What to think of the Obama-Xi summit this weekend

The US recognizes that China is on course to overtake it as the world’s number one economy by size. This is because an economy’s size is basically per capita GDP times population. There hasn’t been a really major technological advancement allowing an intensive boost to economic growth, that has allowed successive generations in the past to achieve a higher quality of life. The examples in the past are electricity and plumbing and steam engines, that would allowed economies in Europe and then the US to be more productive and grow rapidly. Author Neal Stephenson got at this when he talked about the lack of game-changing technological breakthroughs in recent times. He compares the experience of US technology 50 years ago to today and asks: Where’s my donut-shaped space station? Because it was such progress innovations, culminating in the US space program, that in the past allowed countries with smaller populations but more technologically developed economies (like the US) to outpace larger, less efficient ones (like China). The Economist breaks out the arguments nicely in a piece called “Innovation pessimism

For most of human history, growth in output and overall economic welfare has been slow and halting. Over the past two centuries, first in Britain, Europe and America, then elsewhere, it took off. In the 19th century growth in output per person—a useful general measure of an economy’s productivity, and a good guide to growth in incomes—accelerated steadily in Britain. By 1906 it was more than 1% a year. By the middle of the 20th century, real output per person in America was growing at a scorching 2.5% a year, a pace at which productivity and incomes double once a generation. More than a century of increasingly powerful and sophisticated machines were obviously a part of that story, as was the rising amount of fossil-fuel energy available to drive them. But in the 1970s America’s growth in real output per person dropped from its post-second-world-war peak of over 3% a year to just over 2% a year. In the 2000s it tumbled below 1%.

Technological breakthroughs are needed to increase growth in output per person. But some speculate there won’t be so many new breakthroughs.

It’s interesting to note that China’s rapid investment-led growth coincides with a period of innovation stagnation globally. This is happening as the historical norm of China’s economic dominance returns. Basically, it’s closer to a pre-industrial revolution order.

The US recognizes that if it’s going to be the home of the next technological breakthrough, bringing about a new era of economic growth, the US needs to be able to develop the best technology.

If that technology is continually siphoned off by China, then the US can effectively be muscled into a permanent second place. This would create a vicious cycle, with less money for less research, and basically, would make the country resemble Mike Judge’s critically-overlooked satire “Idiocracy

This is why cyberhacking is becoming a major issue now. American businesses – bastions of government welfare and civil disobedients in their own right – must begin coordinating with the US government to allow themselves to protect their inventions.

If the US doesn’t confront China on cyberespionage, either face-to-face at Obama to Xi summit, or through more aggressive cyber responses, the outlook for the US economy’s key area of strength dims.

But in order for that to happen, there has to be at least a nod of acknowledgement about American company’s relative Americanness in the face of the globalized market. This is no small feat. The internet has opened the playing field, luring companies to the corners of the earth in pursuit of profit. There has been little prohibition on global tax dodging, wage arbitrage, playing local employees against low-cost alternatives overseas, and a basic attitude that the public exists to enrich shareholders, with no corresponding responsibility back to society.

If the US can transition to a new, more dynamic economy, it must find a way to balance the need to foster innovation at home without closing the door on foreign engagement. This this brings up another important point about China’s rise. While there’s no doubt China’s economy has grown dramatically, that does not mean it can successfully convert to a dynamic economy, capable of spawning successful new game-changing technologies and ideas. Just look at Malaysia’s trajectory of progress and stagnation.

Finally, there is no promise that Xi, who has consolidated his power with the military, can actually stop PLA cyber hacking, even if he promises to.