4 Reasons To Cheer When China Overtakes America

Becoming the world’s No. 2 economy would underscore America’s decline.

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As many athletes know, it can be harder to stay on top than to get there in the first place.

America has had a lengthy and rewarding tenure at the top. The United States emerged from World War II as the world's dominant economic power, and for the next several decades prosperity became an American birthright. We still have the world's biggest and most powerful economy, with investors flocking to the dollar during the recent financial crisis and the Federal Reserve pursuing America-first policies that the rest of the world can only acquiesce to.

[See 10 industries that will hire the most in 2011.]

But every champion suffers defeat sooner or later, and the United States is starting to look like an aging, off-balance heavyweight. Developing countries like China, India, and Brazil weathered the global recession far better and they're now growing at two or three times the rate of the United States. Washington is also the most profligate capital among developed countries, with a shocking amount of debt and no plan to do anything about it. Despite massive amounts of government aid, more than half of all Americans tell Gallup that the economy is still in a recession—or a depression. Median incomes are falling, with living standards likely to follow. The dollar has drifted close to all-time lows against other major currencies. And by most projections, it could be another four or five years before employment is back to levels deemed normal.

Journalist Brett Arends encapsulated this sense of decline recently by arguing that the "age of America" will end in 2016. He based his claim on projections from the International Monetary Fund showing that under one measure of GDP, called purchasing power parity, China would account for about 18 percent of world economic output in 2016, while the United States would account for just 17.7 percent—the lowest level in decades. The U.S. economy would still be larger than China's in nominal terms, and far more productive when measured in output per capita. But Arends argues that the measure he examined gives a more accurate picture of real economic power, since it strips away distortions caused by China's deliberate undervaluing of its currency and other factors.

One could quibble with his reasoning, but there's no denying that China, which recently eclipsed Japan to become the world's second-largest economy, is a rapidly rising power destined to displace the U.S. economy eventually, if only because of its sheer size. The implications are sobering. China is a proud and aggressive country controlled by communist-capitalists who have learned to harness free enterprise to pursue state interests. Sooner or later, it will outspend the United States on defense and perhaps flex its military muscle in confrontational ways. It could also tilt world markets in its direction and siphon off investment from the West, which could be especially destabilizing for nations like the United States that are overdependent on debt.

[See 5 upsides to global turmoil.]

It sounds scary, and the wide distribution of Arends' story suggests that it struck a nerve. But here's another idea: Maybe it will be good for us when China finally overtakes America. Here are four reasons why:

We need an underdog mentality. America is like the rich, dysfunctional family that lives in the ramshackle mansion at the top of the hill. We're living off of our past and have lost the habit of working hard to earn our livelihood. The neighbors hear us arguing all the time and notice that the property is looking a little shabby. We seem more fixated on amusements and trivial problems than on keeping our house in order.

In economic terms, this plays out in rampant deficit spending, unaffordable giveaways to favored campaign contributors, and grandiose global ambitions undermined by small-minded political one-upmanship. Ordinary citizens are guilty, too, because they have wildly unrealistic expectations that a government veering toward insolvency will continue to take care of them. Nobody wants to sacrifice for the common good, and cries for "smaller government" basically mean smaller government for everybody else but me.

America has a good record of bouncing back when it's fighting for something that's clear and just. We remain a rich country with extraordinary resources that we're just not using very well right now. If falling to No. 2 would generate a common sense of purpose and give Americans something to rally around, it might help generate the kind of determination to solve problems that no blue-ribbon commission or bipartisan study group can generate.

[See 7 ways to sink in a stagnant economy.]

A quick descent would be better than a slow decline. We stopped being No. 1 in a lot of things some time ago—or simply never were. The U.S. poverty rate is close to the worst among developed nations. Our education scores have been middling for years. The Legatum Institute's annual global prosperity index ranks the United States 10th. On healthcare, we spend far more than any nation on earth but have below-average life expectancy for a developed country, an alarming obesity rate and millions who can't even afford healthcare. The jingoistic chant of "We're No. 1!" is usually wishful thinking, because it's hard to find something we are actually No. 1 at.

Yet we're still in denial about the influence we have around the world and our ability to control events we deem in our national (or personal) interest. Jobs are a good example: Trillions of dollars in government stimulus have done little or nothing to speed job creation, which is more robust in other countries where it's happening with far less government aid. If the U.S. economy were no longer the world's biggest, it would be an undeniable sign that decline is real. But until that happens, we're likely to fool ourselves into the thinking that if it's the world biggest economy, it must be healthy enough.

[See 10 industries that will hire the most in 2011.]

It might force action on economic priorities. Despite a lot of jawboning, politicians have done virtually nothing to reduce the government's gaping deficits or pay down America's $14 trillion debt. Part of the reason is that the rest of the world keeps lending Uncle Sam money at irresistibly low interest rates, prolonging the addiction to debt. There are signs this may change in the near future, but some analysts think it will take a genuine crisis to force politicians to make the deeply unpopular moves—including spending cuts in cherished programs and higher taxes on most voters—that it's going to take to solve this national problem.

Legislators are also dithering on a broad range of other important economic issues. Tech firms complain that they can't get enough U.S.-based engineers, partly because foreigners who come to the United States to attend college or grad school can't get visas to stay after they graduate. So they go back home and work for companies there, or start their own firms. This seems like a no-brainer to fix, yet politically it gets conflated with the gridlock over illegal immigration, which is something altogether different. The United States is also standing by while China builds the world's most modern infrastructure and establishes leadership in important technologies like electric batteries for cars and next-generation solar panels. There's no sense of urgency in Washington about assuring the nation's economic primacy. Maybe a drop in America's economic rank would be the kind of impossible-to-ignore setback that it takes to get politicians' attention.

[See what voters need to know about America's debt.]

You can be small and prosperous, too. We mistakenly think that only a big economy can be a successful one. False. In the Legatum Institute's prosperity index, for instance, Norway, Denmark, and Finland rank at the top, followed by a bunch of other countries with far smaller economies than the United States. Most of them spend relatively little on defense, because they're not out patrolling the whole world, and they seem quite content to let others set global policies while they simply stay home and enjoy high standards of living. The trick, of course, is aligning your national ambitions with your capabilities, which is where the United States has fallen out of sync.

We're not the only ones. China, with the second-largest economy in the world, ranks 58th on the prosperity index. Its ranking will probably improve as it gets wealthier, but China will also devote a lot more of its income to an expensive military and to geopolitical infrastructure as it starts to throw its weight around in every quarter of the world. Come to think of it, maybe we should let them.

Twitter: @rickjnewman