Will China Overtake the U.S. On the Next President's Watch?

The Future of American Power
Oct. 30 2012 10:23 AM

Will China Overtake the U.S. On the Next President's Watch?

shanghai skyline
Shangai's Pudongs Lujiazui Financial District: Kansas City, indeed!

Photograph by Feng Li/Getty Images

 "We will lift Shanghai up and up, ever up, until it is just like Kansas City!"

Michael Moran Michael Moran

Michael Moran is an author and geopolitical analyst.

—U.S. Sen. Kenneth Wherry, R-Neb, 1940

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Just over a year ago, I launched this blog with a chart showing the gradual erosion of American economic dominance that is projected to occur over the course of the next presidential term. The projections of that chart—based on the April 2011 IMF World Economic Update—led some to question whether such a thing could really happen so quickly.

Sadly, our grasp of such things today isn't much better than the Nebraska senator's was in 1940.

Since this blog went public last October in a deliberate attempt to provoke debate on the relative decline of the U.S., both the U.S. and Chinese economies have slowed a bit. The latest quarterly numbers for China in October 2011 showed annual growth of about 9 percent; for the U.S. the figure was just about 3 percent.

The latest figures show the US economy grew at a 2 percent annual rate in the third quarter of this year. That beats recession, but it’s hardly something to crow about. In China, the slowdown meant growth of 7.4 percent—or, to put that slightly differently, a pace that would double the size of China’s economy in just over 13 years.

The Economist magazine, which keeps close tabs on these things, took issue with the IMF numbers, publishing a revised chart that suggests a slightly brighter picture for the U.S. The assumptions the magazine’s app makes in default mode—China long-term growth at 7.75 percent per year, and the U.S. at 2.5 percent—don’t seem impossible. At that rate, America gets a two year reprieve—to 2018—before being knocked from a pedestal it has occupied since just after World War I: World’s biggest economy.

I can hear the cheers now: “Two more years! Two more years!”

Of course, adjust the numbers just a bit—for instance, factoring in a fiscal cliff—and you get a very different result. A U.S. in recession and a China that just stays slightly below its growth rates for the last decade—say 8 percent—and the IMF starts to look optimistic.

Now I'm not a China-basher. China has plenty of its own problems, not least of which is an authoritarian government that executes 6,000 people a year without due process. But a sensible country would have more than a name-calling match during their presidential campaign over an issue this large. What should our relationship be like with China? How should the U.S. encourage democracy, fair trade practices and a stable East Asia? Except to use China as a way to attack their opponent, sadly, there has been barely a mention of these gigantic questions.

With most people focused on the tit-for-tat claims of the U.S. election, it might seem like just so much economic thumb-sucking to bring this up now. China, it will be argued, has to grow much faster to maintain social peace. And besides, it’s growing from a “lower base.” Because of the relative size of the U.S. v Chinese economies, U.S. growth of 2 percent represents a much larger amount of economic activity than it would in China.

True enough. In terms of “nominal GDP,” which measures the market value of goods and services produced by a country, the U.S. remains nearly three times the size of China.

But don’t get too comfortable with that palliative. Measured in Purchasing Power Parity—the value of all goods and services a nation’s economy produces if differences in currency valuation are factored in—the size of China’s economy, according to the IMF, was about $11.2 trillion the size of China’s economy is $11.1 trillion, compared with $15.0 trillion for the U.S. And the gap is closing.

Why should you care? Isn’t the budget deficit, the distorted tax system and our unsustainable pension and medical problems the real problems?

I’d argue they are symptoms. The affliction suffered by the United States right now is an inability to come to terms with a changing environment and to adapt to new realities. We will not, as Mitt Romney ridiculously promised during his campaign, grow at 4 percent a year for a decade. That would be twice as fast as America’s historic growth rate—a rate compiled during decades in which much of the world was locked behind the Iron Curtain and the other half recovering from the most devastating war in human history.

The United States needs to trim its sails and do so wisely. It needs to stop playing global policeman, demanding more of its allies abroad. It needs to use its waning influence to stand up new international economic and security organizations tailored to the problems of the 21st rather than the 20th century (yes, NATO, I’m talking to you). It needs to embrace the immigration (i.e., demographic health) and invest in innovation—the only things that stand between it and the second-tier fate that befell major European economies.

Most of all, it needs to lay out a realistic plan for solving this simple fact: Our economy can’t produce enough revenue as currently configured to pay for the defense, social benefit,s and infrastructure improvements necessary to keep pace in this changing world. And both candidates have used the ridiculous fig leaf of the looming fiscal cliff negotiations as cover for avoiding the topic.

Do I think Obama deserves more credit for trying? Yes—Romney’s “plans” for the deficit are neither economically nor politically plausible. But Obama’s high marks were earned during those 2010 budget talks. Since then, having been tactically outflanked by the naysayers in the GOP House, he has dropped the subject for the most part. You can almost hear David Axelrod warning against words like “sacrifice” or “sharing the pain” or even grand bargains.

So as you make up your mind ahead of Nov. 6, broaden your perspective just a bit. It’s too late for voters to force a longer term debate on the challenges facing the country: We just seem incapable of seeing anything but trees as we wander through the forest of the early 21st century.

But that doesn’t mean the world is going to wait for us. Once the election is over, Americans should insist on progress of some kind on these major issues. If Democrats lose the White House, they would feel justified, I’m sure, adopting the reprehensible legislative blocking tactics of the GOP. But they would be wrong. It was unpatriotic, frankly, of the GOP to do it. It would be no better as Democratic revenge.

Similarly, if the GOP fails to take the White House, the party’s leadership should finally stand up to its Tea Party radicals, renounce the obstructionist strategy adopted back in 2009 and work toward a grand bargain.

There does not have to be anything cataclysmic about China’s rise—nor in the retirement of the baby boom generation, the changing nature of energy markets or the challenges of job creation in an increasingly automated, interconnected global market. These are the kinds of problems the world’s greatest democracy used to be wired to solve. American ingenuity, after all, referred not to manifest destiny or some other airy, nonsensical slogan, but rather to the practical, non-ideological qualities that drove common sense decisions that once separated our politics from that of the “Old World.”

As I said a year ago, “the political game under way today ends not with control of the White House, a plan for a balanced federal budget, or a jobless rate suddenly hovering at a magical 8 rather than sour 9 percent. The larger picture—the new “Great Game,” if you will—is about managing the speed of America’s decline from the heights of hegemony to the more earthly altitude that 21st century gravity will impose.”

So far, through primaries, conventions, debates and endless stump speeches, both sides have failed to grapple with the big picture. On the next president’s watch, whom ever that president will be, such a failure will not just be his legacy; it will determine America’s 21st century destiny, too.