China's Per Capita GDP Is Closing In Fast

The news this year that China's economy is now larger than the United States' continues to reverberate on the conservative side of the political spectrum.

Some argue that the only way to arrive at China having the world's largest economy is to use a purchasing power parity (PPP) basis, rather than a U.S. currency normalization.  This is correct, but PPP is also the correct way of looking at the situation.  The currency markets are simply too volatile and influenced by a host of confounding factors to yield the most reliable comparisons of GDP between nations and their associated trends.

But the remaining piece of the discussion is the difference in per capita GDP between China and the USA.  Some excellent analysts with whom I normally agree have argued that “despite China's new status as the world's No. 1 economy by one IMF measure, the US is still 74 years ahead on a per-capita basis.”

I'd argue this appears unlikely.  In reality, current trendlines suggest that China may catch the USA in per capita GDP within 20 to 25 years.

Taking the IMF's own per capita GDP-PPP and looking at trends since 1980, it is clear that China's per capita GDP-PPP is closing in fast on that of the United States.

Economic growth in the United States has been progressively stagnating since the 1970s under the onslaught of big government.  Ironically, the IMF has general government revenues as a percent of the total economy at only 22.7 percent of GDP in China versus 31.4 percent of GDP in the USA.  In other words, big government is bigger in America than it is in communist China.

Of course, the Chinese government has its tentacles embedded throughout its national economy in a variety of ways that do not show up in such simplistic statistics – and real economic freedom is much higher in the USA.  But the point is that the past century has seen an explosion in the size of the American government at all levels, and the drag on the free market in terms of high taxes and excessive regulations is strangling innovation and entrepreneurship.  This, along with unfavorable trade relationships and misguided foreign policy decisions, has allowed China to start catching up.

Back in 1980, the per capita GDP-PPP of the USA was 42-fold higher than in China.  Today, that ratio is only 4 and dropping fast.  As the plot on the right shows, if current post-1980 trends continue, per capita GDP-PPP parity could be reached by the mid-2030s.  This matters: living in a world where the world's largest economy is also wealthy on a per capita basis and an authoritarian communist state is a frightening future for those who value freedom.

The preferred narrative is as follows.  While the West remains wealthier than communist China, the fact that China's economy is now larger than the United States', and its per capita wealth is on a trajectory to potentially overtake that of many Western nations (including the USA) within a couple decades, is of major concern.  We should be using this threat to justify the roll-back of the administrative state and other restrictions on personal and economic freedoms.

Reagan used this language back in the 1980 campaign, and it worked both at the ballot box and with the overall economy.  Stick to this storyline; it is a proven success for motivating voters and those who create wealth.  Avoid the counter-narrative that breeds complacency and over-confidence, and which can be used by the left to justify the current undesirable path that all major Western economies are on.