Last week, Brett Arends of MarketWatch reported that, for the first time since Ulysses S. Grant sat in the White House, the United States no longer has the world’s largest economy. That honor now belongs to China. Recent International Monetary Fund figures show that China will produce 17.6 trillion dollars worth of goods and services in 2014, while the United States will produce 17.4 trillion dollars worth of goods and services. America still produces more than China on a per capita basis, but as recently as 2000 we produced three times as much as China in absolute terms. China now accounts for 16.5% of the world’s economy, while our share has fallen to 16.3%.
China has succeeded in building the world’s largest economy in large part because the Chinese are emulating 19th century Americans. When we were overtaking Britain to be the world’s largest economy, we knew that production was more important then consumption and saving was more important than spending. The Chinese have come to believe that, even as we are told that consumption is the basis of prosperity and the surest way to help the economy is to spend, even if that means going into debt.
America in the 19th century also protected our economy from foreign competition, even as our most important competitors, the British, came to embrace free trade. As the British stubbornly clung to free trade, they watched their economy be surpassed first by the protectionist Americans and then by the protectionist Germans. Today, we are the ones who have foolishly embraced free trade, while the Chinese protect their manufacturers from foreign competition and watch their economy grow.
To regain what we have lost, we must look to the wisdom of our forebears and not the folly offered by today’s self-proclaimed experts.