Can we stay ahead of China? Yes!

I was approached by a man at the supermarket who penetrated my Southern California disguise of baggy shorts, T-shirt, and deck shoes with no socks and asked if I was me? (Yes); the one who talked about China on CNBC? (Yes); then the question I hear all the time, “Are the Chinese going to let us to stay rich?”

He is onto something. Whether we stay rich and powerful is hugely important. Economic, political, technology, and military power go hand in hand. But whether we stay rich is not up to China; it is up to us – determined by how fast we grow. We didn’t need China to get rich; we don’t need them to stay rich. But we do need to get our economic growth act together.

While the United States is the biggest, richest economy in the history of the world, it’s about to get passed by. China’s gross domestic product will exceed US GDP within the next decade – of this there is no question. At recent relative growth rates – 10 percent for China, 2 percent for the US – China’s GDP will exceed US GDP in 12 years. Adjusted for purchasing power, China’s GDP will exceed US GDP in just five years.

Being the second richest guy in the room, of course, isn’t the end of the world. But it’s not as good as being No. 1. Just ask the Europeans or the Japanese how they feel about US dominance in recent decades.

Of course, China has more than four times the number of people as America does. So in terms of annual income per person, Americans remain far ahead: $48,157 versus $4,399 (or $7,481, if measured in terms of purchasing power). At present rates of growth, it would take 30 years for the average Chinese to exceed American standards (25 years, if adjusted for purchasing power). This assumes that Chinese growth can keep outpacing America’s growth by the same rate, which becomes harder to do as China’s economy becomes larger and runs into more resource constraints on the availability of energy, commodities, and other resources.

So Americans have an opportunity to stay ahead in terms of income per person – and that won’t depend on China. China's high growth rates are not the result of manipulating its currency or restricting trade: Manufacturing employment in China is falling, too. Instead, they are the result of huge saving and investment levels and intensely competitive Chinese markets. Private companies account for more than 70 percent of Chinese economic activity now and for essentially all new growth, jobs, and tax revenues.

Which brings us to the real question behind my supermarket pal’s query. Do we have the political will to stay No. 1?

To do that, we are going to have to tackle our real problems – the ones that put us in this spot. We are going to have to fix our schools so our kids can read, do math, and graduate. We are going to have to reform our tax system so people have incentives to work, save, and invest again. We are going to have to replace our so-called entitlement programs with ones we can afford so we can rein in unsustainable spending, runaway budget deficits, and the growth of government debt before it reaches the point where default or permanent 1970s inflation – with the attendant 20 percent interest rates – are inevitable. We have to restore the Fed’s political independence and commitment to price stability.

To do all these things we must talk with voters about our problems like adults, not blame our troubles on others. If we face up to these problems we can do more than stay rich, we can continue to lead the world.

But make no mistake about it. In that world, there are going to be two big elephants in the room, the US and China. There will be plenty of legitimate issues – energy supplies, environment, and terrorism – to solve. Playing the blame game runs the risk of bringing these two elephants into conflict, with unthinkable consequences.

I am convinced that the security and welfare of my children will depend more upon the quality of US-China relations than any other single issue. We simply must get to know each other to find common ground to work together for mutual security and prosperity. And the US must get back to the economic growth that allowed us to earn the No. 1 spot in the first place.

– John Rutledge, one of the principal architects of the Reagan economic plan in 1980-81 and tax-policy adviser to the George W. Bush White House, is chairman of Rutledge Capital, a private equity investment firm. He will be speaking on China policy at a June 7, 2011, forum in Darien, Conn., sponsored by the Common Ground Committee.