There is a debate over which country has the world's largest economy. One side cites gross domestic product adjusted for purchasing power parity and puts China on top, while various other indicators show the United States ahead. The claims are used to gauge China's importance, highlight Sino-American competition, and sometimes identify China as a threat.
What is almost never in dispute is that China is rising economically relative to the United States. If China is not ahead yet, it is said, the day is coming when it will be. However, at least one vital indicator casts doubt on that thesis: national wealth. From the beginning of 2008 through the middle of 2014, China may have lost ground to the United States in total wealth.
Despite a slowdown, China is still reporting GDP growth about three times faster than that of the United States, and is thus catching up in annual GDP. Why use wealth and not GDP? To be concise, we have forgotten what GDP is.
Gross Domestic Product is a measure of transactions, whereas the goal of economic development is not more transactions, but more wealth. On Jan. 2 of each year, GDP is tiny, but the economy is not. Economic activity can be measured by GDP, but the size of an economy cannot be - wealth is a far better measure.
Credit Suisse has been measuring net household wealth in most countries since 2000. This is a difficult task, and errors are unavoidable. Nonetheless, Credit Suisse has found consistent numbers from applying comparable methodology over the past 15 years. Further, their figures for the United States are fairly close to the Federal Reserve series on American net private wealth.
At the end of 2000, Credit Suisse put net private American wealth at $42.9 trillion, compared to $4.7 trillion for China: a ratio of more than 9:1. The Credit Suisse numbers do capture China's rise. By 2007, the figures sat at $64.5 trillion and $15.4 trillion, respectively. China's net private wealth had more than tripled, and the size ratio of the two economies had fallen sharply, to well under 5:1.
In 2008, of course, the financial crisis hit. It was seen as speeding up America's decline and paving the way for China's rise. Closing on seven years later, the outcome looks quite different.
The latest Credit Suisse figures are from the middle of 2014. Chinese private wealth stands at $21.4 trillion, and American wealth at $83.7 trillion. It would have obviously been unreasonable to expect Chinese wealth to triple again, but the absolute increase from 2007 to mid-2014 was only $6 trillion, versus $8.75 trillion from 2000 through 2007. China grew only 40 percent over this period.
The financial crisis certainly affected the United States as well. American private wealth growth dropped to 30 percent from 2007 to mid-2014. But the pace at which China is overtaking the United States slowed dramatically, and the size ratio barely budged. From 2007 to mid-2014, the private Chinese economy moved only from 24 percent to 26 percent of the size of the private American economy.
Moreover, the slightly shrinking ratio may be trumped by the absolute wealth gap. This gap rose from $49 trillion to $62 trillion, a bigger expansion than that seen from 2000 to 2007. On this score, China is not catching up - it is losing ground by the trillions.
The world's fixation on GDP, which even China is renouncing, is not a good rebuttal to this point. A better one involves public wealth, as Credit Suisse (and the Fed) only measure private wealth.
Public wealth is much more difficult to measure. American federal debt is well tracked, while state and local debt has ranged from $1.5 trillion to $3 trillion over this period.
But a precise figure for U.S. public sector assets is out of reach. Federal land holdings are a full 28 percent of total U.S. acreage. Depending on how land would be sold and the value of embedded resources, it could be worth less than $2 trillion (land only), or more than $100 trillion (if resource prices stay high for a long time). Land owned by U.S. states adds to that total. Federal and state-owned physical property, primarily buildings, may be worth another $2 trillion.
At the end of 2000, U.S. public debt exceeded $7 trillion. A conservative and very rough estimate of the value of U.S. public assets in 2000 was $5 trillion, putting net U.S. public wealth at about -$2 trillion and total U.S. wealth near $41 trillion. The same rough calculations put total U.S. wealth at approximately $59 trillion in 2007 and close to $72 trillion by mid-2014.