US Should Thank China For Raising Americans Standard of Living
Source: aei.org, Mark J. Perry
We should thank China for doing more to raise our standard of living than any country in America’s history
The chart above shows the amazing deflation that has taken place in the US for durable goods (vehicles and parts, household furnishing, furniture, household appliances, household utensils, tools and equipment for the house and garden, sporting goods, video/audio/photographic equipment, computers, etc.) over the last several decades. Compared to 1995, durable goods have fallen in price by 35% (measured by the Personal Consumption Expenditures implicit price deflator for durable goods), while services have increased by 75% and nondurable goods have increased by 46%. Overall, the implicit price deflator for all Personal Consumption Expenditures has increased by 48%.
How to explain the dramatic 35% price decline since 1995 for durable goods? Here’s one very important reason: China. Scott Grannis explains in his recent post “Durable goods deflation is wonderful” (featuring a chart similar to the one above, emphasis added below):
I don’t think it’s a coincidence that the emergence of China as a major exporter of durable goods (e.g., TVs, computers, cameras) coincided with the beginning of a sustained decline in the prices of durable goods. If there’s been an identifiable source of deflation in the US economy, it’s not been the Fed, but the vast increase in the productivity of the Chinese economy, and the vast increase in the volume of imported Chinese goods to the US economy. Thanks to the industrialization of China, the world has been able to produce manufactured goods much more cheaply than ever before.
This has been a boon to just about everyone in the US economy, and the chart above is also proof of that. Consider that the price of “services” is largely driven by wages, and service sector workers are about 86% of total payrolls. What the chart shows is that the earnings of the great majority of US workers have increased 2.7 times more than the price of durable goods. In other words, an hour’s worth of work for the typical American today buys 2.7 times more in the way of durable goods than it did in 1995. When it comes to durable goods, the average American’s purchasing power has nearly tripled over the past 22 years, thanks largely to China.
And China’s total contribution to lower prices in the US isn’t completely captured by the 35% deflation in durable goods because that doesn’t include clothing and footwear (those are classified as nondurable goods), which have also fallen in price over the last twenty years along with durable goods. As the table below of the top US imports from China indicates, Americans purchase a lot of clothing and footwear from China (about $47 billion worth last year), and those consumer items represent three of the top 13 import categories from China (data here). The other 10 items below are durable goods, and would be good examples of the types of goods that have gotten cheaper for Americans since the 1990s due to the emergence of China as a manufacturing superpower.
Bottom Line: We hear a lot about how China “steals” America’s production, jobs, and wealth. According to President Trump, “the money and the jobs China has taken from us is the greatest single theft in the history of the United States.” Here’s another way to look at it: The billions of dollars Americans have saved from buying low-cost products made in China since 1995, and the US jobs that have been created by the additional spending from those savings is one of the biggest transfers of wealth (or “theft” in Trump-speak) in the history of the United States. Instead of continually criticizing our largest trading partner, maybe we should show a little more appreciation to the country that has probably done more to raise America’s standard of living by providing us low-cost durable goods, clothing, and footwear than any country in the history of the United States.
Mark J. Perry is concurrently a scholar at AEI and a professor of economics and finance at the University of Michigan's Flint campus. He is best known as the creator and editor of the popular economics blog Carpe Diem. At AEI, Perry writes about economic and financial issues for American.com and the AEIdeas blog.