Déjà Vu All Over Again

How many times do grand-scale forecasts have to fail before we stop trusting them?

Last week, Elon Musk did a long interview in which the man who apparently aspires to be CEO of Humanity Inc. ran down a checklist of the world’s most vexing problems and deftly solved them all. (Musk really seems to believe his every pensée is a world-changing insight. It’s quite amazing.) But he also paused now and then to deliver predictions about the future. One involved China.

In the future, Musk said, China’s economy will be double or “perhaps” triple the size of the American economy.

That caught my attention because it’s the kind of thing people often said not that many years ago. One of the more conservative forecasts was a 2010 Goldman Sachs projection that saw China surpassing the US by 2030. It was conventional wisdom in those years. But that sort of talk slowly and quietly faded in recent years.

The reason for the change was summed up, by coincidence, this week in The Wall Street Journal, when Greg Ip, the chief economics commentator, took a long look at where the Chinese economy is relative to the United States and where it may be going. The bottom line? Musk’s pensée is laughably out of date.

China’s astonishing growth rates of more than a decade ago — the growth rates that got so many economists and commentators to get out their rulers, draw a straight line, and declare the coming end of American dominance — are ancient history. Thanks to long-overlooked structural problems in the Chinese economy finally making their presence known, Chinese growth rates were much lower over the past decade. The last few years have been particularly difficult.

As a result, the size of China’s economy relative to the American economy peaked at 75% a couple of years ago. And it has slid back to 64% now. Lets pause and chew on that. Forecasts by the IMF and The Economist said China would surpass the US by 2017 or 2019, respectively. Not only did that not happen, China never even came close to catching up. And now, it’s falling further behind.

Most analysts now think a Chinese economy double or triple the size of the American economy is a pipe dream. Ip quotes one analyst who says China’s economy may one day rebound and match the size of the American economy but it has no plausible path to 150% or 200%. A big reason for that is demographic. Remember that China’s immense and growing population played a major role in its rise, but China has now entered a period of rapid and severe population aging, with absolute population decline coming fast. Standard demographic projections — one of the few important economic factors that can be reliably forecasts decades ahead — suggest that China’s current population of 1.4 billion will drop below 1 billion by 2080.)

The importance of this development for the present and future is obvious. But this newsletter likes to include the past with the present and the future, so let’s point the lens in the other direction.

Way back in ancient history — 1992, specifically — the economist and future labour secretary in the Clinton administration Robert Reich put together a list of books proclaiming the rise of an Asian giant and the end of the American economic lead.

That Asian giant was not China.

It was Japan.

Wee you shocked by that dramatic twist, Gen Z readers? I assure you no one my age or older was.

In the late 1980s, it was absolutely, positively, take-it-to-the-bank certain that the booming Japanese economy would soon overtake the American economy and Japan would become the world’s dominant economic power. The only uncertainty was how bumpy the transition to the new era would be, and a political scientist named George Friedman shot to prominence when he published “The Coming War With Japan,” whose title is its thesis. (Friedman subsequently went on to publish further volumes of prognostication, including The Next Hundred Years, that were huge bestsellers. He also founded a consulting firm that made a killing as multinational corporations and governments lined up to hear Friedman’s sage insights — demonstrating that while chutzpah and Olympian confidence are terrible for making forecasts, they are superb for making money.)

I was in university in the late 1980s. I remember this era well. Want a career, young man? Learn to speak Japanese.

But in the early 1990s, long-overlooked structural problems in the Japanese economy finally …. Hey, that sounds familiar, doesn’t it? Even the demography rhymes: By the early 1990s, Japan’s soaring population growth was no more, and the country entered a period of rapid and severe population aging which soon turned into absolute population decline. Which goes a long way to explaining why the Japanese economy has been mostly stagnant the past 30 years.

But now, let me share a punchline that will shock not only my Gen Z readers, but also my Millennial readers, and even you Gen Xers.

Three decades before Japan was said to be on the verge of surpassing the American economy, yet another Asian giant was enjoying rapid economic growth. And when economists and commentators took out their rulers and drew straight lines forward, they foresaw this Asian giant becoming the world’s number one economy sometime in the late 1980s or early 1990s.

Name that Asian giant!

Right now, all my Boomer readers are mumbling, “is it really an Asian country? I guess, technically. But that’s a little misleading, Gardner.”

OK. I’ll give you that. Let’s do this again.

The year is, let’s say, 1962.

This Eurasian country’s economy is growing rapidly. Lots of economists and commentators say it will become the world’s number one economy by the early 1990s.

Name that Eurasian giant!

I’m going to put a photo of a cuddly animal here so you can’t see this country’s flag, below.

Make your guess!

Credit: Kevin Dietrich, National Geographic. See his personal website, which is full of amazing stuff: Kevin-Dietrich.pixels.com

Cue the Red Army Choir.

In the 1950s and 1960s, the Soviet economy grew so rapidly that observers felt it would surpass the American economy. When was a matter of dispute. That it would was conventional wisdom.

How conventional was that wisdom?

If you took Economics 101 at an American university any time from the late 1940s to the 1990s, you probably had a textbook written by Nobel laureate and “father of modern economics” Paul Samuelson. It is the best-selling economics textbook by a country mile. It has been translated into 41 languages. If the economics of that era had a Bible, it was Paul Samuelson’s textbook.

Over the decades, Samuelson revised his textbook often, including a section about the future of the global economy near the end of the book.

In that section was a chart.

Here is that chart from the 1964 edition.

So the Soviet economy would overtake the American economy around, oh, let’s say, roughly, 1991.

In lectures, I used to say, “1991 turned out to be an important year for the Soviet Union, but not for that reason.” It always got a good laugh until people born in the Clinton era started showing up in my audiences. They just look confused.

But this isn’t about my failing jokes.

Given where the Chinese economy is now, and what it would take for it to equal the American economy, let alone far surpass it, we are increasingly close to something truly astonishing: In considerably less than a single lifetime, we will have gone from unchallenged American economic dominance, to serene confidence that the end of American economic dominance is at hand, to unchallenged American economic dominance… Not once. Or twice. But three times.

We’re not quite there yet, of course. An American civil war would really give China’s fading chances a shot in the arm.

Regardless, the point is now, I think, well-established, that these grand-scale, long-term forecasts — “here’s the state of the world decades from now” — have a tendency to be very, very wrong. (There’s lots more evidence, of course. See Future Babble, among other sources.)

But people keep lapping them up.

One of my “favourites” of the genre — heavy on the quotation marks — is a book called Head to Head. Written by economist Lester Thurow, published in 1993, Head to Head purported to handicap the global economy in the first half of the 21st century. In line with almost every economist at the time, the former dean of the MIT Sloan School of Management said the US would not pull out of its economic decline. Unlike almost every economist, he saw the future as a struggle between the Japanese and European economies, and he predicted the winner of that struggle would be Europe.

Want a career young man? Learn to speak German.

Thurow differed from other economists another way. In all the many other books predicting the dominance of Japan, the word “China” scarcely appears. In many cases, China literally isn’t mentioned at all.

But Thurow did better. He spent a whole two pages considered China’s economic future. His conclusion? “While China will always be important politically and military,
he wrote, but “it will not have a big impact on the world economy in the first half of the 21st century….”

I repeat this old mistake not to have a bash at the now-departed Mr. Thurow but because Head to Head was a major bestseller that influenced the decisions of countless corporate and government officials. When Bill Clinton came to office, Head to Head was the book that all the smart young things on his staff were reading. (In Canada, when the Liberals under Jean Chretien looked set to return to power, the keynote speaker at their annual convention was Lester Thurow. He told them nations would never again make big money from natural resources. Sad trombone.)

More recently, the world’s richest man, whose personal and corporate power is almost incalculable, is convinced that in the future China will utterly overshadow the United States. Care to bet how that belief has influenced Elon Musk’s decisions?

Smart, powerful people still take confident grand-scale, long-term forecasts seriously. Despite the abysmal track record of those forecasts. Despite the mountains of evidence that it is not even theoretically possible for these forecasts to be meaningfully accurate. (The number of factors involved in determining even the broad outlines of the global economy decades hence is almost incomprehensible. It would be easier to forecast the weather three months from today — and it’s utterly impossible to forecast the weather three months from today.)

Want to know when the United States will cease to be the world’s largest economy? Want to know which country will take the lead?

I can tell you the correct answer.

It is: Nobody knows. And it’s foolish to pretend otherwise.