It is scary how ignorant the Washington Post’s columnists can be on the issues they address. (Who says that in today’s economy you need a good education to get ahead?) Joel Achenbach puts his ignorance on display in a front page feel good article of the Sunday Outlook section titled “Bet on America.” The main point is that the U.S. is still number one and no one else is close. If he were a bit more informed, Achenbach would know part 2 of this claim is obviously false. At one point he puts U.S. GDP in 2007 at $13.2 trillion and outs China’s at $2.6 trillion. Sorry Joel, try $11 trillion. The problem is that Achenbach is using an exchange rate conversion that is completely inappropriate for such comparisons. The better measure is a purchasing power parity measure which applies the same set of prices to goods and services produced in both countries. Neither measure is perfect, but it is ridiculous to imagine that a country whose manufacturing output exceeds the U.S. on a wide variety of measures, that produces more scientists and engineers each year than the United States, and has more cell phone and computer users than the United States is one-fifth the size. On a per capita basis China’s economy is still less than one-fifth the size of the U.S. economy, but on an aggregate basis, it should pass the U.S. in a few years. The other ungodly silly sin committed by this piece is telling readers that the U.S. in far better shape to deal with its aging population than any potential rival. It reaches this conclusion simply by examining the ratio of retirees to workers. In fact, the ratio of workers to retirees is at best half the story. A large part of the story is productivity growth, which is why the claim that China faces a problem here is close to absurd. Retirees usually expect that their living standard in retirement will bear some relationship to their living standard while they were working. If a country has rapid productivity growth (and it is shared by its workers), then living standards for workers will rise rapidly through time. At present, China is enjoying productivity growth of close to 8 percent annually. Let’s do some quick arithmetic. Suppose that an average worker lives 20 years in retirement, so that the average retiree last worked ten years ago. Suppose that China has two workers per retiree, approximately the same ratio that the U.S. is expected to have in twenty years. An 8 percent rate of annual wage growth means that the average wage will have increased by almost 116 percent after ten years. This means that a tax or some form of transfer from workers to retirees equal to 10 percent of the age bill will allow for a retirement benefit equal to more than 43 percent of the average workers’ pay during their working lifetime. What’s the problem here? By contrast, the comparison of the situation of the U.S. with any other country must take account of the fact that U.S. health care costs are projected to continue to spiral in a way that is not true of any other country. Since care for the elderly is especially costly, this will pose an enormous burden on the U.S., if our health care system is not reformed. If the projected increases in health care costs prove accurate, in twenty years, health care costs for people over age 65 will average more than $25,000 per person (in 2007 dollars). This will place a far greater burden on the economy and the national budget than any scare stories that Mr. Achenbach can dream up for the countries he views as our competitors. It would be great if the Washington Pravda would allow such dissenting views on demographic issues to appear on its pages occasionally.
--Dean Baker
