The United States is a declining economic superpower.  When will decision makers realize this?

The United States is a declining economic superpower. When will decision makers realize this?

The United States is a declining economic hegemon. But far too few Americans, including politicians, realize this. The potential new and very big kid on the block is, in all but extreme scenarios, China and, after China, India. By 2100, the United States will be in third place, when ranked by GDP, producing only 12% of global output, compared to 27% for China and 16% for India.

This is the message of a comprehensive new study by ourselves and the co-authors. The study, just released by the National Bureau of Economic Research, separates the world’s countries into 17 regions and is carefully calibrated to United Nations population projections as well as budget data from the International Monetary Fund.

The two main forces determining the economic future of a region are its labor productivity growth and its demographics. Based on historical data, China’s and India’s labor productivity will reach 30% and 13% of the US level, respectively, by 2050. By 2100, China will be as productive as the United States and India. India, 30% more productive. On the other hand, the Chinese population is expected to decline by the end of the century by 400 million people (that is, more than the current American population). India, on the other hand, should gain more than 400 million inhabitants. In 2100, its population will exceed that of China by 50%. During this time, the US population will increase by about 30%, adding about 120 million people (more than the current population of the Philippines).

These changes are massive and surprising. But they are overshadowed by those from Africa and the Middle East. By the end of the century, sub-Saharan Africa will have an additional 2.4 billion people. This is close to adding the population of two current Chinas. The number of Middle Easterners and North Africans is expected to increase by nearly 800 billion, nearly 2.5 times the current US population.

Other populations will decline by 2100 – Japan’s by 40%, Western Europe’s by 10%, Russia’s by 14% and Eastern Europe’s by 36%. Interestingly, whether region-specific populations increase or decrease, all regions will experience dramatic demographic aging. Take China. People aged 70 or over currently represent 6% of the population. In 2100, they will constitute 26%. For Latin America, Central Asia and South Asia, the projected aging is just as striking. Aging foreshadows dramatic budgetary tensions, in particular the payment of pensions to the elderly. Several regions, including the United States and China, will need to significantly raise their payroll tax rates, the sooner the better, to fund benefits for their retirees.

Demographic changes – in population size and age distribution – matter a great deal. But productivity growth is fundamental. In 2100, sub-Saharan Africa will have 30% more inhabitants than China and India combined. But the region’s weak productivity growth means that its share of global output will hardly change – from 2% to 4%. What about automation? The West currently has more highly skilled workers to produce and use advanced technologies. But, as a companion study shows, automation needs to move much faster to matter.

This vision of the future may seem inconceivable. But revisit 1945, when the US economy was half the world’s total. At the time, China’s share of world production was tiny. Today, the United States’ share of global GDP is only 16%, roughly on par with China’s. By the end of the century, the Chinese economy will, as indicated, be more than double ours. As for Russia, its share in world production will fall to 1%, against 3% today.

The projections are based on uncertain assumptions. Yet, barring an immediate and permanent decline in Chinese productivity growth, the 21st century belongs to China. Given this, how will America react?

Most likely by falling into the Thucydides Trap – the tendency of declining hegemons (Sparta in the time of the Greek historian Thucydides) to preemptively confront rising powers (Athens) to retain their dominance. This is reflected in our new policies that limit China’s access to chips and commit us to defending Taiwan.

Attempting to subdue China economically and militarily will be very expensive with unlikely success. Again, Sparta subjugated Athens. His secret was outside help, from Persia. A coalition of the United States, Europe, Japan, Southeast Asia and India could overwhelm the Chinese tiger. But that would require maintaining a close alliance for decades – something that worked for Athens and Sparta during the Persian Wars, but not afterwards.

In short, the United States and China are exchanging economic places. But the process puts our two nations on a likely path to war. It would cause terrible and lasting damage to both economies, leaving others, like India, to pick up the pieces.

Seth Benzell is an assistant professor at the Argyros School of Business and Economics at Chapman University and a member of MIT’s Digital Economy Initiative and the Stanford Digital Economy Lab. Laurence Kotlikoff is an economist at Boston University.

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