Feeds: 
symbol identifies content for paid subscribers only.
Washington Post Spouts Feel Good Misinformation
It is scary how ignorant the Washington Post’s columnists can be on the issues they address. (Who says that in today’s economy you need a good education to get ahead?) Joel Achenbach puts his ignorance on display in a front page feel good article of the Sunday Outlook section titled “Bet on America.”
The main point is that the U.S. is still number one and no one else is close. If he were a bit more informed, Achenbach would know part 2 of this claim is obviously false. At one point he puts U.S. GDP in 2007 at $13.2 trillion and outs China’s at $2.6 trillion. Sorry Joel, try $11 trillion. The problem is that Achenbach is using an exchange rate conversion that is completely inappropriate for such comparisons. The better measure is a purchasing power parity measure which applies the same set of prices to goods and services produced in both countries.
Neither measure is perfect, but it is ridiculous to imagine that a country whose manufacturing output exceeds the U.S. on a wide variety of measures, that produces more scientists and engineers each year than the United States, and has more cell phone and computer users than the United States is one-fifth the size. On a per capita basis China’s economy is still less than one-fifth the size of the U.S. economy, but on an aggregate basis, it should pass the U.S. in a few years.
The other ungodly silly sin committed by this piece is telling readers that the U.S. in far better shape to deal with its aging population than any potential rival. It reaches this conclusion simply by examining the ratio of retirees to workers. In fact, the ratio of workers to retirees is at best half the story. A large part of the story is productivity growth, which is why the claim that China faces a problem here is close to absurd.
Retirees usually expect that their living standard in retirement will bear some relationship to their living standard while they were working. If a country has rapid productivity growth (and it is shared by its workers), then living standards for workers will rise rapidly through time. At present, China is enjoying productivity growth of close to 8 percent annually. Let’s do some quick arithmetic.
Suppose that an average worker lives 20 years in retirement, so that the average retiree last worked ten years ago. Suppose that China has two workers per retiree, approximately the same ratio that the U.S. is expected to have in twenty years. An 8 percent rate of annual wage growth means that the average wage will have increased by almost 116 percent after ten years. This means that a tax or some form of transfer from workers to retirees equal to 10 percent of the age bill will allow for a retirement benefit equal to more than 43 percent of the average workers’ pay during their working lifetime. What’s the problem here?
By contrast, the comparison of the situation of the U.S. with any other country must take account of the fact that U.S. health care costs are projected to continue to spiral in a way that is not true of any other country. Since care for the elderly is especially costly, this will pose an enormous burden on the U.S., if our health care system is not reformed. If the projected increases in health care costs prove accurate, in twenty years, health care costs for people over age 65 will average more than $25,000 per person (in 2007 dollars). This will place a far greater burden on the economy and the national budget than any scare stories that Mr. Achenbach can dream up for the countries he views as our competitors.
It would be great if the Washington Pravda would allow such dissenting views on demographic issues to appear on its pages occasionally.
--Dean Baker
COMMENTS (9)
China will likely
achieve hegemony in 21st century by default through self-immolation of USA.
America's self-immolation stems from its dismally and continually low net fixed
business capital investment which is a critical driver of future industrial
development military power.
The low levels of net fixed business capital investment in America means that
corporate America will not invest appreciably in new plant and equipment and
will not deploy advanced processes and technologies.
The foregoing action has
caused productivity and income growth in America to stagnate and caused the creation of
only low value added, low productivity, and non-tradable domestic service jobs
for American workforce.
In short, America's military superpower status rests on
shaky technological and economic foundations.
China is continually spending robustly in net fixed business capital investment,
thereby contributing to its high productivity growth and tremendous current account surplus.
Posted by: jmk | September 2, 2007 1:15 PM
Dean
i think you must have gone to school in a time and place where knowledge was "truth oriented."
it doesn't seem to be that way anymore. now an education means you have learned in detail the rationalizations of some "school of thought" or another.
you can be sure the reporter has been "educated."
as for the retirement costs. by a completely different method i arrive at the same results you do. which gives me confidence that you are right.
but do you have any idea how hard it is to beat truth into the heads of the "educated"?
Posted by: coberly | September 2, 2007 2:12 PM
America's self-immolation stems from its dismally and continually low net fixed
business capital investment which is a critical driver of future industrial
development military power.
jmk --
Shhhhhh! Important Americans are growing exceedingly rich off of the dismantling of American production.
Anyway, in the brave not-so-new world of neoliberal globalization, it seems military power now derives from the bidding up of existing assets, increasing indebtedness, and legalistic rules on ownership and control.
Just go along with the flow and repeat the following as if it were a mantra:
free trade is an absolute good
free trade is an absolute good
free trade is an absolute good
free trade is an absolute good
Done enough times this will lead you to believe that (1) what is being practiced is free trade in the traditional Ricardian sense and (2) it's a win-win for everyone involved!
Ignorance is bliss.
Posted by: Ponzi Q. Globalization | September 2, 2007 3:15 PM
"and it is shared by its workers"
Haven't you spent the last few years complaining that this isn't so? Or not necessarily?
Posted by: Tim Worstall | September 2, 2007 4:17 PM
Tim,
i don't expect that the income will keep flowing upward forever, but I could be shown wrong.
Posted by: Dean baker | September 3, 2007 5:26 PM
Is there any macroeconomic context in which using the "absolute" (eg currency exchange) comparison rather than the PPP one is more appropriate? I'm thinking in particular of a country's ability to affect global financial markets, or any global markets for that matter.
Posted by: Melissa B. | September 4, 2007 5:02 PM
JMK is spot on with his observation about the paltry lack of business captial investment as being the most important factor in stangnant growth. Couple that with the M & A industry which does bid up existing asset values and then sytematically deconstruct those corporations and the open artery that is healthcare costs. We will see economic transposition as China becomes U.S. and we go to the rice paddies with our baskets.
Posted by: Jim Hannley RIA | September 6, 2007 7:00 PM
Well, there is an social and economic system called Anarchism (sometimes called Libertarian Communism or Libertarian Socialism) that encourages long-term economic planning to meet human needs through direct worker ownership and control of the means of production.
It was successfully implemented in Aragon and Catalonia (a total area a bit smaller than South Carolina) in the 1930's, during the Spanish Civil War. Productivity actually increased in these areas during the war.
Factories were run through workers' committes and agrarian lands were organized into libertarian communes. Even some small businesses such as hotels, restaurants, and barbershops were under worker control.
George Orwell writes about it in his Homage to Catalonia.
Unfortunately, faced opposition and sabotage from Stalinist-Communists, and finally could not resist Franco's force of arms.
because such a system has never competed toe-to-toe against Capitalism, we won't know how viable it is until we (human beings in general) try it again.
Posted by: Maletesta's Mamma | September 7, 2007 4:55 PM
The fall of the dollar was inevitable. It is the only way to get the trade deficit down to size. The real problem was allowing the dollar to rise to the point that it made such a painful adjutsment necessary. This was the Clinton-Rubin high dollar policy. It felt good in the short-term (except for manufacturing workers), but just like tax cuts that lead to big budget deficits, it could not be sustained.
Posted by: san | April 8, 2008 2:16 AM