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.
Interesting discussion, but there is no Social Security trust fund, it is an accounting fiction, emphasis on fiction
Rusty come on. Legally that is not true. Historically it has not been true, those Special Treasuries were honored and redeemed right down to the last dollar in every year from 1971 to near zero balances in Spring 1983. And currently it is not true, the DI Trust Fund started taking some of its accrued interest in cash in 2006 and started cashing in its principal (those Special Treasuries) in 2009 and expects to cash in another $23 billion in 2010. And there ain’t a thing fictional about the checks DI has been funding since the drawdown started four years ago with that first interest payment. How much more real can it be? I mean Treasury under both Bush and Obama has honored its obligations under Full Faith and Credit to Social Security, to suggest that somehow this transforms into fairy dust going forward is just unbacked special pleading.
Is there an echo in here? See my response to the exact same comment (by STR) above.
Writing my own SS post in response to the latest stupidity of Bruce Krasting. And now above here.
The Federal Government isn’t Enron nor is it even structured like the States. Which make all of these accounting analogies totally fallacious. Enron had a pension plan funded mostly with its own stock, and this is pretty characteristic of a lot of companies. And when they go down so do those funds. And while sometimes people go to jail, other times those corporations just go through some sort of restructuring that wipes out workers and lets the top execs walk with a combination of previously retained compensation and a funded golden parachute.
The U.S. government and a couple of others are in the enviable position of being able to pay their debts with their own paper. And government entities like the Fed hold vast amounts of Treasury and Agency debt without anyone advancing the argument that these are “just a bunch of iou’s”. No this argument is only applied to Social Security. Note to that you rarely hear it in reference to the HI Trust Fund, nor did you hear it much about Social Security prior to the mid 1990s. That is because Medicare now and Social Security then were projected to have their TFs go to zero so soon that there was no reason to cast doubt on the reality of the Special Treasuries held by both. It was only when SS Trust Fund Depletion date projections started getting pushed out to the mid 2030s to early 2040s and so beyond the point of maximum Boomer impact that this meme popped up like mushrooms. It is purely an ideological move in response to a system that wasn’t dying on schedule.
Legal Glibertarianism is all it is.
Jim A. Lets get real. Interest on the Trust Fund is not set arbitrarily nor should it be, instead it is set the mix of yields of bonds coming due in the next few years. In that way it properly accounts for the time value of money without changing the system from an insurance model to a welfare model. Arbitrarily setting interest rates higher is just the same as having the General Fund guarantee the current schedule.
The Trust Funds consist of real dollars extracted from the economy plus interest representing the average time value of those dollars if invested in an asset class with the same level of risk. Which is perfectly equitable, no one is stealing anything from anyone and no one HAS stolen anything from anyone. Not yet.
The answer to Social Security is to do a true cost/benefit analysis and lay out the real options and allow democratic majorities or their representatives to make an informed choice. Instead the most straightforward option, and the one most used in response to similar projected gaps in the past, that is a set of phased in tax increases, has simply been removed from the table and purely for ideological reasons. And the result is a debate distorted beyond all recognition.
The cost of a 25 year fix to Social Security is less than a dollar a week per worker. No cap increase, no change in retirement age, nothing. Per CBO the cost of a 75 year fix to Social Security is a reduction in take home of 0.05% of payroll each year for 20 years. From a Real Wage conservatively estimated at increasing at 1.0% per year. Don’t expect that option to be on the menu of the Catfood Commission even though workers would clearly benefit more from it at lower cost than any other proposal out there. Because exactly zip about this discussion is about securing full benefits, the welfare of workers is not what is under debate here.
china is coming to the world as a developing superpower. the only developing coiuntry with superpower status. in 2025, china will be a developed country barring any revultion or uprising. that’s good for china.