(What’s Left of) Our Economy: Why the U.S. Still Holds the Winning Economic Cards Versus China

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Biden, CCP, China, Chinese Communist Party, CNBC.com, consumers, consumption, demographics, Donald Trump, export-led growth, gross domestic product, IMF, International Monetary Fund, per capita GDP, population, technology, Trade, trade wars, workforce, {What's Left of) Our Economy

Since there seems to be no end in sight to the rise in U.S.-China tensions, it’s especially interesting that two analyses of the Chinese economy and its future that challenge some widely held views on the subject have just appeared. Also noteworthy: They matter greatly for America’s perceived prospects for success, and one of them comes from the Chinese Communist Party (CCP) itself.

More important still:  When you put them both together, the implications look positively startling – and encouraging – for America’s prospects in its economic and technological struggle with the People’s Republic.

The first apparently contrarian information comes from the International Monetary Fund in the form of this chart.

It shows recent and projected trends in U.S. and Chinese gross domestic product (GDP) per capita – that is, how much economic output each country turns out adjusted for population. This statistic is a valuable gauge of economic power and affluence because it reveals which national economies (or the economies of any other political unit) are a certain size simply because their populations are a certain size (big or small), and which economies are doing a particularly good or bad job generating goods and services given how many people are doing the producing.

For example: Let’s say you have one economy with a population of 100 and one with a population of 10,000, and the latter generates twice as much economic output than the former. The more populous country would have the larger economy in absolute terms, but its performance wouldn’t be seen as especially impressive because it took so many people to achieve this result – and indeed orders of magnitude more people than the smaller population economy.

Moreover, the latter economy would have much less wealth to distribute among its own people than the former, and therefore each of its citizens would be a good deal poorer than their counterparts in the smaller economy all else being equal.

But let’s not dismiss the bigger economy’s record altogether. For if the two ever fought a war – all else equal again – the bigger economy would have much more in the way of resources to build and equip a military, and keep it fighting, than the smaller.

Throughout modern history, the U.S. economy has greatly exceeded China’s by both measures, but because of the amazing progress made in recent decades by the People’s Republic and a slowdown in U.S. growth, China has been able to close the gap in terms of the size of the two economies. In fact, many forecasters (as made clear in the CNBC.com post containing the chart), believe that the Chinese will catch up before too long. As indicated above, the implications are sobering for Americans if the two countries come to blows, and by extension for any diplomatic jockeying they engage in – for relative military power always casts a political shadow.

China’s overall catch up has been so fast that you might think that the per capita GDP gap that’s been so large because China’s population has been so much bigger than America’s might start narrowing, too. But the chart makes clear that this hasn’t been the case at all. Indeed, the gap has continued to widen, and is projected to keep widening at least for the next four years.

And this finding and prediction suggests that the unquestionable surge in living standards that China has been able to foster due to its rapid growth – which has led so many U.S. and other non-Chinese businesses to pin their future hopes largely on selling to this huge and supposedly ever-burgeoning market – won’t even come close to American living standards for many years. So if the chart is right, the purchasing power growth of the typical Chinese will stall out at pretty low levels and disappoint many of these corporate hopes.

As a result, fears that a thorough “decoupling” of the two economies resulting mainly from U.S. concerns about over-dependence on an increasingly hostile country will kneecap many U.S.-based businesses and possibly the entire American economy could be seriously overblown, at least longer term. For if the chart is right, these expectations will be revealed as unrealistic no matter what course Washington follows – and even if China displayed any willingness (which it hasn’t) to permit foreign businesses to make any more inroads into its economy than are absolutely necessary.  (See here for the latest – and an unsually explicit – official Chinese designation of “complete” economic self-reliance as a goal.)  

All of which brings us to the second contrarian take on China that’s been expressed recently – and by the Communist Party. It’s a finding from the Deputy Director of a party-run research institute that the country’s “Consumption has already past the phase of rapid increase and will only rise slowly in the future.” And his opinion deserves big-time credibility because he clearly believed that he could express such a downbeat view without getting his head chopped off, or being sent for a few decades to a reeducation camp, or risking punishment for any immediate family and relatives.

In addition, however, Xu cited two specific, interlocking reasons for this judgement: an aging population and a shrinking workforce.  And although he seemingly didn’t mention this, if China will need to temper its plans to generate more economic growth through its own domestic consumption, it will need not only to rely more on the kinds of infrastructure investment he did cite.  It will also need to keep relying heavily on exports – which should ensure that the United States will retain plenty of leverage over the People’s Republic with its tariffs as long as the Biden administration decides to leave them in place. 

None of this means that former President Trump was right in claiming that trade wars are “easy to win,” or that maintaining satisfactory technological superiority will be a piece of cake, either, or that generally the United States can stop worrying so much about China threats on these scores.  But it does mean that if American leaders have the will to prevail – and to advance and safeguard U.S. interests adequately – they’ll have plenty of wallet to use.                                    

 

(What’s Left of) Our Economy: A Feeble Case Against U.S. Populism

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bubble decade, CCP Virus, coronavirus, COVID 19, Donald Trump, France, GDP, Germany, global financial crisis, gross domestic product, per capita GDP, Populism, real GDP, Wuhan virus, {What's Left of) Our Economy

Since I’m still glad that Americans elected a President with strong populist leanings in 2016 (however flawed he was in all the temperament and character ways on full display after his reelection loss), I was especially interested in a new academic study on how well populist leaders have run their nation’s economies when they’ve had the chance.

And since I’m particularly keen on properly assessing former President Trump’s record in this regard (it’s the selfish American in me), I was especially disappointed that this research on “The cost of populism” said nothing useful at all about the subject because it lumped the experiences of populist leaders in widely divergeant economies and across many equally divergeant periods of time into one category. Therefore, I thought I’d provide some perspective.

The authors, a trio of German economists, are pretty emphatic in their conclusion:

“When populists come to power, they can do lasting economic and political damage. Countries governed by populists witness a substantial decline in real GDP per capita, on average. Protectionist trade policies, unsustainable debt dynamics, and the erosion of democratic institutions stand out as commonalities of populists in power.”

And they highlight their finding that, after taking into account the circumstances faced by populist leaders once they’ve gained power or office (which presumably were pretty bad – otherwise, as the authors recognize, why would the populists have succeeded in the first place?), right after a populist victory, such economies as a group fared increasingly worse in terms of their growth rates compared with economies headed by more establishmentarian leaders. To their credit, the authors also try to adjust for whether the countries examined faced financial crises just before their populist political experiments began.

The question remains, though, whether a study encompassing and deriving averages or medians from a group of countries containing many chronically impoverished lands, as well as the high-income United States, can tell us about the latter, whose single populist leader during the period studied served for just a single brief term. Interpreting this American experience is further complicated by three important, concrete factors the authors apparently haven’t considered.

First, the pre-Trump growth rates of the United States were artificially inflated by interlocking bubbles in housing and consumer spending. And because the growth stemmed largely from these massive bubbles, by definition it should never have reached the levels achieved. So viewing that bubble-period growth as an achievement of establishment leaders isn’t exactly kosher methodology. Even more important: The financial crisis that (inevitably) followed these establishment-created bubbles nearly crashed the entire world economy. So maybe this debacle deserves at least a little extra weighting?

Second, U.S. growth during the populist Trump years compared well with that of the second term of the establishment-y Obama administration, especially before the CCP Virus struck and much economic activity was either voluntarily depressed or actually outlawed. For example, during the first three years of Donald Trump’s presidency, gross domestic product (GDP) after inflation (the most widely followed measure), increased by 7.68 percent. During the first three years of the second Obama term, it rose by 7.63 percent. And don’t forget: American economic expansions usually don’t speed up the longer they last.

Even if you include the results of pandemic-stricken 2020, real GDP improved by 3.90 percent under Trump – a rate much lower than the four-year Obama total of 9.47 percent, but hardly disastrous. Moreover, since this growth has already begun accelerating once again, the claim that Trump’s policies did lasting damage looks doubtful.

The price-adjusted GDP per capita statistics (i.e., how much growth the economy generates per individual American), tell a similar story. During the full second Obama term, this number improved by 6.25 percent as opposed to the four-year Trump advance of just 2.46 percent.

But the pre-CCP Virus comparison shows a 5.58 percent climb under Trump versus 4.81 percent during the first three years of Obama’s second term. And here again, the levels have snapped back quickly so far after plummeting during the worst pandemic and lockdown months. Therefore, the populist Trump administration likely left the pre-Trump trends intact at the very worst.

Third, if you want to go international, the Trump economic record holds up well compared to those of establishment leaders in Germany and France. During the CCP Virus year 2020, France’s economy shrank in real terms by 5.01 percent, and Germany’s by 3.88 percent. The U.S. contraction? Just 2.46 percent.

No reasonable person would conclude that these comparisons prove once and for all that American populism has been vastly superior in economic policy terms. And it’s entirely possible that the U.S. record has no or few lessons to teach other countries. But for Americans, nothing in this paper indicates that they’ve paid any “cost of populism,” and a deeper dive uncovers evidence that they’ve actually benefited.

(What’s Left of) Our Economy: An All-Too-Convenient “Truth” About Productivity

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An Extraordinary Time, economic history, establishment, living standards, manufacturing, Marc Levinson, per capita GDP, Populism, productivity, Robert J. Barro, technology, The Wall Street Journal, {What's Left of) Our Economy

As a close friend once sagely told me, “If you take the most cynical possible interpretation of something, you’ll rarely be wrong.” He surely would agree, “That goes double for politics and policy.” So I hope you agree that it’s reasonable to predict that Marc Levinson’s upcoming economics book An Extraordinary Time will attract an inordinate amount of establishment attention – including of course from the Mainstream Media – because it so conveniently absolves that establishment of any significant responsibility for the economic mess in which the nation finds itself. And of course, if American (and, to be sure, other leaders) can’t rightly be blamed for sluggish (at best) economic growth, stagnant wages and incomes, or even (presumably) the financial crisis, then there’s no justification whatever for the populist revolt sweeping America and Western Europe.

Although I haven’t read Levinson’s book yet, I’m assuming that the long article-length adaptation published in yesterday’s Wall Street Journal is a representative summary. The author’s main argument is that the American (and other) high income economies don’t “roar anymore” because since the early 1970s, they’ve been experiencing a return to historically normal economic performance that mainly looks terrible because it followed a post-World War II boom that was unique and – most important – irreproduceable.

Worse, the principle reason for this return to normal is a productivity slowdown that’s been inevitable because it results overwhelmingly from the impossibility of recreating that favorable combination of circumstances that era enjoyed. As Levinson writes:

“The workforce everywhere became vastly more educated. As millions of laborers shifted from tending sheep and hoeing potatoes to working in factories and construction sites, they could create far more economic value. New motorways boosted productivity in the transportation sector by letting truck drivers cover longer distances with larger vehicles. Faster ground transportation made it practical, in turn, for farms and factories to expand to sell not just locally but regionally or nationally, abandoning craft methods in favor of machinery that could produce more goods at lower cost. Six rounds of tariff reductions brought a massive increase in cross-border trade, putting even stronger competitive pressure on manufacturers to become more efficient.

“Above all, technological innovation helped to create new products and offered better ways for workers to do their jobs.”

What both politicians and publics refuse to realize, he continues, is that

“Once tens of millions of workers had moved from the farm to the city, they could not do so again. After the drive for universal education in the 1950s and ’60s made it possible for almost everyone in wealthy countries to attend high school and for many to go to university, further improvements in education levels were marginal. Projects to widen and extend expressways didn’t deliver nearly the productivity pop of the initial construction of those roads.”

More fundamentally, however, “Productivity, in historical context, grows in fits and starts. Innovation surely has something to do with it, but we have precious little idea how to stimulate innovation—and no way at all to predict which innovations will lead to higher productivity.

“Moreover, the timetable cannot be foreseen.” And there is no “secret sauce that governments can ladle out to make economies grow faster than the norm.”

Not that Levinson’s theory is devoid of virtues. Especially admirable is his willingness to argue that neither Big Government liberalism nor Small Government conservatism has consistently managed to halt, much less reverse, the productivity deterioration over any length of time.

But at least on the basis of this article, he seems to have overlooked America’s historic economic record. Productivity, as RealityChek regulars know, is the area of economic performance about which economists display the least confidence. But the consensus view appears to be that America’s productivity growth glory days started somewhat earlier than Levinson suggests – according to widely accepted data, 1913. (To be fair, this paper in which they appear also suggests that the boom ended in the 1960s, not the 1970s. Moreover, although Levinson is referring to labor productivity, the data cited here present the broader measure of multi-factor productivity, which looks at a broad range of inputs needed to generate a unit of output.)

Further, what’s astonishing about the data in this study (I’m talking about Table 1) is that the era of peak productivity identified (1928-1950) includes both World War II and the Great Depression. Just as you’d expect unusually strong productivity performance during the former, thanks to the numerous major technological innovations generated by the war effort), you’d expect unusually weak performance during the latter, because all economic activity was slumping at historic rates. And yet the net result was productivity advance that puts that of later decades to shame.

In addition, although the return to peace brought multi-factor productivity growth back down to levels not seen since before the 1880s, the falloff from roughly the 1960s to the 1970s was much greater – even though no comparably epochal change took place.

Even more telling is how America’s economic growth performance contrasts with the framework described by Levinson. A recent report from Harvard University economist Robert J. Barro contains historical data on America’s per capita GDP growth – that is, how quickly or slowly the economy has expanded adjusting for population, and therefore the growth improvement that tends to result simply from greater numbers of workers.

According to Barro’s numbers, the 1939-1979 period does represent the nation’s best stretch of creating wealth per person. So that tracks well with Levinson’s argument. But the dropoff is pretty gradual through 1999 – when it really nosedives. That doesn’t bolster the Levinson view. Nor does the fact that lots of pre-1939 decades saw much faster per capital economic growth than either the 1999-2009 period or the the 2009-2015 period.

Levinson supporters can observe that these trends are roughly consistent with his emphasis on the productivity-enhancing role played by demographic movement (from countryside to city). And as a result, they’re consistent with the idea that productivity has been enhanced by the higher rates of high school and college graduation that have resulted.

But most Americans still don’t graduate college nowadays, and major questions have arisen about the value of a four-year college degree. It’s also widely argued that the typical American high school graduate is more poorly prepared for college than in the past. Isn’t is possible that poor public policies lie behind at least some of these failures? And what about technological progress? Many theories suggest that it should be speeding up, as it feeds on its own momentum. Instead, the opposite seems to be happening, at least in terms of technology’s record in raising living standards. Are there no policy decisions bearing at least some responsibility?

Finally, Levinson pays no attention to a possible explanation for slowing productivity growth that at least deserves some consideration: As I’ve suggested, the problem’s emergence coincides with the American government’s decision to start viewing with at most indifference to major losses suffered by domestic U.S. manufacturing – first due to the predatory trade policies of high-income countries like Germany and Japan, and then due to trade agreements that actually encouraged the offshoring of manufacturing production to super low-cost, low-regulation countries like China and Mexico. Since manufacturing has historically led the economy in productivity growth, is it surprising that official decisions to reduce its domestic footprint has undermined its overall productivity performance?

Levinson is surely right in noting that much about productivity – like much else about the economy – is beyond the control of politicians. As a result, voters should definitely hold realistic expectations about the economic changes that politicians can foster. But can anyone doubt that Levinson’s overarching claim, that the economy’s current overall performance is the best that reasonably can be hoped for, logically lets nearly all of the nation’s leaders off the hook – and will only deepen the despair and cynicism of all those Americans that “ordinary economic performance” is leaving behind?

(What’s Left of) Our Economy: Which States are the Biggest Economic Growth Winners and Losers?

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Commerce Department, GDP, Great Recession, gross domestic product, growth, inflation-adjusted growth, per capita GDP, {What's Left of) Our Economy

Last Friday, I reported that the government’s new figures on state-by-state economic growth came out, and focused on what they told us about how manufacturing’s been faring. (Reminder: Not well.) If you’re curious about how your state’s been doing lately in terms of economic output and growth, this Wall Street Journal post on the Commerce Department numbers makes it easy.

Today, I’d like to focus on what’s arguably a more important measure of economic health – gross domestic product (GDP) per capita. These figures divide a state’s total production of goods and services by its population, and they give us a better idea both of (a) whether the economy of a state looks big because its residents are adept at creating wealth, or simply because there are lots of them; and (b) whether they’re creating wealth fast enough to keep up with (and in principle share among) their headcounts.

That last sentence hints at something that the GDP per capita statistics can’t tell us – whether state-level of national wealth is actually being shared relatively evenly. But there’s no doubt that states whose pies of output are growing faster than their populations will have more overall wealth to share and easier political choices regarding various sharing ideas.

These new data reveal a GDP per capita (PCGDP) champ that may surprise many: the government-dominated District of Columbia. With inflation-adjusted output per head of more than $160,000 in 2015, D.C. was also Number One (by far) the year the last recession started (2007) and the year it ended (2009). The two runners-up for 2015 are probably less surprising: Alaska ($66,835) and North Dakota ($66,507). Of course, they’re small-population states with huge deposits of fossil fuels – which means their 2016 performance will be weaker.

Rounding out the Top Ten: Connecticut ($64,115), New York ($63,929), Delaware ($63,463), Massachusetts ($62,918), Wyoming, ($60,231), New Jersey ($56,721), California ($56,365), and Washington ($55,403). Aside from energy-rich Wyoming, these PCGDP leaders are in the Northeast and on the West Coast.

The U.S. national figure in 2015? $49,844 in real terms. So that reveals that some states at least are major PCGDP laggards.

America’s poorest state, by this yardstick, is Mississippi, with a 2015 PCGDP of only $31,894. Next, in ascending order, are Idaho ($35,505), South Carolina ($36,174), West Virginia ($36,486), Alabama ($37,597), Arkansas ($37,644), Maine ($37,958), Arizona ($38,244), and Florida ($38,950). The common theme here, of course? Deep South and Sunbelt.

But maybe the trends over time are markedly different from the picture portrayed in this snapshot? Let’s examine the start of the recession (2007) through 2015. Interestingly, high-PCGDP state North Dakota was by far the fastest grower – with its real output per head surging by nearly 51 percent. Way behind in the second slot was another energy producer, Oklahoma (11.45 percent), followed by agricultural power Nebraska (10.19 percent).

Rounding out the fast-growing Top Ten are West Virginia (one of the poorest states, but a 9.82 percent grower), high PCGDP Texas ($53,707 in 2015, with 9.45 percent 2007-15 growth), South Dakota (8.50 percent), Pennsylvania (whose problems I highlighted last week but that nonetheless clocked in at 6.79 percent), Oregon (6.68 percent), New York (6.03 percent), and Minnesota (5.75 percent).

As with stand-still PCGDP, however, overall U.S. PCGDP growth of only 1.46 percent during this 2007-2015 period signals that output per head fell during this period in many states. Nowhere was the plunge bigger than in Nevada (16.71 percent), Arizona (13.47 percent), and Florida (10.92 percent) – all hammered by the housing crisis. Revealingly, all are also fairly low PCGDP states.

Next came even lower PCGDP state Mississippi (-10.18 percent), high PCGDP states Wyoming (a big coal producer, at -9.31 percent) and Connecticut (8.09 percent), PCGDP laggard Idaho (5.66 percent), Georgia (another PCGDP laggard that was a prime housing bubble victim as well, at -5.38 percent), low-PCGDP state South Carolina (-4.60 percent), and much wealthier Delaware (-3.89 percent).

These fast-grower and fast-decliner PCGDP lists in particular strongly indicate that the U.S. economic recovery is getting more uneven geographically. The biggest question they raise, however, could well be political: Are these economic conditions providing many clues as to how these prospering and struggling states’ Electoral College votes will turn out in November? As soon as we have the data, you’ll be able to see them on RealityChek!