Saturday, October 25, 2014
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Megatrend: China's GDP Will Exceed U.S. GDP in the 21st Century -- Deal With It

Welcome to the Great Convergence -- The Developing World is Converging to Developed Country GDP Per Capita Levels -- The Alternative Would Be Worse(1)

This is an election season, so all hope of intelligent policy discourse has been abandoned in favor of the partisan soundbite. One side, uniquely brilliant, will magically solve our nation's problems (all caused, of course, by the incompetent opposing candidate/party). An example is Professor Niall Ferguson's recent article "Hit The Road, Barack":

"The failures of leadership on economic and fiscal policy over the past four years have had geopolitical consequences. The World Bank expects the U.S. to grow by just 2 percent in 2012. China will grow four times faster than that; ... By 2017, the International Monetary Fund predicts, the GDP of China will overtake that of the United States.(2)"

Professor Ferguson ascribes China's growing, at a rate four times faster than the US, to a "failure of leadership" by the Obama administration. Clearly, a case of Romnesia (the inability to remember facts which ruin the Romney narrative). Under President George W. Bush (Bush II), China's economy grew over five times faster than that of the U.S. (Source: World Bank; China's real GDP growth rate for 2001-2008 was 10.7 percent vs 2.0 percent for the U.S.). In fact, China's out-performance of the U.S. over the past 30 years has been bipartisan (see Chart 1).

Chart 1: China vs. US Real GDP Growth Rates 1980-2011.

China's been growing very rapidly, because it started with very low per capita income. We're experiencing the Great Convergence -- where countries globally converge to similar levels of economic productivity. China's income per capita is still only a fraction of the U.S. level, leaving plenty of room for its continued high growth rates.

The U.S.' best growth decade (the 1950s, when marginal Federal income tax rates were 90 percent) produced about 4 percent/year sustained real GDP growth. As noted above, during Bush II's Presidency (2001-2008, when marginal Federal income tax rates were reduced to 35 percent), the U.S. averaged only 2.0 percent/year real GDP growth.

Supporters of 'Romney-Ryan as economic saviors' believe they'll miraculously produce the hyper-economic growth we failed to achieve -- under Presidents Truman, Eisenhower, Kennedy, Johnson, Nixon, Ford, Carter, Reagan, Bush I, Clinton, Bush II and Obama -- by lowering marginal tax rates, repealing and replacing Obamacare, and increasing military spending. And, if you believe Romney-Ryan will produce this miracle, you probably also believe in the Tooth Fairy.

An economic miracle seems especially unlikely since Romney's economic team and policies closely resemble Bush II's - the team and policies that wrecked our economy and produced a global financial crisis. Even assuming a Romney presidency produces growth at the upper end of the US post-WWII range, China's GDP (under current trends) will still surpass that of the US within our lifetimes.

What about the prospects of China stumbling? As Professor Ferguson himself pointed out in his excellent book Civilization, the reasons China might not surpass the US relate mainly to failures inside China. First, China could prematurely plateau in a manner analogous to Japan. Second, China might succumb to social unrest (e.g., due to a surplus of males caused by the 1-child policy). Third, a rising Chinese middle class might demand more power than the system can accommodate. Fourth, China could antagonize and alienate its neighbors and trading partners. While these scenarios might preserve America's preeminent role, it could be at the cost of an unstable nuclear-armed China -- hardly a desirable outcome.

Whoever wins the election, our president in 2013 will face the economic and political challenges presented by the Great Convergence. We need to begin a serious national dialogue -- about what we want America's role to be as our relative economic importance declines -- and end the competition to produce the most quotable soundbite.

Notes:
(1) For clarity in a short essay, I've focused on China, but many of these comments are applicable to India, as well as other emerging market countries.
(2) On a Purchasing Power Parity basis.

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