Xavier University's Recent State of the American Dream Survey Reveals Irrational U.S. Fears About China

A growing majority of Americans believe "the future will be created somewhere other than America." (57% in 2011- 52% in 2010.)

• 52% believe the future will be created by China.


• 16% by the European Union.


• 10% by Japan
  


• 3% by India

In addition, 63% of Americans believe that the Chinese economy is larger than the US economy although it is actually one-third the size.

It's not unusual for Americans to misunderstand foreign affairs but these numbers reveal a chink in the armor of the American Dream which is ultimately fueled by self confidence. The famous "can do" spirit doesn' wilt from challenges.

Complicating matters are new counter-intuitive economic wrinkles. Advanced economies grow primarily through innovation and technology breakthroughs. Developing economies offer investor advantages that developed nations do not; low wages, higher returns on capital, the freedom to adopt or reverse engineer technology rather than invent it. The incessant pressure to innovate, create new technologies, products, and processes is the curse of success. Thus, it is the natural economic order that investor capital flows from wealthy countries to developing countries.

But according to World Bank numbers it appears counter intuitively that money is flowing more from rich countries to rich countries. In 2007 as the US was entering its economic slide and facing the loss of 8 million jobs, direct foreign investment in the US was $240 billion. In China it was $138 billion. Despite all the hype, that's about the same as the direct foreign investment into the Netherlands with a population 1% of China's.

There has been phenomenal growth in China and other successfully developing economies. But before we turn over the future to China there are some important considerations.

1. China is still not fully a free market economy and the irony is that Americans distrust both their government and big business but we are evidently willing to trust that the communist Chinese government and businesses have competence we do not.


2. The "cheap labor" in China is becoming more expensive. Wages doubled between 2002 and 2008 and cheap labor has declined as a priority for US companies. According to a survey of by KPMG, labor costs are now less important to buisinesses than "product quality, fluctuations in shipping rates and currencies."


3. Quality issues - A survey by MFG.com indicated that 19% of companies surveyed brought all or part of their manufacturing operations back to North America in 2010, (up from 7% from 2009.) This action is largely credited for the increase of 136,000 jobs last year --- the most since 1997.

The idea that countries like China and India are successfully creating a "middle class", a legendary signal of economic health, are exaggerated. Based on the calculations of the World Bank, in 1980, the per capita GDP in China was $525 per person, while in the US it was $25,000 per person. This means there was a differential between China and the US of about $25,000 per person.

China has had spectacular growth and the per capita GDP there is now about $7,000. However, per capita GDP in the US has also grown in the same period to $46,000. This means, counter intuitively, that despite China's remarkable growth, the per cap GDP differential has actually widened from $25,000 per person to $39,000 per person.

According to Branko Milanovic, head of research at the World Bank, "if the US per cap GDP grows by 1%, India will need to grow at 17% and China by 8.6% a year, just to keep absolute income differentials from rising."

A relevant question is whether the odds are greater that China can persistently grow at nearly 9% a year or whether the US will only grow at 1% or less per year? The average growth rate for the US has been 3.1% for 65 years and in the recent very tough years (2003 - 2011) the US has still averaged 3.2% with only one year of negative growth.

The point is that our fate is in our own hands not in China's or anyone else's. If we feed the beast of innovation by keeping up with the educational and financial commitments necessary to do so, it's America's game to lose.