In real terms, the U.S. economy expanded by a total of $290 billion dollars in 2013. With some minor adjustments, that's essentially the amount of extra income created by the nation as a whole. It also represents the increase in the purchasing power of its residents.
By comparison, China's economy added over $800 billion dollars to its citizens spending power during 2013 alone. That's an extra $800 billion that is now available for Chinese households to purchase new products and services or to save and help fund new ideas and technologies. At this rate, China is expected to overtake the U.S. as the largest marketplace in the world by the end of the decade.
This is not just about statistics. It is about our quality of life and how long we will live. It is about where our children will want to live and who will be our neighbors in the future.
While entrepreneurs in the U.S. are focused on "disrupting" established products and industries, working in China raises no such concerns. With so much extra income being generated every year, there is plenty of space for the new and latest.
With prospects for success - and its sizable rewards - so much greater in China, our ability to attract and retain the best and brightest will be seriously tested. Although Americans may not be moving anytime soon, fewer young and talented Asians are now interested in pursuing their careers in the U.S.
What can be done?
A lot is beyond our control. China is already large and is still growing quickly. Although the pace is starting to slow, the yuan is still undervalued by perhaps 10 percent or 15 percent, and it is hard not to see its economy making similar size gains for the rest of the decade.
But the U.S. can and should grow faster. It needs to grow faster. For demographic and budgetary reasons. And also to ensure it remains an attractive place for biotechnology, communications, electronics and other forms of frontier knowledge. Low growth perpetuates itself.
How do we grow faster?
Between the end of World War II and the beginning of the last recession, in 2007, economic growth in the U.S. averaged nearly 3 percent per year. Most of this was due to average labor productivity, which expanded at about 2 percent per year. In addition, the total number of hours worked also grew by 1 percent per year, in line with the overall growth in population.
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Unfortunately all these numbers have fallen sharply in the last few years. Some of this is surely cyclical. But much is beginning to look structural. The Congressional Budget Office now estimates that U.S. economic growth will remain below post-war levels well into the next decade. GDP growth is expected to settle at only about 2.2 percent per year. Annual labor productivity growth should slow to 1.6 percent while the growth in total hours worked will fall to just 0.6 percent per year. Since population growth will continue unabated well into the next few decades, this means that the average American is expected to work less and less.
The decline in working hours has been happening for quite some time now. More precisely, after adjusting for population growth, fewer and fewer Americans are working, or even trying to work. In 1999, at the height of the tech boom, over 74 percent of working-age Americans were employed. The same ratio is now 67.4 percent. That represents a loss of about 14 million workers. It also appears that those still at work are also working slightly fewer hours, although the evidence is less clear.
Reversing this trend has to be a priority for the next administration. And virtually every major domestic policy debate should be viewed from this perspective. Any policy reform that fails to deal with this issue has to be seen as an outright failure.
For example, the ongoing changes in health care law may or may not lead to improvements in the provision of quality medical care. However, their impact on the labor market is nothing short of disastrous. Once fully implemented, income-linked subsidies for individuals, combined with the employer mandates and various tax penalties, are estimated to cost us a minimum of another 2.5 million full time jobs. The prospect of increased worker mobility due to the portability of health insurance is a positive outcome. But under current law I doubt this particular feature will matter very much.
Reforming Social Security and immigration are two other major unresolved policy issues that will have a large impact on the incentives for households to work, on job creation, and ultimately the U.S. economy's growth potential. These have to be our primary focus.
Unless we just don't care anymore.
Commentary by Joao Gomes, the Howard Butcher III professor of finance at UPenn's Wharton School, and a faculty affiliate of the Penn Wharton Public Policy Initiative. Follow Penn Wharton PPI on Twitter @PennWhartonPPI.
- Budget, Tax & Economy