U.S. vs. China? Grow Up! Or is it?

U.S. vs. China? Grow Up!

Why it’s childish to be comparing the size of our economies.

By ZACHARY KARABELL

May 06, 2014, Brookings Institute

 

Last week, it was reported that China is poised to supplant the United States as the world’s largest economy much sooner than expected, perhaps as early as next year. These reports were derived from a new release by the World Bank that revised previous estimates of the size of China’s gross domestic product, or GDP, which in turn suggested that China’s economic output is now greater than that of the United States.

 

Or is it?

The idea of China replacing the United States as the world’s largest economy is headline catnip. It plays so well into the widespread narrative that the United States is rapidly losing ground, and that China represents America’s greatest economic and military threat.

That story is a profound distraction. only if you believe that the world is a zero-sum pie of only so much output and only so much affluence is China's rise a threat to American prosperity. That is a sandbox game in a grownup world. The Chinese aren’t playing it; neither should we.

What’s more, as many have noted in recent days, this story is not nearly as simple. Measuring economies is not like two people pulling out their wallets and counting who has the most cash or comparing bank statements. National economic output has only recently been measured at all, and only since the latter part of the 20th century have international standards evolved such that comparing one nation’s GDP to another was statistically feasible and reliable. Even then, however, it is not as straightforward as comparing one GDP to another.

Just as it costs considerably more to live in Washington, D.C., or New York City than it does in Mobile or Milwaukee, it costs far more to live in the United States, on average, than it does in China. It also costs more to live in Switzerland than it does in the United States. Recognizing that, statisticians have long adjusted national GDP figures to account for different purchasing power.

The only thing that changed in the past week was a statistical optic that plays into a deep strain of American anxiety. You might think that in China, leaders and those who pay attention to such numbers – and honestly, most of the 1.4 billion Chinese are not scrolling through GDP figures – would be crowing. Far from it. The Chinese are acutely aware of how far they have to go before they are anywhere near to an economy that matches that of the United States or most European nations. The official Chinese statistics bureau responded to the new figures by expressing serious concerns about the methodology and refused to endorse the new statistics.

The Chinese are not alone in their skepticism. Not everyone is in agreement about the numbers. The Organization of Economic Cooperation and Development has a somewhat different methodology and still sees China a few years away from surpassing the United States.

And for Americans, panicking about losing the GDP race is itself a sign of weakness. The United States has had the world’s largest economy since about 1870, and until the 1950s that was never a source of either complacence or arrogance. Of course, until the 1950s those numbers weren’t even kept, so perhaps some of that was due to lack of awareness. Even so, being the biggest is not the same as the best, or even the same as fulfilling the needs and providing a glide path for the hopes of hundreds of millions of Americans.

 

Using GDP as a marker for national strength is also a problem. GDP is simply one number, one way of gauging output and economic success. Most nations in the world have come to lionize GDP as the primary symbol of national strength and success. But GDP can only measure what it measures — namely how much stuff a country makes and how much it (and its citizens) consume at market prices. GDP tells us little or nothing about standards of living and about whether most people have sufficient means.

 

Standards of living are precisely what Chinese leaders are most focused on, and what increasing numbers of Americans are concerned about. Comparing GDP tells us nothing about whether a country’s economic system is satisfactorily meeting the needs of its citizens. The Chinese leadership, although they do enshrine GDP targets in their Five-Year Plans, understand acutely that their legitimacy and success will ultimately derive not from the size of their output but from whether a considerable majority of those 1.4 billion people believe that they are enjoying a fair share of that output. They seem to recognize that bigger or not based on total GDP, China – with four times the population of the United States – remains much poorer in terms of what each person has or can hope to, and that will not change anytime in the next few decades.

Their goal, then, is to improve the living standards of hundreds of millions of Chinese. That will not be accomplished by juicing GDP through state spending or exports, as the new president, Xi Jinping, fully recognizes.

Yet Americans still have not made the full break with GDP as the end-and-be-all of economic success. In the United States, with technology-enhancing productivity and output, we are beginning to see rising GDP without much concomitant rise in living standards. A factory today can produce more output than any factory 30 years ago and do so with a fraction of the jobs. Government policies designed to enhance GDP are almost always short term and based on boosting consumption. The more we consume, the better GDP looks in the short term. Investment, however, may or may not make GDP look better (depending on how it is categorized), and the benefits of the spending, whether on education or infrastructure or research, will not be felt until many years later when those investments begin to bear fruit. Saving also does nothing to boost GDP, simply because it is not counted as such. And many of today’s disruptive information technologies are still invisible in GDP, because we have yet to figure out to best calculate the net effect of free goods such as Google that manifestly alter how we live and do business. More GDP by itself, therefore, does not mean a strong economy or long-term sustainable growth.

Nor does it mean that the overall system is meeting the needs of citizens. Our leading indicators, GDP above all, were created in the 1930s and 1940s to measure a world of war and depression. They were not designed as proxies for national greatness, as measures of one nation’s strength compared to others, or indicators of whether this thing we call “the economy” is succeeding in creating both opportunity and prosperity for most people. Using them today to judge whether we are falling behind China is not just besides the point; it reinforces the wrong message and can easily undergird the wrong policies.

In the end, it matters little who has a larger absolute or adjusted GDP. What does matter is who has the dynamism and focus, who innovates and creates, and who succeeds in satisfying the needs and aspirations of a substantial portion of the population. U.S. GDP did not grow throughout the 20th century because we were all focused on growing GDP. Its growth was simply a byproduct of a dynamic system. In the statistical hullaballoo over China’s emergence, we would do well not to forget that.

 

Zachary Karabell is the author of The Leading Indicators: A Short History of the Numbers That Rule Our World.

 

Read more: http://www.politico.com/magazine/story/2014/05/us-vs-china-grow-up-106388_Page2.html#ixzz30zmPv3HE