GDP games

Sam Altman of Y Combinator recently published an essay called “China,” mostly about the ongoing apparent eclipse of the U.S. as the world’s leading economic power by the People’s Republic of China. He makes some good points about the history of economic conflict between great powers, notably the German Empire and the British Empire for nearly 50 years across the 19th and 20th centuries. Overall, however, the essay comes off as both fearful and somewhat confused about subjects such as reserve currency status and what benefits it as well as GDP entail.

China vs the U.S.: What does it mean to be the biggest?
China, in its many geopolitical incarnations over the millennia, has more often than not been the world’s biggest economy. This statement requires some economic retrofitting, since GDP did not become an important figure until at least the mid-20th century (it was proposed in 1934).

GDP and overtaking
For what it’s worth, though, if we use GDP as our main metric of economic power, one can see that the Qing Empire indeed had a larger GDP than either the U.S. or the U.K. throughout the 19th century, when Anglo-French forces burned the Old Summer Palace, the U.S. was blazing trails in railroad infrastructure and adding territory, and the British Empire was still growing in size and power.

Eventually, economic strength shifted away from China to Europe and North America. Neither Germany nor the U.K. was the world’s largest economy in 1914 (the U.S., still a peripheral geopolitical player at the time, was), but their combined economic, political, cultural, and diplomatic power made them the most important players on the globe. Competition between them put hundreds of millions of lives at stake because of the size of their colonial empires and alliances.

I bring this point up because Altman penned this passage:

“The historical track record of the largest economy being overtaken by another is not good. Sometimes it’s violent. (For example, Germany and the UK in 1914. Though neither was the biggest, the world was less globalized. They were the largest in the region and very focused on each other). Sometimes, it’s a long, slow slide of denial into stagnation and decreasing relevance.”

There was violence that coincided with Germany’s initial rise following its victory in the Franco-Prussian War. Over several decades, Germany amassed the industrial and military capacity to put pressure on the U.K. The important changes were development of the Kaiserlichmarine and Germany’s fledgling colonial efforts, all in the context of a continent consumed by imperialism and nationalism, not fluctuation in a figure (GDP) that hadn’t been invented yet.

Moreover, the U.K. was hardly in decline at this time. Its empire was expanding and its technological lead over Germany, demonstrated by creations such as the H.M.S. Dreadnought, was impressive. I think that the epistemic violence created by our fixation on figures such as GDP sometimes makes us read too much into the decline and fall of nations based on a number.  We end up looking for convenient symmetries, speaking at length about the moral or educational failings of the states involved, and overlooking other, often more mundane explanations.

In the case of Germany and the U.K., the unification of the German peoples in the 19th century had created overnight a state with a significantly larger population than either France or Britain. The simple math of having to counterbalance the massive German state and army created a crisis that would not be resolved for decades, plus its shadow has extended to today in the form of concerns over Germany’s power over the rest of the E.U.

Ultimately, however, Germany failed to match the strength of the Royal Navy and, more critically, the vast resources of the Allies’ empires. If there was a German economic sorpasso of Britain, with retroactive consideration of GDP, it didn’t translate into geopolitical dominance, with the defeat at the Battle of the Marne initiating a stalemate that Germany could not break. The difference seemed to be that, at the end of the day, in an ironic twist, the Allies simply had more people to draw upon, and were fortunate to have won the Marne and later enlisted the U.S. Britain, France, the U.S. and Russia between them had empire encompassing almost 1 billion people.

With China and the U.S., something similar is at work when it comes to population. If China surpasses the U.S. in GDP and becomes a credible military rival, it won’t indicate much more than the fact that China has more 4 times the populate of the U.S. I think Altman creates a dismal set of prospects for what changes in the “GDP #1” slot, as it were, portend. A change in rank need not be seen as a commentary on violence or laziness and decline. GDP is first and foremost a figure about scale, which means that overall population is a good predictor of how any country will stack up.

The globalization point is strange. One of the main reasons that World War I in particular was so surprising was that so many in Europe believed that the world was too interconnected and globalized for war, much less the mechanized carnage of WWI, to be an option. Telegraphs, coal-powered ships, and railroads had already shrunk the world, which at this time was dominated by the colonial reach of just a handful of powers.

When I see “globalization” in these types of essays, I see the same sort of retrofitting that is often done with terms like “GDP” and “technology” that would have had no meaning at the time. It’s a convenient segue into ruminating on the central role that government regulations, business competitiveness, etc., may play in the change in GDP rank.

The irony of pointing out these changes, though, and then talking about what lessons they hold for areas like education or immigration policy, is that any change that isn’t directly related to population growth/decline is likely to be temporary. Altman wrote:

“The US has become less competitive globally—for example, other countries have surpassed our education system, and we have structural and demographic challenges other countries don’t and that create significant expenses.”

Perhaps education is an issue, but it is enough to make up for a 4x population disparity between the U.S. and China? China’s enormous number of working age men and women from the 1970s onward meant that, free of dramatic failures of policy such as the Great Leap Forward or a catastrophic war in Asia, it would become #1, even if it had to pursue old-fashioned mercantilism to get there.

Certainly, matters such as political collapse, warfare, and resource scarcity have affected GDP – the rankings are, after all, not a perfect match with population. For example, one could argue that the U.K. eventually overtook China in the 19th century because it had better weaponry and a more outward-looking foreign policy that created a mercantilist system in which China refused to participate. With the U.S., its rise was facilitated by the disarray of China (invaded multiple times during its Century of Shame) and India (colonized for centuries and at war with its neighbors for a while since independence.

Both the U.K. and the U.S. have since seen their shares of world GDP inevitably shrink. If anything, the change is good: it shows that worldwide growth has somehow rebounded after a half-century of global warfare and an ensuing half-century of nuclear brinkmanship, that Japan and China have recovered from the mistakes of evil regimes, and that much of the world is no longer under the heel of outright imperialism. The peace dividend has also normalized GDP as a reflection more of population figures than contemporary events (wars, recessions, etc.).

The mention of “structural and demographic challenges” has some merit. The U.S. has infrastructure that is in need of repair, plus it has unconscionable healthcare costs created by decades of terrible policy.  On the other hand, China has many similarly serious issues, including a rapidly aging population, low fertility rate, shortage of water, and an opaque political system in need of reform.

It’s possible that China could lose its crown as the most populous country to India by the middle of the century and that its size relative to the U.S. will continue to shrink. In 1900, the Qing Empire had 5x the population of the U.S. In 2015, the PRC is at about 4x. It could soon fall to 3x. These sorts of long-term population shifts are better predictors of GDP fluctuations than the  transient political affairs of nations.

A basic and perhaps flippant question about GDP rankings is: why should anyone care? We’re living in perhaps an atypical era in which the GDP rankings match up relatively well to each country’s relative power. It hasn’t always been this way, though. The USSR was never #1 or even #2 in national GDP. As one goes further into the past, the correlations start to break down, with the weakness of the Qing Empire and the isolation of the Gilded Era United States at odds with the strength suggested by their retroactive GDP figures.

Reserve currency
In trying to understand why anyone should pay attention to GDP rankings, it’s also worth figuring out if there are any benefits to being #1. Do countries get automatic prestige and power by being #1? Do they instantly become that Cold War anachronism, “a superpower”? Altman has some thoughts on the issue:

“The US gets huge advantages from being the world’s largest economy (as mentioned earlier, other countries wanting this sometimes leads to major conflict).  For example, our currency is the most important currency in the world, and we can do things like run a trillion dollar deficit without anyone getting too concerned.  People generally have to buy energy (oil) in our currency, which adds a great deal of support (though we’ve already seen the very beginnings of the PetroYuan).  Also, we get to have the world’s most powerful army.”

The benefits of reserve currency status are difficult to quantify. Called the “exorbitant privilege,” the USD’s status is likely just as much a hindrance to U.S. prosperity as it is a boon. Economics professor Michael Pettis, who has taught in China for years, has been one of the most articulate skeptics of A) the yuan overtaking the dollar any time soon; B) that being a bad thing for the U.S., even it it were to happen. He wrote late last year:

“[I]t is actually quite easy to list the conditions under which reserve currency status encourages growth and the conditions under which it forces a rise either in debt or in unemployment. In advanced countries with deep and flexible financial markets, except in the case in which capital has become severely constrained by the need for money to be backed by gold, or real interest rates have been forced up to extremely high levels in order to break inflation (as was the case in the late 1970s and early 1980s), the net inflows associated automatically with reserve currency status will not result in an increase in productive investment. They only result in an increase either in debt or in unemployment.”

I won’t quote too much more of him since it’s technical reading, but the whole parent essay – “Are we starting to see why its really the exorbitant “burden”?” – is worth reading. The reserve currency status of the USD is no longer so much a benefit or sign of dominance as it is an enormous drag on policy and growth. Odd how if the USD were to lose this “privilege,” many of the issues identified in Altman’s essay – stagnation, slow growth, etc. – could be addressed much more freely than they could in the current currency model.

So what?
If I had to guess, I would guess that China would surpass the U.S. in nominal GDP at some point but that the lead wouldn’t last, just as Germany’s lead over the U.K. likely won’t survive their different demographics directions. I’m not sure any of this matters for most people alive.

Being #1 in GDP seems to be more about pride or weird symbolism than being ‘the best.’ Being #1 hasn’t given the U.S. the best healthcare system nor the lowest rate of inequality, for example. And what does having the world’s strongest army, as Altman notes the U.S. has, do for Americans who need jobs?

Plus, if the world is as globalized as Altman says it is, then the importance of the individual power of single nations would seem to lessen with time as multinational corporations become more prevalent and the interconnection created by global markets and networks discourages war. I don’t really agree with this outlook, but it seems strange to fear the implications a change in GDP rankings while also believing in inevitable globalization.

The U.S. has had relatively good growth for a developed country in recent years. It recovered more quickly from the Great Recession than any of the E.U. nations. At the same time, China’s development has lifted millions of people out of abject poverty. The GDP games of fretting over rankings seems to overlook the benefits that both nations have seen, as well as the profound difference of their situation and cultures.

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