IMF says the Age of America is nearing its end

Georgene Rice interviews Derek Scissors, a bond strategist with the Heritage Foundation. They discuss the International Monetary Fund (IMF) prediction that the “age of America” is nearing its end. They have set a date in which America’s economy will be overtaken by China and will no longer be the world’s largest economy.

Georgene: According to the latest IMF official forecast China’s economy will surpass that of America in real terms by 2016. What do you think of the IMF’s analysis?

Derek: Not very much. The IMF does outlooks in which they take a trend and run with it. They don’t take into consideration possible changes. They just say, “If nothing happens, this will be the result”. They then change their forecast a couple months later when something changes. However, there is a real issue of whether China’s economy will be bigger than America’s economy in five or ten years.

Georgene: Do you believe the IMF report is politically motivated?

Derek: Not explicitly. The IMF does talk up certain issues so there is some background political motivation. There does seem to be some biases in the way the IMF looks at China, but they make these kinds of inaccurate predictions all the time.

Georgene: China faces some formidable issues that will make it difficult for them to continue growing at their current rate. They admitted their GDP may drop to 7% next year, down from 10% this year.

Derek: They have serious growth obstacles to consider. As with Japan in the late 1980’s, they are wasting a lot of money, they don’t have a lot of natural resources to draw on, and they face an aging population.

Georgene: Investor’s Business Daily says the IMF doesn’t use the correct data in making its assertions because they use overall GDP rather than per capita GDP.

Derek: Each of these measures very different things so I wouldn’t say that one is the correct measurement over the other. Most American’s could say by looking at the statistics that China is bigger than America now, but that they are five times richer than the average Chinese person. China has a billion more people. If they don’t mess up they are going to have a bigger economy than us, but we are much, much wealthier.

Georgene: According the Investor’s Business Daily China’s best days are behind it. The per capita income for the average America, by 2005 dollars, is $42,517. In China it is $2,802. They don’t believe China may ever catch up with us. Even by 2030 China doesn’t get close to our per person output.

They say that China has only a few more years of rapid productivity growth because of its aging population. Due to its “one child” policy China is aging fast. Today they have 6 workers for every elderly retiree, by 2040 that will drop to a 2 to 1 ratio. Already, China uses roughly six times the resources the United States does to produce $10,000 worth of goods because their state run economy which is big and getting bigger is not innovative. They say America’s problems may be serious but they can be solved.

So, why is it important that the IMF produced this kind of report?

Derek: What I take out of this is not so much that the IMF is looking at China but that it is looking at the United States. The U.S. seems to have just stopped. The more important point is what the U.S. is doing.

Georgene: It is interesting that the IMF’s report came out following the S&P warning on America’s spending and while keeping a AAA rating expressed a negative outlook for future if our policymakers don’t reach an agreement on how to meet budgetary challenges by 2013.

Derek: How we do it is up for argument, but we have got to eliminate the budget deficit. Once the deficit is eliminated everything changes. Our workers are more productive and we have far more in the way of natural resources. If we shoot ourselves in the foot with bad policy, we open the door for China or someone else. We have to cut the budget deficit to keep America on top in the world. That is not up for debate.