US vs China: which economy is bigger, better?

One of the most surprising developments resulting from the financial crisis is the belief among ordinary Americans that China has become the world's leading economy. This view appeared in the roughest times of 2009 and has persisted even though the impact of the crisis has begun to ebb. US media have frequently conveyed the same belief. But it is patently absurd.
The principal reason for Americans' dismay is jobs: Official US unemployment breached 9 percent during the past two years. It is even higher when counting those who have stopped looking for jobs, yet would work if they could. In contrast, Beijing issues an urban unemployment figure below 4.5 percent, but this includes only those officially recognised and no one, including officials at the Ministry of Human Resources and Social Security, believes it is accurate.
The state-controlled Chinese Academy of Social Sciences placed urban unemployment at 9.4 percent before the full impact of the financial crisis was felt. The PRC's rural unemployment has long exceeded 20 percent. True Chinese unemployment is certainly higher than true American unemployment, and, depending on how unemployment is measured, could be much higher.
The contest in income, meanwhile, is utterly unequal. American Gross Domestic Product (GDP) in 2009 was nearly $15 trillion, while China's was $5 trillion, despite a population more than four times as large. The average American had $48,000 in 2009 income, the average Chinese had less than $4,000. Both of these gaps narrowed in 2010, as they have almost every year in the past 30, but they remained huge.
It is true that many consumer goods are cheaper in China, some much cheaper. Economists try to formalise different prices in different countries by checking the purchasing power of the same amount of money. The idea is that the same amount of money should buy the same good or service everywhere. When it does not, because one country has far lower prices than another, for instance, it can be useful to compare incomes using differences in prices. The difference in prices is called purchasing power parity (PPP). PPP recognises that earning $50,000 a year in London is very different from earning $50,000 a year in Luanda, Angola. But PPP is often not very accurate.
PPP is one of the reasons for the claims that China is about to pass the U.S. Adjusting for purchasing power, the CIA estimates China's GDP to be near $10 trillion in 2010. PPP estimates are imprecise and some figures for China are still higher. Because China is growing quickly, the $5 trillion gap PPP shows between the U.S. and China could, if American growth stagnates, disappear in as little as five years.
While PPP is a step in the right direction in principle, there are multiple pitfalls. For economies as large and diverse as those of America and China, differences in purchasing power within each country are huge. It is almost meaningless to find an average price for all of the U.S. or all of China. Perhaps even more important in comparing two economies, PPP changes over time. Because prices change at different rates in different places, purchasing power comparisons made at one point can be quite misleading just a few years later, and even more misleading when projected forward in time.
The PRC offers a dramatic example. Chinese inflation has generally been growing faster than American inflation since about 1999. Due to the cumulative effect, the World Bank retroactively cut the size of its 2005 PPP estimate of China's GDP by more than 40 percent.
In an instant, the Chinese economy became 40 percent smaller. If this had not happened, Chinese GDP would be comparable to American GDP right now. Moreover, since 2005, Chinese inflation has again been faster than American inflation. The World Bank has not yet adjusted for this faster inflation. Nearly all economic projections that show China surpassing the US in the next few years are based on a PPP measurement that is out of date. These projections overstate Chinese GDP considerably and should not be trusted.
If China's economy is well behind that of the US now, how long will that last? While official Chinese data are certainly flawed, it is also certain that Chinese growth has outpaced American growth by a huge margin over the past 30 years. Between 1981 and 2010, U.S. GDP increased a fairly impressive 4.7 times. Chinese figures are less precise but it looks as if China's GDP increased approximately 30 times over the same time period. Such an outstanding performance appears to all but guarantee that China will surpass the U.S. in the next 30 years, and probably far sooner. In fact, the PRC's outstanding performance has led to some exceptionally inaccurate projections of its trajectory for the next three decades and beyond.
Whither Chinese growth?
Economic results are not determined by history. If they were, Chinese reform would have failed and the pre-1978 suffering would have continued. If they were, the US would remain the world's largest economy simply because it has been so for more than a century. If 30 years of rapid growth guaranteed 30 more, Japan would now be the world's largest economy. Instead, 40 years of Japan soaring up the global ladder have been followed by 20 years of stagnation.
Results are instead determined by a nation's resources and policies. Resources include but are not confined to natural resources; there are also critical human and financial resources. Beijing in particular has relentlessly pushed investment forward for a decade. In 2001, fixed investment was the equivalent of 38 percent of GDP. In 2010, because its growth easily outpaced GDP every year since 2001, fixed investment was the equivalent of 70 percent of GDP. It is not possible to exceed 100 percent of GDP. The policy of boosting growth simply through the pure quantity of money spent cannot extend through the current decade as it did through the last decade -- China must change course or face sharply smaller GDP gains.
To be continued