The math of income and GDP targets
Special points to highlight in this issue:
• While paranoia about China keeps Washington focused on predatory Chinese trade, Germany’s current account surplus is almost certainly a far bigger problem and one that may take longer to resolve. China is not the threat that many in Washington think it is, and the US should de-emphasize the China challenge and perhaps worry more about the impact of trade policies generally, and German policies specifically, on US unemployment.
• At the beginning of the current administration’s term, Beijing announced that it planned to double China’s GDP between 2011 and 2021. If Beijing is able to pull this off, Chinese GDP between now and 2021 must grow on average by at least 6.5% annually. This probably requires that by 2021 total debt will rise to a level equal to between 360% and 540% of China’s GDP. This, to put it mildly, is implausible.
• It makes far more sense for Beijing to focus on the other part of that same announcement. Beijing promised also to double household income between 2011 and 2021. This implies an average annual growth rate in household income over the next five years of just over 6%. Because in a rebalancing China household income growth must outpace GDP growth, meeting this target would not require average Chinese GDP growth to be much above 4% or 5% annually. These lower GDP growth levels would also result in substantially lower debt levels for China, although even then probably too high.
• To achieve its household income targets Beijing will probably have to engineer annual wealth transfers from the state to households of at least 1% of GDP.
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