Economics, Pethokoukis, U.S. Economy

Sorry, China, the US is still the world’s leading economic power

Image Credit: Shutterstock

Image Credit: Shutterstock

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, say, 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.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

7 thoughts on “Sorry, China, the US is still the world’s leading economic power

  1. nearly 70% of US GDP is personal consumption expenditures, and just over 13% is fixed investment…

    just 35% of China’s GDP is consumption, while nearly 49% is fixed investment…

    moreover, government consumption accounts for 19% of US GDP (not including entitlements), vs 13% in China…

    so which country has the unsustainable economic model?

    • Well, considering that consumption drives growth, and that fixed investment has historically led to mis-allocated capital resulting in over capacity (think 1980′s Japan……and 2014 China), I would have to argue that the US economic model is far more sustainable than China’s.

      Don’t believe me? Then perhaps you should ask the Chinese government why that are desperately trying to fix the imbalances in their economy by reducing fixed investment and encouraging more personal consumption. The Chinese are finally coming around to accepting proven economic theory and models…..shouldn’t you?

    • Answer, the US.

      Fixed asset investment bubble is not sustainable. China is hitting the middle income trap, is poor, lacks resources, and has worse demographics due to one child policy. Accounting for black market financing backed by Govt and conservative estimates of Write offs due to gross over investments in assets where ROI can’t service debt, you are looking at a debt to GDP ratio of 100+%.

      Add to that, China will need to transition to a consumer based economy which can’t be done without throwing growth into a negative trajectory and you are looking at a very difficult transition for a very poor populace.

      To add fuel to fire, they are over populated and lack natural resources per capita with emerging competing powers in their own back yard, yikes!

      Compare to US, virtually inexhastable supply of fossil fuel, one of the most innovative economies mainly because of the consumer culter (high GDP per capita), plenty of arable land, strategic position on NA continent, largest fresh water supply, and net worth in excess of 100+Trillion when consider recoverable resources and we are looking like a great bet to be the foremost economic power for the foreseable future. Sorry, predictions for US demise are premature even after Obama.

      • financial services are a bit over half a percent of GDP…moving money around only adds to GDP when someone collects a fee for it…but no doubt, the nominal money amounts in motion are much greater that GDP…as i recall, last BIS report indicated over $600 trillion in derivatives outstanding….that alone is around 37 times US GDP…

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