GDP misleads on China and the US
- By Derek Scissors
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E-mail China.org.cn, October 29, 2014
GDP too
For these reasons and others, global rankings of countries on the basis of GDP PPP border on nonsense. The tougher question is the use of GDP itself. GDP measures certain kinds of transactions annually – is this the right way to measure an economy?
GDP is an accounting device for national income. It is not actual money, it cannot be spent. As a result, the distribution of GDP is meaningless. In China in particular, GDP per person of about $6800 far outstrips disposable income of about $3000.
Moreover, because GDP is just an accounting tool, it cannot cause anything. Statements along the lines of “weak employment is due to slower GDP” are like saying your scale is making you fat.
GDP is dubious even as a scale. Building a house, tearing it down, and rebuilding it each add to GDP, as does selling the same house multiple times – but there’s still just one house. Meanwhile, imports benefit their purchasers, yet are treated as harmful in GDP accounting.
On January 1st of each year, GDP shifts from huge to minimal, while the economy certainly does not. In contrast, national wealth – the monetary value of everything we have — does not reset each year, it accumulates over time.
Wealth can actually be spent, so changes in personal wealth do cause other economic changes. The distribution of wealth and wealth per person are vitally important policy variables. Wealth is a better representation of the economy than GDP.
US vs. China revisited
What does this mean for China and the U.S.? The Federal Reserve measures net American household wealth on a quarterly basis. At the end of June, the number was approximately $79 trillion (non-profits push the total to $81.5 trillion). Credit Suisse has a similar figure for the U.S. and also publishes one for China. Credit Suisse puts private wealth in the U.S. at $83.7 trillion, private wealth in China at $21.4 trillion.
This stunning gap is not the whole story, of course. There’s also net public wealth. The calculations for the U.S. are multi-faceted, including state debt, local debt, federal debt held by the public, and intra-government debt. The value of federal land and property is large and positive but difficult to pin down because it is off-market. In net terms, American public wealth is clearly large and negative, on the order of $10 trillion.
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