China’s Per Capita Real GDP Relative to that of the U.S.

I’d like to start the New Year with a prediction related to the following parlor game. Which will occur first: (a) our Social Security Trust Fund reserve will reach its peak; or (b) China will become the world’s largest economy? My prediction is (b).

I call this a parlor game because discussions of which nation has the largest absolute GDP strike me as odd. After all – if California succeeded from the U.S., its GDP would currently be less than that of China. Yet we have a much higher level of income per capita. Via Mark Thoma, we see Bloomberg’s John M. Berry saying my prediction is not possible:

China’s economy is growing so fast that estimates of its long-term prowess are bordering on the absurd. After Chinese statisticians recently sharply revised up their estimate of economic output in 2004 to $1.93 trillion, some analysts said that in 35 years it would overtake the U.S. economy. No way, no how. The U.S. simply has too big a lead, with gross domestic product last year at $11.73 trillion. Even if China’s GDP were to grow indefinitely at 11 percent a year – 9 percent real growth plus 2 percent inflation – and the U.S. experienced 5.5 percent growth – 3.5 percent real and 2 percent inflation – it would take the Chinese 40 years to catch up in terms of nominal GDP. Sustainable nominal GDP growth of 5.5 percent annually is well within the capability of the U.S. Eleven percent growth, about what Chinese authorities expect in 2006, isn’t remotely possible in the long run. One reason China’s economic growth looks so formidable is the sheer size of its population, just over 1.3 billion as of the middle of this year, compared with slightly fewer than 300 million in the U.S., according to the U.S. Census Bureau. Yet that comparison is misleading in calculating the availability of workers to fuel economic growth. Partly as the result of continued immigration, legal and illegal, U.S. population is increasing by 0.92 percent a year, according to census estimates. With no net immigration and with its government’s harsh rule of one child per family, China’s population is expanding at a much smaller 0.58 percent rate.

There are at least a couple of things wrong with Mr. Berry’s logic, which has motivated me to produce pictorials from a couple of simple Excel models – the first one roughly capturing what Mr. Berry is trying to say. Each model forecasts real GDP (2004$) for both China and the U.S. using Mr. Berry’s assumptions that U.S. growth will continue to be 3.5% per year, while China’s growth will be 9% per year. Each model also assumes the U.S. population will grow by 0.9% per year, while China’s will grow by 0.6% per year. It turns out that both nations would have real GDP equal to $39 trillion by 2039. As the New Economist suggested: growth arithmetic is not Mr. Berry’s strong suit.

The New Economist also provides links to some other very good discussions with the piece from Sun Bin of special interest. Notice that in my first pictorial, China’s population is projected to still be four times that of the U.S. in 2039 according to Mr. Berry’s own forecasting procedure. Sun Bin notes that China’s income per capita could readily reached 25% of the U.S. income per capita within 15 years (by 2019). In fact, using PPP-adjusted GDP figures, China’s income per capita was 14% of the U.S. income per capita according to the data provided by the CIA’s World Factbook. The New Economist notes that Wikipedia provides two other PPP-adjusted GDP series with roughly the same conclusion. Our second pictorial depicts another Excel model that starts with the CIA provided data for 2004 and uses the assumptions that Mr. Berry provided and yet called absurd.

Perhaps China will not overtake the U.S. in terms of GDP by 2014, but Sun Bin provides evidence on relative GDP per capita that suggests that China could overtake the U.S. in terms of absolute GDP by 2019. Ah, but the White House is telling us that Social Security benefits will start exceeding payroll taxes a couple of years before 2019. Maybe, but the Trust Fund will still be earning lots of interest income on its reserves – so they should continue growing for a couple of more years. There is, however, one potential flaw in my fearless long-term forecast – the GOP controls both the White House and Congress at least for the rest of this year. Let’s just hope they don’t somehow manage to mess up the Social Security Trust Fund.