Sorry, China, the U.S. is Still the World’s Leading Economic Power—James Pethokoukis

 

The US economy has been the world largest since 1872 when it overtook the UK’s. A heckuva run, no doubt. But that may end this year, according to the Financial Times:

The US is on the brink of losing its status as the world’s largest economy, and is likely to slip behind China this year, sooner than widely anticipated, according to the world’s leading statistical agencies.

Both economies will have gross domestic products of around $16 trillion when you adjust for “purchasing power parity,” or the much cheaper cost of living in China. Economists previously thought China would pull ahead by 2019, but the glacial US recovery has allowed the gap to narrow more quickly. (All this analysis, of course, depends on the accuracy of Chinese economic statistics.)

Some important context here: on a per person basis, PPP GDP is $51,000 in the US vs. $11,000 in China. Anyway you slice the data, China is still a much poorer nation than America. (More than 30 million Chinese, basically the population of Texas, live in caves.) And at market rates, the US economy is about twice as large as China’s. Also note that within two decades or so, China will have an older population than the United States. The Middle Kingdom has become old before it has become rich. In addition to demographic problems, China is still trying to transition to a sustainable, consumer-driven growth model. So the other team has its problems, too.

Now here is what the FT’s headline, “China poised to pass US as world’s leading economic power this year,” really gets wrong. The US remains the world’s leading economic power due to its technological innovation. Most global innovation surveys put the US at or near the top. For instance, the World Economic Forum ranks the US as the 7th most innovative economy, China the 32nd. Bloomberg puts the US at third, while China did not make the top 30. And which global economy is most critical to expanding the technological frontier —a country like Sweden, Bloomberg’s #2 ranked economy with a population of 9.5 million and a $400 billion economy, or the #3 US with its 315 million people and $16 trillion economy? Pound for pound, no nation innovates like America. It’s our deep magic, and a competitive advantage we should be careful not to squander.

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  1. user_48342 Member
    user_48342
    @JosephEagar

    Does it really matter if China’s economy is bigger than ours?  Playing the “soft power” game requires more than simple economic muscle;  you also have to have political stability, and some people argue you need an open financial system as well (though I don’t know if I buy that last part).

    Since 1872, America has had no civil wars.  The American government has peacefully transferred from one party’s hands to another for all of that time, in a continuous constitutional process that is one of the world’s oldest.   That gives us a lot of credibility with investors around the world.  Whether China can achieve this  level of credibility remains to be seen.

    • #1
  2. Marion Evans Inactive
    Marion Evans
    @MarionEvans

    This reminds me of the headlines of Japan taking over and before Japan, it was supposed to be the Soviet Union taking over. The more articles like the FT you see, the closer we are to a big reversal in that other economy.

    • #2
  3. Valiuth Inactive
    Valiuth
    @Valiuth

    Marion Evans:

    This reminds me of the headlines of Japan taking over and before Japan, it was supposed to be the Soviet Union taking over. The more articles like the FT you see, the closer we are to a big reversal in that other economy.

     Yes, it is like the announcers curse in sports. 

    • #3
  4. user_554634 Moderator
    user_554634
    @MikeRapkoch

    The real issue is growth. George Will congratulated Obama yesterday on Bret Baier’s show, for the Prez’s amazing accomplishment of slowing growth to almost nothing. Will was being ironic, of course, but it is a big deal when a Prez ruins a productive economy. Kudos Barack.

    • #4
  5. user_981769 Inactive
    user_981769
    @Derringdoo

    We must not allow a mineshaft gap!

    • #5
  6. Arahant Member
    Arahant
    @Arahant

    Mike Rapkoch: The real issue is growth. George Will congratulated Obama yesterday on Bret Baier’s show, for the Prez’s amazing accomplishment of slowing growth to almost nothing. Will was being ironic, of course, but it is a big deal when a Prez ruins a productive economy. Kudos Barack.

    Just as Wilson, Roosevelt, Nixon, and Carter managed to have policies that fettered the economy, Barack Obama has joined an élite club of growth killers.  Hopefully, the next President will help reverse that and the pent up growth will blast us back into the lead.

    • #6
  7. ctlaw Coolidge
    ctlaw
    @ctlaw

    The PPP vs. nominal GDP distinction is not the end of the story. Every other consideration you mention is a problem.

    US GDP is padded with lots of parasitic losses. Government, tort lawyers, diversity consultants, etc. do not add anything worthwhile, but I believe they are counted in GDP.

    The nature of China’s economy means that their GDP is much more usable to their government than ours is to our government. The way to start this analysis is with a slightly different example. Consider two different countries with populations of 10 million and GDP of $1 trillion:

    1) Entrepreneuria is a country whose economy is based on the high value work of its people. Almost every one is making a substantial contribution to the economy. Perhaps the actual productivity of a 25th percentile worker is only $40 thousand…

    2) Petronia has a ton of resources. Resource extraction is 80% of the economy and is hugely profitable. 90% of the population lives in squalor.

    (cont.)

    • #7
  8. ctlaw Coolidge
    ctlaw
    @ctlaw

    (cont.)

    Here’s the problem. Petronia can easily siphon off hundreds of billions of dollars per year to engage in international mischief. Entrepreneuria can’t siphon off much money from its economy to engage in anything. If it tries, it will kill its economy.

    Clearly, the US and Israel are like Entrepreneuria. Although Russia and Iran seem more like Petronia, China also has similarities. China’s main resource is exploiting the labors of its people rather than oil. With currency manipulation and trade barriers, China turns the kind of governmental surplus that a Petronia would get from resource extraction.

    China’s economy is not efficient, as noted by your reference to the lower per capita GDP. However, under my reasoning that highlights its significance as an immediate threat. It also highlights the room for further growth in the Chinese economy.

    Finally, I call BS on your assertion that “Pound for pound, no nation innovates like America.” The stats in that paragraph indicate that several exceed the US.

    • #8
  9. Misthiocracy Member
    Misthiocracy
    @Misthiocracy

    When the US overtook Great Britain as the “biggest economy” in 1872, it did not immediately mean that Great Britain had ceased to be the “World’s Leading Economic Power”.  That came later.

    • #9
  10. user_48342 Member
    user_48342
    @JosephEagar

    ctlaw:

    The PPP vs. nominal GDP distinction is not the end of the story. Every other consideration you mention is a problem.

    US GDP is padded with lots of parasitic losses. Government, tort lawyers, diversity consultants, etc. do not add anything worthwhile, but I believe they are counted in GDP.

    You are misunderstanding how GDP works.  “Parasitic losses,” as you put them, are already taken into account by the inclusion of the trade deficit (remember that GDP = consumption + investment + exports – imports).  If the government spends more than the economy can produce, the result is a trade deficit, which subtracts from GDP.

    • #10
  11. flownover Member
    flownover
    @flownover

    Let’s see = they will buy all the coal we can send them . And ignore the idiot climate scarecrows.
    And = they will burn all that coal and make the steel to build the world without the unions, the EPA, and the nagging regulatory atmosphere strangling America.
    And = if that doesnt work, then they will just have the prisoners make it for no wages and a thin gruel and a day away from the whip.

    GDP is great and per capita is great, but the field is tilted to the Chinese as long they focus on getting things done rather than building bureaucracies .

    • #11
  12. ctlaw Coolidge
    ctlaw
    @ctlaw

    Joe,

    I believe you are wrong. For example, the money you pay to a diversity consultant or an environmental lawyer is counted as a “service” in GDP just as much as the money you pay to your gardener or barber. It does not, however add anything real to your standard of living as does having a nice lawn and salon quality hair.

    • #12
  13. user_48342 Member
    user_48342
    @JosephEagar

    ctlaw:

    Joe,

    I believe you are wrong. For example, the money you pay to a diversity consultant or an environmental lawyer is counted as a “service” in GDP just as much as the money you pay to your gardener or barber. It does not, however add anything real to your standard of living as does having a nice lawn and salon quality hair.

     This isn’t a matter for debate.  It’s a tautology.  GDP is a simple measurement of output; you can’t simply claim that some goods or services are “unreal.”  Whether a product adds to the standard of living has nothing to do with whether or not that product is being produced in the first place, which is what GDP measures.

    • #13
  14. ctlaw Coolidge
    ctlaw
    @ctlaw

    Joseph Eagar:

    ctlaw:

    Joe,

    I believe you are wrong. For example, the money you pay to a diversity consultant or an environmental lawyer is counted as a “service” in GDP just as much as the money you pay to your gardener or barber. It does not, however add anything real to your standard of living as does having a nice lawn and salon quality hair.

    This isn’t a matter for debate. It’s a tautology. GDP is a simple measurement of output; you can’t simply claim that some goods or services are “unreal.” Whether a product adds to the standard of living has nothing to do with whether or not that product is being produced in the first place, which is what GDP measures.

    Country A and Country B both have GDP of $1 trillion and populations of 20 million. 40% of Country A’s GDP is those parasitic services I mentioned; only 5% of Country B’s is. Which is the more significant economic power?

    • #14
  15. user_48342 Member
    user_48342
    @JosephEagar

    ctlaw:

    Joseph Eagar:

    ctlaw:

    This isn’t a matter for debate. It’s a tautology. GDP is a simple measurement of output; you can’t simply claim that some goods or services are “unreal.” Whether a product adds to the standard of living has nothing to do with whether or not that product is being produced in the first place, which is what GDP measures.

    Country A and Country B both have GDP of $1 trillion and populations of 20 million. 40% of Country A’s GDP is those parasitic services I mentioned; only 5% of Country B’s is. Which is the more significant economic power?

     Neither.  To achieve that level of income, the other 60% of country A’s economy must be very productive (otherwise, again, wasteful government mandates and spending will simply lead to a trade deficit, which subtracts from GDP).

    When economists talk about parasitic losses (usually regulatory losses), they aren’t saying that part of existing GDP is illusory.  They are saying that potential GDP growth is lower than it otherwise would be.

    • #15

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