What Janet Yellen Needs to Tell China’s Leaders

It would be great if Treasury Secretary Janet Yellen had a copy of “The Portable Karl Marx” with her on her trip to China this week. She could quote from it to the Chinese leaders, whose amended constitution promises to follow “the guidance of Marxism-Leninism, Mao Zedong Thought, Deng Xiaoping Theory, the Theory of Three Represents, the Scientific Outlook on Development and Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era.”

Marx, who sought and predicted a dictatorship of the proletariat, would see little to like in China, whose living standards are far lower than its gross domestic product per capita warrants. A working paper released by the International Monetary Fund in 2018 concluded that Chinese households’ consumption would more than double if they consumed as much of their incomes as households in Brazil, which at the time had a similar output per capita in purchasing power terms.

Inequality has also worsened, and the government is doing little to fix it. In fact, the tax system taken as a whole is probably regressive, meaning that it makes inequality worse by taxing the poor at a higher rate than (most of) the rich. China was “among the most unequal countries in the world” in 2018, another I.M.F. working paper released that year said.

While Xi Jinping name-checks Marx, it’s clear from his behavior that what he really pursues is national greatness under the direction of the Chinese Communist Party. That’s more in line with Lenin, who believed that a “vanguard” party would lead the proletariat, than with Marx or Engels.

What makes this an issue for Yellen is that the United States and other trading partners of China would be better off if Xi really did give his top priority to the prosperity of the average Chinese. That would require restructuring the economy so growth came from consumer spending rather than investment and exports.

Right now, exports are fueling China’s growth. China is running an enormous trade surplus in manufacturing, which means all other countries in the world are collectively running a trade deficit in manufacturing. Here’s a chart based on one created by Brad Setser, a senior fellow at the Council on Foreign Relations, and Volkmar Baur, a China economist at Union Investment, a German asset manager.