average of more than 9 percent per year. Growth has slowed recently, and American tariffs could bring it down to 6 percent or 7 percent, but that's still faster than almost any other economy in the world, including America's.


The American system relies on taxes, subsidies and regulations to coax corporations to act in the interest of the American public. But these levers have proven weak relative to the overriding corporate goal of maximizing shareholder returns.

Recently, for example, Walmart, American's largest employer, announced it would lay off 570 employees despite taking home more than $2 billion courtesy of Trump and the Republican corporate tax cuts. Last year, the company closed dozens of Sam's Club stores, leaving thousands of Americans out of work.

At the same time, Walmart has plowed more than $20 billion into buying back shares of its own stock, which boosts the pay of Walmart executives and enriches wealthy investors but does nothing for the economy.

It should be noted that Walmart is a global company, not adverse to bribing foreign officials to get its way. Last week it agreed to pay $282 million to settle federal allegations of foreign corruption. That included funneling more than $500,000 to an intermediary in Brazil who specialized in making problems with construction permits disappear.

Across the American economy, the Trump tax cut did squat for jobs and wages but did nicely for corporate executives and big investors. Instead of reinvesting the savings into their businesses, companies used it to buy back stock, according to the International Monetary Fund.

But wait. America is a democracy and China is a dictatorship, right?


True, but most Americans have little or no influence on public policy -- which is why the Trump tax cut did so little for them.

That's the conclusion of professors Martin Gilens of Princeton and Benjamin Page of Northwestern, who analyzed 1,799 policy issues before Congress and found that "the preferences of the average American appear to have only a minuscule, near-zero, statistically non-significant impact upon public policy."

Instead, American lawmakers respond to the demands of wealthy individuals (typically corporate executives and Wall Street moguls) and big corporations -- those with the most lobbying prowess and deepest pockets to bankroll campaigns.

Don't blame American corporations. They're in business to make profits and maximize their share prices, not to serve America.

But because of their dominance in American politics and their commitment to share prices instead of the well-being of Americans, it's folly to count on them to create good American jobs or improve American competitiveness.

I'm not suggesting we emulate the Chinese economic system. I am suggesting that we not be smug about the American economic system.


Instead of trying to get China to change, we should lessen the dominance of big American corporations over American policy.

China isn't the reason half of America hasn't had a raise in four decades. The simple fact is Americans cannot thrive within a system run largely by big American corporations, organized to boost their share prices but not to boost Americans.

Robert Reich's latest book is "The Common Good," and his newest documentary is "Saving Capitalism."