Posted by: CS | June 29, 2011

USA versus China: Wage Convergence, Wealth Divergence and Global Hegemony

No US Currency, Please

Yesterday, I outlined a scenario whereby US wages might converge with those in China and other developing nations within ten years. The underlying assumptions were:

(1) That China’s economy continues to grow by 10% a year and that, in line with the growth of the economy, Chinese wages rise by a factor of two to three over the next ten years.

(2) That inflation in America continues at around 10% a year, but that nominal wages remain flat, resulting in a cut in real wages of about two-thirds in ten years.

Not considered was America’s roaring underground economy, where wages are already little better than those in the developing world.

Fueled by mass illegal immigration, with every indication of encouragement by the US Federal Government, the underground economy, which already accounts for 7% of US GDP, will increasingly impact wages and employment opportunities in the legal economy. One consequence will likely be elimination of minimum wage laws that deny the least skilled American workers access to the labor market. This, in turn, will help drive average wages lower.

If US incomes fall, so also will consumption, whereas, with rising incomes, Chinese consumption will grow.

If, when wages converge, consumption converges also, the rate in both countries would likely settle about midway between America’s current rate of 60 to 70% of GDP and and China’s 36% of GDP, or about 50% if GDP.

A fall in US consumption equal to 15% of GDP would, all other things being equal, imply a similar reduction in US GDP. However, as US wages converge with those of the developing world, a recovery in US manufacturing and the tradable services sector of the economy should be apparent.

By 2020, therefore, the American economy could be on track for renewed growth, with American firms competing with the newly developed nations on a level playing field so far as wages are concerned.

But by then, China’s economy will be several times the size of America’s, which calls in question the long-term feasibility of America’s drive for global hegemony.

That question will be resolved by the ability of the United States to maintain a UN-led Western coalition.

A Western coalition for World governance was the goal of the British Rhodes-Milner group, who, in the aftermath of WW1, spearheaded the movement for the creation of the League of Nations.

The League, which lacked American participation, utterly failed in its mission.

Whether NATO, under US leadership, will do any better remains to be seen.

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