Two Dreams

Stephen Roach

Yale University

No nation has a monopoly on its aspirational dreams.  That’s true of the dreams of its people, its leaders, its educators, its scientists, and even its entrepreneurs.  The dream connects, but at times, divides the human spirit.  It is also shaped by context —  the experiences and history that societies and nations bring to their longings for the future.

As the collection of case studies that follow indicate, the modern version of the China Dream is that of a people-centric vision, a forward-looking notion of shared prosperity and national rejuvenation. It has important inward-looking implications that are very much aligned with the reforms required of the daunting development imperatives of China’s ambitious trajectory toward a moderately well-off society.  And it also has critical outward-facing repercussions, as rejuvenation can be seen as underscoring the determination of a proud nation to reclaim its former stature among the world’s leading nations.

The American Dream is very much a moving target.  Like the China Dream it can be framed from both inward and outward-facing perspectives.  The introspective implications have been shaped by the aspirations of a generational progression in living standards, an eradication of poverty and disease, and even the material trappings of homeownership and other forms of wealth.  As seen from the outside looking in, the American Dream has long been couched in terms a nation that has opened its borders to immigrants from foreign lands.  From either perspective, inward or outward, the American Dream has always centered on the concept and ideals of opportunity, with emphasis on fairness and equity and protection under the rule of law.  

The two dreams are very much a study a study in contrast.  China and America are, of course, two very different nations in so many respects — political, social, and economic.  The economic lens, together with a rich array of comparative metrics, is particularly well-suited to shed light on the similarities and contrasts between the two dreams.  

The US and Chinese economies are, of course, at very different junctures in their respective journeys on the road to prosperity.  By comparison, China is still a relatively poor nation — 76th out of 181 nations (after adjusting for purchasing power parity) as tabulated by the World Bank — while the US is in 11th place in the same rankings and #1 for large developed economies.  Chinese GDP per capita in 2020 is only 31% of that in the United States. Yet the Dream is not a static snapshot of where nations stand today nor is it a backward looking celebration of what has been accomplished in the past — namely, America’s 15-fold increase in per capita income over the last 150 years or China’s 25-fold increase over the past 40 years.  The Dream is, first and foremost, a forward looking vision of what might be possible in a tough and uncertain future.   

To be sure, there are  well-known flaws of GDP-based metrics, both as a measure of past performance as well as a gauge of what lies ahead. The international system of national income accounts has long faced criticism for ignoring the so-called negative externalities of environmental degradation, traffic congestion, litter, worker safety,  chemical and nuclear waste disposal, and the existential threat of climate change.  Similarly, the aggregate GDP tells us nothing about the distribution of national product and income, thereby giving short shrift to weighty considerations of equity and equality that lie at the heart of both America’s and China’s dreams.  Moreover, GDP-based metrics tend to place much greater emphasis on the quantity (i.e., the speed) of economic growth rather than on the quality of the growth experience.

Notwithstanding these important drawbacks, the GDP filter sheds great light into a nation’s aspirational growth trajectory — adding the key dimensions of credibility and feasibility to the realm of possibilities of which dreams are made. On that basis, there can be no mistaking the opportunities and challenges that both nations face as they grapple individually and collectively with their national dreams.

For China, it is mainly about an important new round of “reforms and opening up” that does nothing less than fundamentally transform its long powerful growth model. Four transitions are key in that regard: Shifting from export- and investment-led growth to more of a consumer-driven economy, rebalancing from manufacturing to services, moving from imported to indigenous innovation, and going from surplus saving to saving absorption and drawing on its enormous reservoir of domestic saving to fund the social safety net needed to address the financial insecurity of a rapidly aging population. If China delivers on this daunting and complex transformation, a trebling or quadrupling of per capita incomes between 2021 and 2049 could well come to pass and the centenary goal of the Great Modern Socialist Nation would well be within sight.  A realization of the China Dream requires nothing less.

The current version of the American Dream offers comparable opportunities and challenges. Unlike a rapidly growing developing economy like China, the growth imperatives of a wealthy and more mature US economy need to be framed in a very different context.  That is especially the case in light of the recent struggles of the US economy.  After 50 years of 3.7% real GDP growth from 1950 to 2000, US economic growth has slowed to just 2% in the ensuing 18 years (2001-18).  This has raised serious questions about the very essence of America’s dream of open-ended prosperity.  Had the US economy stayed the course of its earlier 3.7% growth trajectory,  by 2018 real GDP would have been $6.5 trillion, or 35% higher than that which actually turned out to be the case.   

This poses an obvious and important dilemma for the American Dream.  Can it continue to be realized at the relatively subdued post-2000 growth trajectory of 2%?  Or does the full throttled American Dream require a return to the heady 3.7% growth of yesteryear?  Or is there an acceptable intermediate answer somewhere in between?  

While there is, of course, no exact answer to these questions, it seems reasonable to surmise that 2% doesn't solve the equation for the growth imperatives of the American Dream.  Lifting the longer-term growth rate of the US economy back into an intermediate range — at least somewhere in the 2.5% to 3% vicinity — seems like a far more acceptable outcome.  The question is, How? While the answer  opens up a wide range of possibilities, ultimately, it boils down to a resurrection of increasingly anemic productivity growth; labor productivity in the nonfarm business segment of the US economy has slowed to just a 0.8% average annual pace over the 2011-18 period — a marked downshift from the 2.3% pace recorded over the prior 60 years (from 1950 to 2010).  Economic theory tells us that, over the long haul, workers are paid their just reward in accordance with their productivity contribution. Unfortunately, it follows that the post-2000 productivity slowdown has left American workers under mounting pressures to reap the rewards long associated with the American Dream.  

Economists have long debated the productivity issue.  While the debate is far from settled, there is general agreement that business investment in productivity-enhancing technologies is key in enabling workers to work smarter, more efficiently, and more creatively.  And that shifts the focus squarely to America’s saving challenge, the wherewithal of any nation to fund its capital investments.   Here is where the economic problem of the United States is basically the opposite of that which China faces: while China still saves too much — a 43% domestic saving rate in 2020, down only marginally from the 52% peak in 2008 — America saves far too little — just 18.5% in 2020.  In net terms, which strips out depreciation to cover the wear and tear of worn-out or antiquated capacity and is, therefore, far more relevant for assessing the potential for economic growth, the US domestic saving rate (for households, businesses, and the government sector, combined) has averaged just 2.5% of national income in the past three years (2016-18) — a dramatic shortfall from the longer-term average of 6¾% from 1950 to 2015. With chronic, and now increasingly rising government budget deficits the major culprit behind America’s domestic saving shortfall, Washington’s lack of fiscal discipline has emerged as a major threat to the American Dream.

As noted earlier, economic dreams are not just about national averages.  Equity and fairness matter a great deal, raising critical questions about disparities in the income and wealth distribution as potential impediments to a realization of either the Chinese or the American Dream.  Inequities within national populations tend to pit one group against the other, fostering resentments and undermining harmony, with the potential to sow the seeds of discord that can ultimately shatter the consensus required of shared dreams.

On that basis, there can be no mistaking the growing concentration of income and wealth in both the United States and China. The top decile of the Chinese income distribution accounted for fully 41.4% of total income  in China in 2015 (according to the World Inequality Database). While that’s down slightly from the peak reading of 42.9% in 2011 and below the 47% share of the US in 2014, it is well above the 31% average share recorded by China’s top decile during the 1980s and 1990s.  A similar skewing is evident in the wealth distribution of both nations.  In 2015, the upper decile of the Chinese wealth distribution grabbed a record 67% of total wealth, a dramatic increase from the 42% average share from 1980-99 and not that much below the 72% wealth share of America’s upper decile in 2014.   

Significantly, rising inequality means something very different in a developing country like China than it does in a wealthy nation like the United States.  Early-stage economic development can hardly be expected to spread its benefits evenly across all stratum of society. The initial dividends of prosperity for a nation like China can be expected to accrue disproportionately to the more highly educated, technically adept segments of a growing urban workforce concentrated in the eastern regions of the country .  The hope is that the steady progress of development and poverty alleviation eventually spreads to a broader cross-section of the population.  

By contrast, rising inequality in a wealthy nation like the United States is actually far more disturbing. It depicts a growing bias away from a shared prosperity that can be attributed to a weakened public education system, urban and societal decay, substance abuse, and deteriorating family structures. While the evidence from developed nations hardly suggests that a rising tide of rapid economic growth lifts all boats, there can be little doubt that  the post-2000 growth slowdown has exacerbated these tensions.   

The shifting character of the Chinese wealth distribution stands out as a hallmark of its post-1980 growth miracle. Total Chinese wealth rose to 7.1 times the pace of income generation by 2015, according to the Wealth Inequality Database. That is far in excess of the ratio of 4.8 in the United States and fully 61% higher than China’s average of 4.4 recorded during the 1980s and 1990s.  A surging Chinese property market appears to have played a particularly important role in pushing the pace of wealth creation far in excess of income generation.

This underscores the split character of the economic rewards associated with the China Dream.  The material trappings of asset ownership associated with urbanization and land reforms have exceeded the gains in income generation stemming from increased employment and higher real wages.  In this important respect, the China Dream mirrors shifts in the character of other increasingly asset-dependent economies in the developed and developing world, alike.  And that, of course, raises important questions about the risks of asset and debt bubbles, as well as the development of new policy tools needed to maintain financial stability and avoid the systemic threats posed by unstable systems.     

While the concept of the national dream typically conveys a sense of optimism about the future, there are, of course, no guarantees that it will always turn out that way.  A few years ago I published a book on the US-China relationship (Unbalanced: The Codependency of America and China, Yale University Press, 2014) which argued that a shared economic rebalancing was the best way for both nations to realize their economic dreams, individually and collectively.

I was hopeful that both nations would act in their best interest — specifically, that China commit to the four rebalancing transitions enumerated above and that the United States would focus on rebuilding domestic saving with aim toward boosting its longer-term competitiveness via enhanced investment in infrastructure, manufacturing capacity, and human capital.  At the same time I warned that there were no guarantees it would work out all that neatly. I worried, in particular, about an “asymmetrical rebalancing”, whereby one nation would move to change its growth model while the other did not.  For codependent nations such as the US and China, the risk was that such an asymmetrical outcome could put them on a worrisome collision course. Unfortunately, that is pretty much what has now happened.

The shared needs of the US and Chinese economies are both a blessing and a curse. For years, the benefits far outweighed the costs, providing mutual reinforcement of their growth imperatives and foundational support to their national dreams.  Just as modern China long relied on the United States as the largest source of foreign demand for its export-led growth strategy, the US turned to China as the largest foreign owners of rapidly expanding Treasury debt, as its third largest and most rapidly growing export market, and as an important source of low-cost goods that income-constrained American consumers needed to make ends meet. Both economies relied on the other to fulfill the growth aspirations central to their own dreams. It was a marriage of great convenience.

But neither dream was durable.  The problem is that codependent economic relationships are inherently reactive, leaving one partner highly vulnerable to shifts in the economic structure of the other partner.  China was first to recognize that it needed a strategic realignment of its unsustainable hyper-growth model; former Premier Wen Jiabao famously warned in 2007 that while China seemed strong on the surface, beneath the surface it was increasingly “unstable, unbalanced, uncoordinated, and unsustainable.” And the Chinese leadership took decisive actions to address these “Four Uns”; the 12th and 13th Five-year Plans, in conjunction with the Third Plenum Reforms of 2013, put China on a very different course.  Meanwhile, the US ignored strong signals that it needed to change — paying little heed to an unprecedented saving shortfall that gave rise to chronic current account and multilateral merchandise trade deficits (with 102 nations in 2018).  

And this is where asymmetrical rebalancing has posed a particularly great challenge for both nations.  As it did some 30 years ago when it blamed its trade problems on Japan, the US body politic cast China in the role of the culprit and launched a trade war in 2018.  In my 2014 book, I referred to such a possibility as a “bad dream” — noting, optimistically, that bad dreams rarely come true.  Unfortunately, as I also warned in a fictional narrative of the bad-dream sequence, that rare exception has now come to pass.

Are the Chinese and the American Dreams threated by the trade war between the two of them?  Preliminary agreement on a partial truce — the so-called Phase I accord — is a hopeful sign that both nations recognize the need to put economic conflict aside.  But to the extent that Phase I focuses largely on a narrowing of the US-China trade imbalance — in essence, attempting to orchestrate the impossible solution of a bilateral fix to America’s multilateral problem — it will solve little.  That’s because it appears to duck the tough structural issues of innovation policies, intellectual property theft, forced technology transfer, and subsidies to state-owned enterprises.  With conflict likely to endure on these structural issues log after a Phase I accord is signed, there is a distinct likelihood of a protracted Cold-War-like economic conflict, complete with financial and technology-led decoupling.  For two codependent nations that have come to rely on the benefits of their shared prosperity as the sustenance of their national dreams, that would be a tragic outcome.

In an interdependent world, the dreams of both nations can hardly be realized in a vacuum.  The global dimensions of the China Dream — the “great rejuvenation of the Chinese nation” — are well aligned with President Xi Jinping’s 2017 commitment “… to adapt to and guide economic globalization.” The Belt and Road Initiative, Xi’s signature foreign policy effort, is the most visible manifestation of the outward-facing dimensions of the China Dream.  America, by contrast, seems to be going the other way.  Long the global hegemon in the aftermath of World War II, the “America First” philosophy of President Donald Trump is framed around the view that “… protection(ism) will lead to great prosperity and strength.”  Trump’s tariff war with China is a direct outgrowth of that approach, as his abandonment of much of the multilateralism of the postwar era — from America’s withdrawal from the Trans-Pacific Partnership and the Paris Agreement on Climate Change to US efforts to undermine the World Trade Organization and the North Atlantic Treaty Organization (NATO).

Two dreams, both based on fulfilling people-centric visions of national prosperity, yet with two diametrically opposite approaches to the global context in which these dreams fit.  Are these aspirational visions completely at odds with another?  Or can both dreams be realized in spite of this disconnect?  As always, the answers to such weighty questions are not black and white.

Notwithstanding the anti-globalization mantra of America First, the United States is hardly headed down a path of autarky.  Even if it wanted to sever its ties with the rest of the world, its shortfall of domestic saving will not allow it to do so without a significant sacrifice of its economic growth potential.  That option is politically unacceptable to the American public and to the dreams of which it has long aspired.  The Trump Administration is arguing, instead, for a change in the terms of America’s engagement with the rest of the world. It believes that it has a better chance of realizing worker- and community-centric benefits by shifting from a multilateral to a bilateral negotiating framework.  While the promises of such an outcome are certainly open to great debate, this is a very different objective than isolationism.

China, for its part, is clearly committed to a redefinition of its role in the world. The very concept of rejuvenation that frames the ideals of the China Dream has important historical roots for a nation whose pride was deeply wounded by a so-called century of humiliation.  But China’s global connection is equally important in looking to its aspirations for the future as a Great Modern Socialist Nation.  US politicians have expressed deepening suspicions over these intentions, lumping China with Russia as “… collective challenge(s) to American power, influence, and interests, attempting to erode American security  and prosperity.”  In essence, this pits one dream against the other, basically framing it as a classic Great Power struggle.  That proposition is an unmistakable outgrowth of the unipolar world that the United States has long dominated.  It is not, however, applicable to a multipolar global hierarchy led by more than one Great Power.   

In the end, it all boils down to whether the aspirations of the China Dream are at odds with the realization of the American Dream — or vice versa.  The best answer to that question goes back to the core of the Dreams, themselves — the people-centric aspirations of two nations. As a once poor, now middle-income society, China still has a considerable distance to travel on the road to development and prosperity.  As a wealthy nation, the United States faces considerable heavy lifting to stay the course.  While the context is very different for both nations, as is the systems that govern both the growth and distribution of economic gains, they share one critical challenge in common — solving a daunting growth problem without imposing hardship on others.  National dreams are cut from different cloths for different nations.  The realization of one dream need not preclude the aspirations of the other.