America's economic hegemony is safe
By Gerard Baker
BARRING some wholly unexpected statistical oddity, we will get another spectacular signal of the health of the American economy this Friday.
The gross domestic product figures for the first quarter are expected to show that America's output expanded at an annual rate of about 5 per cent in real terms in the three months to the end of March. In this age of exaggerated gloom about the condition of the world, with all its imbalances, inequalities and uncertainties, it is worth pausing for a moment simply to reflect on the scale of US economic success.
Given that the United States is a $12 trillion ($6,700 billion) economy, the new data mean that in the first quarter the US added to global output an amount that, if sustained at that pace for a year, would be about $600 billion — roughly the equivalent of adding one whole new Brazil or Australia to global economic activity every year, just from the incremental extra sweat and heave and click of 300 million Americans.
Think of it another way. In an era in which China embodies the hopes and fears of much of the developed world, the US, with a growth rate of half that of China's, is adding roughly twice as much in absolute terms to global output as is the Middle Kingdom, with its GDP (depending on how you measure it) of between $2 trillion and $4 trillion and its growth of about 10 per cent.
Even when you account for the fact that US growth is not going to continue at 5 per cent, but will revert to its trend of more like 3.5 per cent per year, you are still talking about an economy adding more than $400 billion in inflation-adjusted terms every year (not quite Brazil or Australia, but significantly bigger than Switzerland or Belgium) .
That means that, on current trends, for at least the next decade the US will actually keep growing in total dollar or yuan numbers by a larger amount than will China (even if the yuan is substantially revalued, by the way). And beyond that ten-year horizon, can anybody really be confident that China will maintain its current rate of growth? (We haven't even talked here about per capita GDP, where the US advantage will remain unapproachable for decades.) Think of it yet another way: at current economic and population growth rates, the United States — now about 30 per cent larger than the eurozone in GDP — will be twice the size of Europe's economy in less than 15 years.
I give you this little statistical litany not just for its own intrinsic appeal, but as a healthful antidote to some of the wishful thinking about America's inevitable decline you can read in the rest of the media.
Historically speaking, indeed, America's economic hegemony has never been greater. However messy Iraq and Afghanistan get, it would be unwise to bet that the US will not continue to be Top Nation for quite a while yet.
What could undermine long-term US dominance? Some fret that the precarious American fiscal position could do it. However, this is mostly hyperventilation. The fiscal deficit, at a cyclically adjusted 2.5 per cent of GDP, is on the large side, but American public debt as a proportion of GDP — at less than 70 per cent — still puts the United States comfortably among the more frugal of the world's big nations.
The inevitable unravelling of global financial imbalances could certainly harm US demand growth in the short term, as both public and private sectors increase savings, but, assuming these extra savings are efficiently allocated by America's highly flexible capital markets, they might even end up improving long-run potential.
The ageing population will surely crimp American economic activity. Most economists expect trend growth to slip a bit in the early part of the next decade as the proportion of the population in work begins to drop. Yet relative to the rest of the world this may not matter that much. America's demographics — a reasonable birth rate and strong immigration flows — are actually rather better than for most other industrialised countries. A century ago, China's population was almost six times that of the US. In 50 years' time, on current trends, it will be less than three times the size.
The only real threat to American economic hegemony, I suspect, is the willingness of its people to continue to tolerate the pains associated with its success. Income and wealth inequalities have grown rapidly in the past ten years — even as the long-term growth rate has accelerated — and, given the continuing direction associated with globalisation, they may get even worse over the next 20 years.
That could tempt Americans to turn their backs on the very free markets that have been the foundations of their continuing prosperity.
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