Gerald Seib’s December 23, 2008 Wall Street Journal article entitled “U.S. Woes Open Door for China” cites recent articles in Foreign Affairs which postulate that this year’s dramatic melt-down in the U.S. and Western finance system has discredited our economic model and presents the possibility that, going forward, developing nations may look to China’s centrally planned economy as a better example of how to structure an economic system than that of the West’s widely varied form of free-market capitalism. While the momentous problems caused by the bursting of the credit bubble are regrettable and should be completely and thoroughly studied so as to preclude them from ever reoccurring, does China’s unique economic model provide a legitimate alternative?

While China’s meteoric economic growth over the past few decades has been impressive by any measure, does the nation really offer a replicable model? No other nation on earth has successfully implemented the Chinese model of transitioning from a centrally planned, totalitarian form of communism to a centrally planned, authoritarian form of quasi-capitalism. While many Chinese—particularly on the coast and in the capital of Beijing—have seen a quantum leap forward in their way of life, the vast majority—perhaps some 800 million—have seen virtually no improvement in their agrarian lifestyle. As China’s export-dependant economy comes to a grinding halt in  the midst of a worldwide recession, societal fissures are already beginning to develop or intensify which could lead to violence and—possibly—threaten the regime’s stability. Furthermore, China has never fully benefited from true market forces.

Since Deng Xiaoping began the process of economic reform in China, the communist party instead of market forces determined where new infrastructure, industrial plants, etc. would be built. As one would expect in such a situation, mistakes were made and resources improperly allocated. In many cases, local employment concerns (which impact regime stability) and plain, old corruption had much greater control over economic decision-making than did market requirements. While the United States is no doubt awash in excess residential—and possibly commercial—real estate because of serious market distortions brought on by a too-long period of easy money, China also faces excess, in misplaced manufacturing facilities, poorly-conceived infrastructure projects and misallocated capital investment. Over the course of modern history, markets have always proven to be a better determinant of societal resource allocation than central planners. This is not to say that markets are infallible. They are not. However, they do offer the best mechanism for economic decision making yet conceived by man and, even when they fail, are self-correcting in ways that central planning systems cannot replicate.

One of China’s greatest current strengths is its massive foreign currency reserves and holdings of U.S. debt. Going forward, as the U.S. retrenches from a multi-decade spending binge and the entire nation learns the benefit of living within its means, China will need to redirect its investment focus to building domestic consumption. It will no longer have the wind at its back as global consumer consumption slows and manufacturing competition—both in Asia, and around the world—intensifies. China’s role as the world’s default manufacturer has seen its golden age and—unless domestic demand can pick up the slack—will never return to the boom times of just a couple of years ago.

Let’s not forget where China came from and the degree of authoritarian control that the Chinese state still has over its society. In the 1980s, the Soviet Union and China both recognized the inherent failures of communism and attempted to reform their ailing systems. The Soviet Union, in its program of “perestroika” or restructuring, chose to focus its initial efforts on political reform, while China eschewed political reform in favor of economic liberalization. Putting political reform before economic reform doomed the Soviet Union and its Eastern European empire. The Chinese Communist Party, which crushed an attempt at forced political reform in Tiananmen Square in 1989, had no intention of making the same mistake and maintained its brutally efficient police state throughout the economic awakening that has occurred over the past two decades.

How many nations that in the future might wish to follow the Chinese economic model already possess such an intimidating and conflict-tested degree of control? I would argue very few. Any nation with even a modest democratic history would have a hard time replicating the awesome breadth and depth of civil control brought to bear by an established communist regime. Without such control, replicating a centrally planned economy such as China’s would be virtually impossible. No other system would offer the patience, unity of purpose and stifling of dissent that Beijing enjoys.

Finally, the painful recession we are now experiencing will expose weaknesses in China’s system. Excess capacity in certain industries and geographic regions will stand glaringly alongside a lack thereof elsewhere. More adaptive and nimble competitors such as India, Brazil, or for that matter, the U.S., will be able to respond more quickly to global market demands and Chinese central planners—bedeviled by endemic corruption and with a wary eye on a restive and economically-stratified populace—will be hard-pressed to keep up.

The U.S. and Western economic model has proven to be imperfect and the failures that have brought us to this difficult state should be studied and remedies implemented to prevent it in the future. However, the market is still the best mechanism for shaping economic policy. Indeed, it was well intended, but nonetheless ill-advised tinkering with market forces that triggered much of the turmoil we now face. Those who believe that China’s centrally-planned model offers a better alternative may find that Beijing’s economic system cannot be duplicated and is itself rife with inefficiencies and short-comings.

The conventional wisdom that the U.S. economy is in recession (as defined by two or more consecutive quarters of negative GDP) and future GDP revisions would bear this fact out, took it on the chin this morning with the latest revision to second quarter GDP. The Commerce Department’s new second quarter number showed that GDP grew by 3.3% in the spring, up from the 1.9% growth number originally given. While analysts had long expected the spring quarter to show a spike as government rebate checks worked their way into the broader economy, few were forecasting such a robust quarter. Corporate profits also reversed their first quarter decline and eked out a one percent gain. We also received news today that the number of new workers filing claims for unemployment benefits fell slightly last week, as was generally expected. Still, the employment picture does not look good and most analysts predict the number of unemployed to continue to rise throughout the balance of this year, into next. However, employment is a lagging indicator and it is one of the last statistics to turn around during an economic downturn.

The GDP revision is big news. Consensus estimates called for an upward revision to 2.7%, so the actual number buried this forecast. A strong increase in exports helped boost the GDP number. For the second quarter, exports rose 13.2% as opposed to the 9.2% increase originally reported. Imports also fell by a greater than expected number. Both of these developments were clearly triggered by the dollar’s relative weakness.

Surging exports may be the bright spot that helps the domestic economy avoid a statistically-validated recession this year. However, there is some concern that slowing global growth may derail this possibility. The Beijing Olympics are history and China’s infrastructure spending will revert to more normal levels, although reconstructing earthquake-ravaged regions will continue to be a spending driver for some time. The Euro Zone is clearly slowing with the GDP of many major economies now firmly in negative territory. Slowdowns in other parts of Asia and previously hot Latin American economies such as Brazil could dampen exports and choke off the one aspect of the U.S. economy showing promise at present.

Further reviewing the second quarter numbers, residential fixed investment (housing) continued to decline, but not at the meteoric rates seen in the prior three quarters. While it is hard to get too excited over what is still a pretty grim number (-15.7%) this could be a sign that a bottom is beginning to form in residential real estate—at least on a nationwide basis. There are still many markets across the country where the combination of rising foreclosures and a ponderous inventory of unsold homes and condos will take years to work off.

Business spending was a bit better than originally reported; especially noteworthy was a 13.7% increase in spending on structures. Unfortunately, the quarter’s price gauge for personal consumption was shown to jump 4.2% over the first quarter’s rise of 3.6%. Taking out food and energy, the increase was slightly below the first quarter’s number, but still reflects inflationary pressures that merit concern.

Clearly, no one is dancing in the aisles over the bulk of financial data being released these days. Rising loan delinquencies, foreclosures and unemployment bedevil the economy and make headlines far more than reports on good economic news. However, this revision is important as it does show that, despite the doom and gloom reported in the mainstream financial press, we are not technically in recession and—despite future revisions—it is unlikely that economic activity in the second quarter of 2008 will turn negative going forward.

The U.S. economy remains one of the most dynamic and resilient in the world. The rise of a more thuggish, dangerous Russia will only remind people that the American marketplace offers stability and predictability that no other economy on earth offers investors. Despite the challenges that lie ahead, it is hard to bet against the U.S. economy.