US versus China: Who will own the future?

A Chinese worker in a factory in Jinjiang Will China's economy overtake America's?

Will this really be the Chinese century? Or, in our awe at what China has achieved in a single generation, do we give its economy the benefit of far too many doubts?

That was the first big question for my guests on Stephanomics this week, broadcast on BBC Radio 4 today. The follow-up was about America: for all its squabbling politicians and ballooning public debt, are we in danger of selling its economy short?

People often look at America and see a global super-power literally living on borrowed time - much of it borrowed, incidentally from China, which for all these years has been buying US bonds to soak up its massive cash reserves (now an astonishing $3 trillion).

US politics are probably more dysfunctional - more polarised - than at any time in living memory. The leading presidential contenders are in a statistical dead heat in the opinion polls and people despair of Congress getting even the smallest things done.

For the first time in the post-war era, there are fewer jobs in the private sector than 10 years ago. Real wages for the average US worker are no higher than in the 1970s. And the share of total income taken by the top 1% of taxpayers has risen from 10% to 21% between the 1970s and 2008.

And yet, as the Economist pointed out on its cover recently (see 14 July issue), there are signs that America's private sector is even now reinventing itself, yet again - just as it has so many times before.

The current account deficit is down, exports are up, and productivity has taken off. That could help sustain America's place in the global economy long-term, even if it produces a miserable jobs market right now.

Charles Dumas, of Lombard Street Research, is one of the US optimists. He's even co-authored a book called "The American Phoenix".

When I tell you that another guest, Arvind Subraminian from the Peterson Institute in Washington, has written a book called "Eclipse: living in the shadow of Chinese economic dominance", you will gather that he takes the opposite view.

When macroeconomists get together to talk about China and America, there's always a risk it will end up in a brawl over who has the biggest structural imbalances. (Piece of advice: never go to the pub with a macroeconomist who's not interested in sport.)

There was some of that on the programme, not to mention a lively debate about whether any of China's official statistics bore any relation to reality.

There's a line going around the City that "China's GDP is the next Libor" - a crucial number for the world economy that turns out to be, er, somewhat fictional.

But we also had Paul Ormerod to throw into the mix, an economist known for having a more unusual, microeconomic take on things. His new book (sigh) is "Positive Linking: how networks can change the world".

He was long-term optimistic about America as well, partly because the US does seem a lot better at innovating and creating powerful networks. But not without sizeable reservations.

It was a spirited discussion - and unexpectedly entertaining. I could barely get a word in, some of you will be relieved to hear.

But I was struck by the lack of disagreement about Europe, which all my guests were deeply gloomy about.

Paul Ormerod even thinks countries such as Greece and Spain could be facing an era of almost unprecedented "de-development", with the crisis and its aftermath reversing decades of economic progress.

That is, indeed, what many people see when they look at Europe. And looking at today's headlines, you can see why.

But when so many economists agree on something, you can't help thinking it might be time to buy some euros. When the dust settles from this crisis, years from now, we might discover we were missing the big picture on Europe as well.

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 32.

    All countries have a spurt of massive growth when all the conditions are right. It occurs from a poor start so high growth is easy. In recent years with its low wages and will do approach it is China, it was Korea and before that Japan. As living standards rise cost rise and people are more aware of environmental costs etc. the super growth baton will pass on to Africa or somewhere else

  • rate this

    Comment number 31.

    #19 & #22 Both of you are right. I have been saying this for years, certainly since 2003 when the collective economic naïveté and crass stupidity of Messrs Blair & Brown made the UK's part in this global tragedy more than just an extra, and our beloved country will be one of the biggest casualties ...all because of a handful of very greedy people over, disturbingly, a relatively short time.

  • rate this

    Comment number 30.

    When economists often get next year wrong how can they possibly have any credibility over the next century?

  • rate this

    Comment number 29.

    Still little talk of the difficulties facing China. They are still to float their currency, a move which would see a rather dramatically revaluation, dampening exports.

    Not to mention that 70% of China's GDP comes from government spending or the consequences of local government borrowing. Then there's always the skyscraper/recession correlation and China's love of skyscrapers.

  • rate this

    Comment number 28.

    I can remember holidaying in Spain and Greece in the mid 1960's
    Both seemed incredibly poor and incredibly cheap (rum and cokes especially). The only thing that has brought such magnificent public buildings, wonderful roads, education and health care is the Euro. That is to say the BORROWED Euro.
    Time to revert to normal I'm afraid.
    It's painful and may result in the army taking over again.

  • rate this

    Comment number 27.

    When China decided to buy US debt, use leverage to create a housing bubble, it lumped itself into the same ship as the US.
    Now China can withstand a hit but it may well not be the economy of the future. As #21 says, it may be Brazil, or perhaps Russia given the potential of global warming to create huge amounts of fertile land.

  • rate this

    Comment number 26.


    The future will be where it has always been and always will be ..... with the secretive tax havens like Switzerland.

  • rate this

    Comment number 25.

    It may be argued that, solely in macroeconomic terms, the owners of government debt own the future but that debt is usually refinanced so it is an ever receding future.

    The question ought to be: who will make the future? That will be those who produce the things people need and want to get through their everyday lives. The future isn't owned-it is yet to be made.

  • rate this

    Comment number 24.

    The future looks bleak for all western countries. The U S may find a short term answer to problems, but the real solution is not in there control.

    China and other far east countries will take control, the west will go into a slow decline, until a balance is created.

    The U S will find it very difficult to improve conditions. Re- invention is impossible now. Europe has more chance to recover.

  • rate this

    Comment number 23.

    Sorry #21, it might be Russia

  • rate this

    Comment number 22.

    China, which for all these years has been buying US bonds to soak up its massive cash reserves (now an astonishing $3 trillion).

    But is insignificant to the $21 trillion stashed away in tax havens.

    The are no free markets anymore, capitalism is dying, globalisation will revert back to protectionism and World War 3 looms...that's the future.

  • rate this

    Comment number 21.

    'US versus China: Who will own the future?'

    Answer is ... Brazil

  • rate this

    Comment number 20.

    JfH @12 + 13

    Absolutely correct. Banking in it's current guise has stripped both the US and UK of much of it's value-added production in the name of profit skimming. It was the Emperors New Clothes.

    Back to R&D, manufacturing, technology and engineering.

    Banks should lubricate, not suffocate.

  • rate this

    Comment number 19.

    The true dynamic of this century is still to become apparant to all nations, namely that we have over consumed finite resources, over polluted our environment, over borrowed, and over populated the world. These will be the mountains societies have to climb and I'm worried we do not realise what is ahead

  • rate this

    Comment number 18.

    I would not trust ANY 'official' finance figures from China whatsoever. The only true measure of their relevance is the amount of the electricity they are producing over a given period. Evidence suggested it was markedly decreased and then it was suggested by a reporter that electricity companies were being 'leaned on' to give higher figures. In REAL terms their GDP is the same as the USA's.

  • rate this

    Comment number 17.

    China wealth has been built on cheap labour (and plenty of it) (add in India as well) and on mature Western markets purchasing the products many of which transfered production from the West. As China labour becomes more expensive and our ability to import is muted then the balance will change. Our days of cheap products are numbered.

  • rate this

    Comment number 16.

    Cooperating with tax avoidance by OAPs, single mums trapped at home 'cos of the price of fixing the washing machine compared to BBC luminaries helping the Beeb avoid tax by the way they set up their
    Tell me when you're telling us who, amomg BBC stars & presenters, does & doesn't do that & I'll listen
    In fact you could tell us here

  • rate this

    Comment number 15.

    Deng's strategy was one to defeat capitalism, but now the princelings are wedded to a form of state capitalism.
    This doesn't mean that this will be another passing of the capitalist baton.
    Capitalism is a world system & finance capital has made use of cheap Chinese labour, but this has necessitated huge debts that will bring down the world's financial system & possibly capitalism itself.

  • rate this

    Comment number 14.

    "The Chinese are known to have protruding teeth"

    It is challenging to see how this is related to ability to achieve economic dominance.

  • rate this

    Comment number 13.

    12 +

    Only by making things - combining labour and capital into (semi) durable products can a country ever succeed (after it has denuded its own natural resources).

    Banking (and financial 'services') is THE criminal conspiracy that is still robbing the West of its true wealth.

    We have a reasonably well educated workforce and it must be put to work. There really is no alternative.

    More maths!


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