added” end of the manufacturing and technology  scale –

the real challenge China poses to the US lies not in the area of currency valuations, but in the “higher-value-added” regions of so-called “green” or “clean” technologies.

The general argument here, as always, relates back to the fundamentally different role of the state in the economy in each of the two countries.

In the US, the general consensus, shared by both Democrats and Republicans alike, is that the government should just get out of the way and let the private sector make its own path to whatever brave new world its ingenuity is able to bring forth, letting venture capital take the lead in funding the technological innovation that creates economic growth.

Proponents of this view point to the PC / MicroSoft revolution of the 1980s and the Internet revolution of the 1990s as perfect examples of this approach.

Unfortunately, this was also the attitude that allowed the “ingenuity” of the financial sector to run amok in general, and particularly in the area of derivatives – again, famously termed by St Warren of Buffett, “economic weapons of mass destruction” – creating the global economic mess in which certainly the developed world, ie the US and Europe, find themselves today.

And it also leaves out the key fact that the Internet – which most Americans think was invented by the private sector – was, in fact, an initiative funded for decades by a research wing of the US government, DARPA: the Defense Advanced Research Projects Agency.

In China, of course, the attitude is just the opposite: the government insists on taking an active role in all major areas of economic activity, notably banking and finance, where it was able to pull off the world’s most successful response to the US-centered Black September 2008 global crisis,

but also, as both the current Rio Tinto and Google cases indicate, in sectors ranging from manufacturing and raw material acquisition to the activities of Internet providers, both foreign and domestic, within China.

As these specific instances demonstrate, of course, the structural problems that arise in this context are corruption and significant deficiencies in product / occupational / environmental safety, on the one hand, and, on the other, not just suppression of the free flow of information, but the sheltering of “domestic champions” from global competition, which may bode ill for them in not just the long-, but also medium-, run, despite their dominance in China’s huge and globally-crucial domestic market.

In this context, observers like Tom Friedman, here and here, among many examples, and Bob Herbert of the New York Times, citing articles that we have pointed to in our heretofore-only-on-Facebook IN THE NEWS section have argued the US is in danger of being outstripped in the areas of advanced / clean / green technology research by China.

And at least one major reason this scenario has strong credibility is precisely the failure of both the government AND the sources of private capital in the US to be willing and able to bankroll the deep-level research and development that leadership in this or any other advancing field requires.

Now, some would argue this failure is in large part due to the resources being sucked up by a “zombie”-like financial sector that – as in Japan’s Lost Decades since 1989 – has taken huge amounts of taxpayer money merely in an effort to avoid having to come to terms with the bad bets they made in the US housing market –

which were then “derivatized”, that is, exponentially multiplied by the mortgage-backed securities [so-called MBS] that have created financial havoc for any country – eg, the UK, Iceland etc – whose banks participated in their syndication.

If this argument is correct, it would indeed spell trouble for the ability of the US to compete in any of the “new technologies” that are going to dominate innovative economic activity in the 21st century –

in precisely the same way Japan’s failure to force its banks to “cowboy up” and state the losses they took when the Tokyo real estate market collapsed in 1989 hampered its ability to compete in the software- and networked-based growth of the 1990s and first decade of the 21st century.

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