Should we care? People from Thomas Friedman to Niall Ferguson cite the looming change at the top of the world economic rankings as a bellwether of broader American decline. “We are the United States of Deferred Maintenance. China is the People’s Republic of Deferred Gratification. They save, invest, and build. We spend, borrow, and patch,” complained Friedman in a recent New York Times column. And yet having the world’s largest economy isn’t all it’s cracked up to be—and you need look no further than the history of China and the U.S. to see that. The swelling size of China’s economy may be a source of pride to the Chinese people, but America is still by far the better place to live—and will remain so for a long time.
Although economists are skeptical about China’s ability to sustain its current levels of growth, most agree it is only a matter of a few years before the Middle Kingdom’s 1.3 billion or so people produce more than the 310 million living in the U.S. That means history is repeating itself. The U.S.’s reign as the largest world economic power began a little before 1890, when it supplanted the previous global giant: China. According to data from the late Angus Maddison, an economic historian at the University of Groningen in the Netherlands, China boasted the largest economy in the world all the way back to 1500. Prior to the 20th century, its run at No. 1 was interrupted only for a brief period around 1700, when India took a turn at the top.
And yet during those five centuries when its economy was the world’s biggest, China was never even close to being the world’s wealthiest country. Italy was almost twice as rich in 1500, the Netherlands almost three times as rich in 1700, and the U.K. six times as rich by 1870. Today, though the GDPs of the U.S. and China are roughly equal, the average person in China lives on an income that can buy only 16 percent of the goods and services of the average person in the U.S., and it will take decades for that gap to close. If you’re an American feeling down about losing top economy status, go take a holiday in Guizhou, a poor western Chinese province where incomes are about one-fortieth as high as the U.S. average. You’ll feel a lot better.
Nevertheless, pessimists warn that being knocked off the top spot could still have all sorts of ill effects for the U.S. Being the biggest economy, they argue, has been vital to American prosperity because, since the close of World War II, the dollar has been predominant in international financial reserve holdings, allowing the U.S. to borrow and trade in its own currency. Arvind Subramanian of the Peterson Institute for International Economics predicts that as China’s economy overtakes the U.S.’s, so too will the relative importance of the renminbi. He argues that within 10 years, the renminbi could replace the dollar as the world’s largest reserve currency.