The coming end of 150 years of the USA as the largest economy

Note: GDP is log-transformed!

Most projections usually predict that China will be the largest economy by the year 2030. This got me thinking: when exactly did the USA surpass other nations? I knew it was in the 19th century, but I wasn’t sure exactly when.

GDP estimates are always somewhat dicey, and they were even more so in the past. But the above plot* is representative of what you can find online: the USA became #1 in the decade or so after the Civil War. What surprised me is that the nation it surpassed was China! Around 1880 the USA overtook China, and around 2030 China will overtake the USA. That’s 150 years of American singular economic dominance. Curiously, for a period India was #3, just as it will be in 2030 (though its GDP will be far lower than #2 USA by most estimates).

I am aware that on a per capita basis America will be the most affluent large society in the world for decades beyond the point when its economy is not the largest. My only observation is that we are living to see the end of a particular phase in world history.

One aspect of this that I wonder about is that it is a fact that to some extent in the late 19th and early 20th century America refused to take over the role of the world’s preeminent power from the United Kingdom long after it had become the most consequential economic force. To be frank, it was clear in the early 20th century that the UK was simply longer up to the task, and arguably a great deal of suffering might have been alleviated if the United States had stepped into its natural role earlier. Now I wouldn’t be surprised if the inverse occurred in the second quarter of the 21st century: the USA, like Britain, continues to play the role of hyperpower hegemon longer after it’s able to carry out that role credibly. I hope I’m wrong.

* Data from Barry Ritholtz’s blog.

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20 thoughts on “The coming end of 150 years of the USA as the largest economy

  1. I’m curious about the measurement of US GDP per capita in the 19th century (relevant to when exactly the U.S. passed Britain and China).

    See e.g. here, which seems to generally line up with that chart:
    https://en.wikipedia.org/wiki/List_of_regions_by_past_GDP_(PPP)_per_capita

    All of the estimates indicate that the US/Colonies were poorer per capita than the UK (which presumably even includes all of Ireland) until the early 20th.

    Yet I have the sense that average incomes in the 13 Colonies were a good deal better than in England; I recall reading accounts from Redcoats during the Revolution who marveled at the standard of living of common American farmers. And of course, a lot of those soldiers opted to stay in the US after the war rather than return — does this make sense if England was 40%+ richer? Were all of the British migrants to the Colonies moving from a richer place to a poorer one?

    Now granted, England industrialized earlier, so the situation may have changed during first half of the 19th, but I’m wondering if the estimates understate the GDP contribution of American farmers who engaged primarily in subsistence but lived much better lives than the average English farmer (or factory worker).

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  2. I absolutely think the US will try to keep playing that role as long as it can. There’s too much institutional and ideological “weight” for it to gradually scale back, and the same was true for Great Britain.

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  3. Like I said, after I read “what’s wrong with China” and “China’s Great Wall of debt” I’m not in the least bit worried about it 🙂

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  4. >institutional and ideological “weight”

    Substitute *hormonal imperative* — why pretend to mentation?

    Anyway, that the West so completely whiffed on the opportunity to win the love and fealty of post-Soviet serfs by not enacting an aggressive “make ’em fat-and-happy” Marshall Plan, still astounds. Now Putin is rehabilitating Stalin as the rockstar WW2 ass-kicker. Way to go, Team Enlightenment!

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  5. the USA, like Britain, continues to play the role of hyperpower hegemon longer after it’s able to carry out that role credibly

    The economy is not the only factor deciding whether the US will continue playing its role as superpower or not. While the US’s economy overtook the UK’s, imo the reason all European powers lost their roles as great powers is because they ended up killing themselves in two world wars. The US still holds the military advantage and the world financial system is still based on the USD. Even Chinese scholars don’t think China will overtake the US (apart from the economy). In their opinion the best possible outcome for China is bipolarity since they simply don’t think it is possible for China to overtake the US in becoming a unipolar power. As long as USG maintains military superiority it’ll do all it can to maintain unipolarity.

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  6. In their opinion the best possible outcome for China is bipolarity since they simply don’t think it is possible for China to overtake the US in becoming a unipolar power.

    yeah, it seems in the next generation or so multi/bipolarity is going to be the norm. that’s probably dangerous if it goes from bi to multi.

    While the US’s economy overtook the UK’s, imo the reason all European powers lost their roles as great powers is because they ended up killing themselves in two world wars.

    if wilson had not become a semi-vegetable post-ww1 may have looked very different re: american power/influence. his illness may have delayed american superpower emergence by a generation.

    though perhaps republicans would have won in 1920 anyhow

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  7. It can be argued that the main trigger of China’s growth over the past 30 years has been the migration of several hundred million people from the country to the city and from subsistence farming to industrial production. All of that despite it being illegal.

    “Negan in China” By Kevin D. Williamson https://www.nationalreview.com/magazine/2018/06/11/negan-walking-dead-authoritarianism-like-china/

    If that is true, demographics might have a severe negative impact on China’s future economic growth.

    First, a country can only urbanize once. When the Rural areas empty out, there is no one left to move.

    Second, the One Child Policy, has sharply altered the age structure of China’s population. People 25-29 at 2015 are the last pre-policy large cohort (~130 million). They are now prime age workers.

    Subsequent cohorts are smaller. Ages 10-14 are more like ~80 million. Even though the policy has been phased out, the sheer smallness of rising cohorts, and the well known tendency of women in modern industrial societies to be less fertile mean that the size of each cohort, and the number of workers in it, is going to decline for some time to come.

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  8. An instructive comparison for China is Japan.

    In the 1980s, the economic rise of Japan seemed to be unstoppable. I have a xerox copy of an article from Forbes Magazine on November, 1989 by Andrew Tanzer “How do you shut the darn thing off”. The article describe a Japanese economy where massive increases in capital investment were driving production increases that would satisfy growing domestic demand and leave more for exports which would fuel dynamic growth in capital investment. Japan would crush the United States.

    Around the same time I remember reading an article in a newspaper that said the grounds of the Imperial Palace in Tokyo were more valuable than the entire state of Florida. I remember telling a friend that the Emperor would make that trade, and come out ahead.

    On December 29, 1989 the Nikkei stock index hit an all time high of 38,916. The next trading day it started to go down, and it went down for 4 years until it was under 8,000 in March 2003. After a modest rise, it was 7,000 in March 2009. 29 years later, it has recovered to 22,000.

    And the story of the Japanese stock market has been the story of the Japanese economy. GDP growth has been anemic. Real estate prices have gone down. And, most of Japan’s major banks have failed, been recapitalized, merged, or been sold to foreigners.

    The moral of the story is that you cannot lay a ruler over a trend line in human affairs and expect it to continue uninterrupted well into the future.

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  9. What should the US do about China?

    The first thing to do is to get our own house in order, beginning with the Federal Budget. Curb the growth of entitlements, raise taxes, and re-build the Navy.

    Start reforming sclerotic institutions such as education (see my post in the Open Thread yesterday), state and local governments (ban public employee unions, reorganize zombie pension plans), and law (Nimby law suits, class actions, etc.).

    Work on firming up our alliances with Japan, Philippines and Australia and make friends with India.

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  10. I used “weight” for lack of a better term. “Baggage” might work, but I don’t think it really captures what’s going on. It’s a nexus of tradition, formal treaties, interested parties both governmental and private, and an ideology that justifies its use (that essentially rose to justify the use of it again after the first Cold War).

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  11. How did people seriously expect Japan to surpass the USA in the 1980s, considering their significantly smaller population and lower rate of population growth? Did they really think it would have a GDP per capita 2-3 times that of America within a few decades?

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  12. China and Russia separately foment Dixie & Interior West to commence the Great Rift.

    As the Republic disintegrates, Russia is invited by its ‘Red Brothers’ to take Alaska and NW quadrant all the way to Omaha. China takes LA to Vancouver, to the Sierra-Cascades crest. Texas maintains ferocity to its north and west, and so takes all from Reno to Miami below the 40th parallel. Yankee Redoubt stands with Europe, for all the good that’ll do anybody. Not sure how the nukes will figure in.

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  13. @Wency

    Adam Smith wrote about this way back in 1776.
    http://geolib.com/smith.adam/won1-08.html

    His basic point was that wages depended on growth rates, which increased demand for labour, rather than absolute wealth.

    He stated that China had been richer than Europe for a long time, but wages were lower due to zero growth.

    America, although less developed, was experiencing very high growth increasing demand for labour and thus wages.

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  14. Re: all the interesting talk about GDP, Europe and the US, to a first approximation my understanding is:

    – US departs from Western Europe in a) converging faster with Britain in GDP/capita during late 19th century (industrializing earlier?), b) continuing to show similar growth rates to Britain during early 20th century and converging on British levels by onset of WWII (not much difference in trend; the US has bumper growth leading up to the 1930s, and a stronger depression in the 30s), while Western Europe has weak growth in the interwar period.

    – During WWII drops GDP/capita or suppresses growth for all Western European nations, including Britain (and so the US overtakes Britain).

    – After WWII, Britain resumes similar per cap growth rates to US, but from a suppressed base, while Western European countries jump to a higher rate of growth that allows them to catch up with the UK, but not enough to catch up with the US. Pseudoerasmus who knows such things favourably reviewed the explanation that Western Europe had long depressed rates of growth for 30 years prior to this due to conflict and slow transition away from agriculture https://academic.oup.com/ereh/article-abstract/6/1/3/540511?redirectedFrom=fulltext (including I think Germany, often thought of as industrialiser par excellence). Therefore the good period after WWII is just a catch up period.

    If you avoid WWII, and you somehow have an earlier modernization of continental Western European economies, you probably don’t see an American Golden Age, or Pax Americana in the way that we are familiar with.

    If Western Europe largely has similar GDP/capita to the US, and comparable investment in military (no post WWII shift to undersized military under US protection), no US as hegemon. Even less so if you avoid the rise of Communism and you get faster Eastern European convergence. The American (half) Century would be entirely gone.

    The difficulty would be how to avoid these conflicts of course. Are they built into the systematic tendency of the nation state system in Western Europe? Or could institutions and practices have arisen to prevent these conflicts?

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  15. Fraxinicus: Read the articles. They are really nuts. There was even a movie. If you live long enough, you see every thing come around again. I didn’t panic or sell my investments in 2008 because I had lived through 1979-82. I am not worried about China because I lived through 1957 (Sputnik Hysteria) and 1989. The only thing that worries me right now is the utter irresponsibility of our governing class.

    Matt: WWI was really the tipping point. By 1917, Britain and France had borrowed so much money in the US, that US could not afford to see them lose. That was not the sole reason why the US entered the war. Germans’ decision to resume unrestricted submarine warfare against US shipping and the Zimmerman Telegram were also major factors.

    The major players in WWI other than the US (Britain France, Germany, Russia, and Austria) ended the war insolvent.

    Once you have WWI, the way that Wilson botched the end of the war, the failure to renegotiate the finances of Europe, and the Great Depression, WWII is just a shot away.*

    *apologies to Mick Jagger.

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  16. It would be interesting to complement with analysis with a comparison of the United States to the British Empire. The British Empire drew significant economic and military strength from its colonies, especially India. According to this (https://en.wikipedia.org/wiki/Economy_of_the_British_Empire), the British Empire was ~24% of the world economy in 1870, whereas the United States was only ~9%. It seems the turning point was more around 1913 when the United States was ~19% of the world economy, close to the British Empire, ~20%.

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