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China’s economy is now bigger than America's? So what

Rick Newman
Senior Columnist
China’s economy is now bigger than America's? So what

This news has been getting a lot of attention lately: China’s economy is now larger than America’s, if you exclude exchange rates and other factors. And even if measured the most conventional way -- using total GDP -- China’s economy is bound to outgrow America’s eventually, since the Middle Kingdom has three times the population of the United States and a rapidly swelling consumer class.

China has become Americans’ favorite bogeyman, even more than Russia and its sinister leader, Vladimir Putin. To many people, the rise of China is synonymous with America’s decline. For the last four years, more than half of people polled have told Gallup that China is the world’s most powerful economy, with just 32% saying the U.S. is tops in the latest survey. In 2000, 65% named America most powerful, with Japan second, at 16%. Only 10% named China as No. 1 back then.

These worries are easily refuted, as several commentators have done in response to hysteria over China’s growth. For one thing, income and GDP are far higher in the U.S. when measured on a per capita basis, which is a much better gauge of wealth, prosperity and economic power than the total amount of output.

America may still be the most innovative nation in the world, as well, with Silicon Valley the epicenter of digital technology that’s transforming the entire planet. The United States has many other advantages China lacks, such as terrific universities, bounteous natural resources, dynamic capital markets and more-or-less effective rule of law. We’ve been squandering some of those advantages through fractious politics and self-destructive greed, yet it has been the United States, and no other country, leading the world out of a deep global economic slump.

Instead of worrying about who might be bigger, we’d be a lot better off worrying about how to remain productive and efficient. A big economy, for one thing, doesn’t guarantee high living standards. GDP per capita, in fact, is highest in small nations, with Luxembourg, Norway and Qatar ranking 1, 2 and 3, according to the World Bank. The U.S. ranks No. 10, with GDP per capita of about $53,000. Germany is 18th ($45,000), Japan is 23rd ($38,500), and China is 70th ($6,800).

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In the business world, size can be an impediment to profitability. Hewlett-Packard (HPQ) is currently trying to break itself into two, because its CEO and many shareholders feel two separate companies could perform better than one monolithic whole. General Motors (GM) foundered when it had eight automotive divisions—more than twice as many as any competitor—but is cruising now that it has only four. Economists frequently point out that the most dynamic companies aren’t big established ones, but fast-growing younger ones, which is where most job creation comes from.

What Americans should be worried about is recapturing the dynamism that seems to have leaked out of the U.S. economy during the last decade or so. Too many adults are sputtering in their careers or sitting on the sidelines, out of work. A lot of them blame Washington for their predicament — with justification — but there’s also a lot of evidence people aren’t doing enough to spring themselves out of a rut. Millions of Americans have lived beyond their means for years, leaving themselves shackled with debt. Companies can’t find enough workers to fill certain “middle-skill jobs” such as sales reps and tradesmen, partly because people aren’t willing to go where the work is or get the required training.

China isn’t a superpower, but it may become one, and in some ways it’s already a tough competitor. Its military has become assertive in the South China Sea and elsewhere. Its state-owned companies have aggressively formed alliances in Africa, Latin America and other up-and-coming regions the West tends to neglect. China also has large vulnerabilities — rampant corruption, many hollow companies propped up by state spending, and a spotty legal code that’s not ready for prime time. It will solve some of those problems and trip over others, just as other nations, including the United States, have done.

China will only overtake America, however, if we get too sclerotic and slow to maintain our lead. That could certainly happen, if venal politicians, Wall Street charlatans and overentitled, underinformed citizens pursue self-interest beyond the point of national interest. If that happens, the size of our economy won’t have anything to do with it. But the size of our egos will.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.