April 30, 2014

Oh Crap! China takes top spot.

Everyone had a sense that this was coming.  According to FT, China is set to overtake the United States as the world's largest economy this year.  That`s 5 years ahead of most predictions.  While there are plenty of reasons to question the validity of the unexpected news, it should still serve as a wake up call for a country whose economy has been the world`s largest since 1872.

First the bad news:
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.

The US has been the global leader since overtaking the UK in 1872. Most economists previously thought China would pull ahead in 2019.
But there are reasons to doubt the veracity of the numbers. Firsty, the calculation has changed - the goal posts have moved;
After extensive research on the prices of goods and services, the ICP concluded that money goes further in poorer countries than it previously thought, prompting it to increase the relative size of emerging market economies.

The estimates of the real cost of living, known as purchasing power parity or PPPs, are recognised as the best way to compare the size of economies rather than using volatile exchange rates, which rarely reflect the true cost of goods and services: on this measure the IMF put US GDP in 2012 at $16.2tn, and China’s at $8.2tn.

In 2005, the ICP thought China’s economy was less than half the size of the US, accounting for only 43 per cent of America’s total. Because of the new methodology – and the fact that China’s economy has grown much more quickly – the research placed China’s GDP at 87 per cent of the US in 2011.
Dumbing down the numbers by using PPP as a medium doesn`t really reflect the true picture. It`s like saying their economy is bigger because stuff is cheaper there. It does incorporate the idea of wealth vs. money which I applaud, but comparing a middle class or poorer class person in China to a middle class or poorer class person in America is not apples to apples. Poverty in the U.S. is not the same as abject poverty in China. That`s where PPP falls apart as a comparative when it comes to GDP.

But there are other reasons to doubt the strength of the Chinese economy.  For example, China very well could be misreporting its GDP numbers. It could be experiencing it`s own economic bubble.  China  still suffers from infrastructure problems and a communist leadership.  They benefit from a preferred trading partner status and lower than acceptable wages to which internal pressures must eventually force a stop.  And of course they benefit from an exchange rate that is unsustainable.

Nonetheless, the U.S. economy is not where it should be.  Growth is anemic, and it should be robust.  Current trends holding true, China will overtake the U.S. economy.  The United States, in particular its leadership, should not be managing the decline of American preeminence, it should be fostering continued economic might and innovation.  It should be protecting American economic might while fostering capitalism abroad.  The two goals are not mutually exclusive and do not represent a zero sum game.  Both can be accomplished simultaneously.  Not to be overlooked is the prospect of the United Stats becoming an energy exporter rather than an importer.  Increasing domestic energy production would create exports, jobs and boost the GDP of the U.S.

Unfortunately, while the present administration focuses on solar panels and income inequality, the boat is full of leaks that need to be patched.  The usual suspects need to be addressed - business and personal taxation, inappropriate incentives for businesses to outsource or offshore, individual freedom to create, the burden of intrusive government regulation and lack of support for small business are some examples.  Germany, it should be noted, has no minimum wage yet the exploitation of employees is no worse than in overly socialist France.  The progressivist tropes in America have taken everyone's eyes of the economic ball. For now.  Perhaps the reality of China overtaking the U.S. in terms of economic might, will shame America into action.
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