US is Investing in the Past While China is Investing in the Future

Just under forty years ago, we looked at the Chinese economy as a third world country. Their GDP in 1980 was just $300 billion compared with the US with $2.8 trillion. The US economy was almost ten times bigger! However today China's GDP is about $11 trillion versus $18 trillion. Chinese GDP per capital has grown from $156 to over $14,000; helping hundreds of millions of Chinese citizens rise out of poverty. The gap is definitely much smaller than before but China will be on the verge to overtake the US as the world's most important country quickly because it is investing in the future while the US is stuck in the past. We can take a look at a few data points to see how China will overtake the US. In order to grow GDP, countries must invest in things that will improve labor productivity or making our production per labor increase. Direct government investment in human capital, physical capital or technology to make workers more productive. Note, tax cuts do not lead directly to these investments if it is saved and hoarded instead of spent wisely.

Human Capital Investment

Human capital is becoming paramount as we move into a much more technologically dependent and information driven economy. Human capital is created by increasing the education levels and experience of workers. China is sending more students into US schools than any other country and is graduating more engineers than any country. China had 4.7 million STEM graduates compared to just over half a million STEM graduates in the US. Nine times more science technology engineering or math graduates than the US! On the other hand, the US making higher education more difficult to attain with cost rising faster than inflation and legislation making it more difficult to obtain a Phd education. These trends will allow China is surpass the US not only in human capital but human capital is a precursor to innovation and technology.

Physical Capital Investment

Physical capital allows workers to have the tools to become more efficient by building infrastructure and adding equipment or machinery. Last year, China spent more on infrastructure than the US and Europe combined. While the US has aging roads, bridges and trains, China has more roads, trains, airports, and transit systems than the US. Not only does China have more, China have faster trains, more advanced airports, and a smarter power grid. As the US has spend trillions on wars, other countries has spent trillions directly on their infrastructure. As the US infrastructure is faltering compared to the rest of the world, the US is closing itself off from the rest of the world. China is investing a trillion dollars in more than 60 countries to make itself the economic engine for the world. Also China is increasing physical capital by investing in robotics. Although China is still behind the US in robots per capita, China is now the largest installer of robots at 90,000 this year with the number projected to grow to 160,000 robotic installations by 2020. In terms of renewable energy, China has become one of the largest installers of solar power beating Europe while the US is continues to support outdated industries like coal. With a large national debt, the US will find it difficult to catch up to China with infrastructure investment but also will require a shift in national priorities.

Technology

Research and development funding is crucial to developing technology that will make workers more productive. Not only is China catching up to the US in R&D spending but it is focusing on areas that will provide greater return like AI and robotics. China is striving to win the robot wars to offset the aging population but also it will help them maintain their status as the manufacturer of the world. Yet it is China's national commitment to technology through their Made in China 2025 program will provide Chinese companies a competitive advantage as the US and the rest of the world ignores helping their own countries and companies with innovation. One area of focus other than smart manufacturing is their emphasis on artificial intelligence which has become another important battle ground to improve productivity in all facets of life. The US is losing the R&D battle and largely leaving this to the private industry and putting up barriers to R&D such as decreasing internet access and supporting outdated technology. China is now leading the world in hardware innovation and software innovation may not be far behind. In the end, technology will drive China to surpass the US if these trends continue.

The US will need to refocus their priorities in order to avoid being surpassed by China. Having a large national debt, spiraling healthcare liabilities and anti-growth mindset, US face obstacles to shifting from focusing on the past to the future.