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How GDP Metrics Distort Our View of the Economy
Submitted by Christopher Casey via The Mises Institute,
GDP purports to measure economic activity while largely divorcing itself from the quality, profitability, depth, breadth, improvement, advancement, and rationalization of goods and services provided.
For example, even if a ship — built at great expense — cruised without passengers, fished without success, or ferried without cargo; it nevertheless contributed to GDP. Profitable for investors or stranded in the sand; it added to GDP. Plying the seas or rusting into an orange honeycomb shell; the nation’s GDP grew.
Stated alternatively, GDP fails to accurately assess the value of goods and services provided or estimate a society’s standard of living. It is a ruler with irregular hash marks and a clock with erratic ticks.
As proof, observe this absurdity: in 1990, Soviet GDP equaled half of US GDP, according to the 1991 CIA Factbook. No one visiting the Soviet Union in 1990 would believe their economy came close to 50 percent of the quality and quantity of the goods and services produced in America. GDP-defined production may have been strong, but laying roads to nowhere, smelting unusable steel, and baking barely edible breads stretches the definition of “production.” And this describes the goods which were actually produced. There is no accounting for the opportunity cost of forfeited essential goods and services.
How can this be? Why does GDP poorly reflect economic size and vitality? The blame largely resides with three fallacious concepts embedded within GDP “measurements”:
(1) intermediate goods (e.g., steel) must be eliminated to avoid “double counting”;
(2) government expenditures consist of viable economic activities; and
(3) imports should be netted against exports.
The Overstatement of Consumption
Which transactions should be included within GDP? Since most products consist of other products, GDP architects attempt to avoid “double counting” transactions by largely including only final goods and services produced. By their methods, the production of a car is counted (as an increase in inventory), but the metal, rubber, and plastic purchased in its creation is not. But the rules behind what makes a transaction “final” are arbitrary. The logic could just as easily justify including the sale of an automobile to a consumer and disregarding its previous production. In addition, any “final” transaction during a given time period does not necessarily include intermediate goods produced in that same time period: metal, rubber, and plastic purchased today will likely be for a different car produced or sold in a different (future) time period.
Regardless as to the arbitrary nature of determining final sales and notwithstanding the problem of temporally matching intermediate goods with their associated final sales, the exclusion of certain “intermediate” transactions simply excludes massive volumes of economic activity. Thus, GDP understates the economy as a whole while grossly overstating its consumption component relative to business investment. A better measure of overall production was created in 2014 when the US Commerce Department began publishing Gross Output which incorporates intermediate transactions. Using Gross Output, the commonly cited statistic of consumption accounting for 70 percent of all economic activity quickly falls to a mere 40 percent.
The Treatment of Government Expenditures as Productive
If GDP purports to measure economic activity which benefits society, the inclusion of government expenditures is dubious. GDP “produced” in the Soviet Union is no different than GDP “produced” by any government — the difference is but one of scale. All government spending is to some degree malinvestment, for as Murray Rothbard noted:
Spending only measures value of output in the private economy because that spending is voluntary for services rendered. In government, the situation is entirely different ... its spending has no necessary relation to the services that it might be providing to the private sector. There is no way, in fact, to gauge these services.
The absence of voluntary action renders prices impotent, and without true price discovery, benefits cannot be ascertained. This does not mean all goods and services provided by government would cease to exist; rather, some production (e.g., hospitals, schools, roads, etc.) would revert to the private sector. To the extent government expenditures for goods and services would be produced by the free market, the true government contribution to GDP may be positive but overstated (it currently approximates 20 percent of US GDP). A more accurate depiction of economic activity would reduce if not eliminate the contribution of government expenditures. Or perhaps, as Rothbard argued, the higher of government receipts or expenditures should actually be deducted from GDP since “all government spending is a clear depredation upon, rather than an addition” to the economy.
The Problems of Subtracting Imports from Exports
As Robert Murphy has noted several times, the netting of imports against exports in determining GDP seriously understates the contribution of trade to overall economic activity. To wit, an economy which exports $1 and imports $1 will have the same GDP contribution (zero) as one which exports $100 billion and imports $100 billion. Obviously, the latter economy would be far worse off with the sudden cessation of trade.
A fixture of GDP is the mercantilist mentality of treating exports positively and imports negatively. Why are exports additive to GDP while imports are deductive? If the goal of GDP is to measure the goods and services provided to people within a geographic region, imports — not exports — are the benefit. Exports are but payment for imports. The problem and confusion arises because the GDP calculation unrealistically excludes other forms of payment: it should make a difference if imports are funded with increasing debt levels or if funds are accumulated from previous years of compensated exports. If China converted over $1 trillion in US debt instruments into imports of American goods and services, its people benefit today, but under GDP accounting, the negative impact of imports would offset greater consumption and/or government spending (the increase in GDP was previously realized in the years during which exports created a trade surplus).
GDP is Designed to Advance the Keynesian Agenda
Simon Kuznets (1901–1985) revolutionized econometrics and standardized measurements of GDP, with his research culminating in his 1941 book, National Income and Its Composition, 1919–1938. While not a Keynesian per se, the nature and timing of his research fueled the Keynesian revolution since central planning requires economic statistics. As Murray Rothbard noted:
Statistics are the eyes and ears of the bureaucrat, the politician, the socialistic reformer. Only by statistics can they know, or at least have any idea about, what is going on in the economy. Only by statistics can they find out ... who “needs” what throughout the economy, and how much federal money should be channeled in what directions.
GDP’s faulty theoretical underpinnings and politically motivated acceptance distort the performance and nature of an economy while failing to satisfactorily estimate a society’s standard of living. In fact, Kuznets partially understood this. In his very first report to the US Congress in 1934, Kuznets said “the welfare of a nation [can] scarcely be inferred from a measure of national income.” Yet the blind usage of GDP persists. That its permanence and persistence only serves the Keynesian policies of greater consumer spending, increased government expenditures, and larger exports through currency debasement should not be considered coincidental. Unfortunately, the resulting economic stagnation, debt accumulation, and price inflation are as inevitable as they are predictable.
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How GDP Metrics Distort Our View of the Economy
Here's the biggest one:
GDP = C + I + G + (Ex - Im)
That G is Government Deficit Spending.
[i.e., "We have to borrow and spend or the economy will collapse!!!"]
Not only that, but many transfer payments in G wind up double counted in C & I... (e.g. the SNAP crowd at Walmart at midnight on EBT deposit day, or all the .gov desk jockeys and their salaries and expense accounts)
Enough can't be said about that, EVERY transfer payment is a double count.
Liberty and Prosperity = Production - Parasites (G + B)
Fewer weevels in the wheat, more to eat.
Liberty is a demand. Tyranny is submission.
"Liberty eats what it makes. Tyranny eats what it takes."
I don't think my view of the economy is distorted. The economy is fucking wrecked......
Government only counts or measures that which they desire to steal or kill
Liberty is a demand. Tyranny is submission.
"The welfare of a nation can scarcely be inferred from a measurement of national income. Distinctions must be kept in mind between quantity and quality of growth, between its costs and return, and between the short and the long term. Goals for more growth should specify more growth of what and for what." the Father of GDP, Simon Kuznets in a report to CONgress in 1934.
Thanks for this post. GDP accounting was a great insight and innovation.
Kuznets is hardly to blame for Krugman.
Correct, no he's not...or Keynes.
Kuznets was very specific (knowing how financial sharks & politicians are) thats why he said it the way he did.
Unfortunately he trusted them.
His quote is almost lost in time now but its relevence & truth remain for those who can understand what he was actually saying. But they did it (used it for their own purposes) anyways, craven assholes that they are.
You can't trust them with anything, that was his only flaw in reasoning, trust.
The numbers are meaningless now.
G gets away with what it's doing because it can.
What's good for you is to obey.
Welfare is defense spending and should be combined with defense spending.
If you disagree, stop it and let's see what happens.
Hey... hookers and blow can get pretty gross, especially domestically!
Tad, Harvard
Good article. The Mises Institute is my "economic bible" so to speak.
That said....
Don't you fuckin' dare touch my SSI!!!
:) hairball
If Apple has a subcontractor make an iPhone in China at a cost to Apple of 200 RMB and then Apple ships the iPhone to the US for $0.25 and sells the iPhone in the US at a price of $500. How much does that transaction/process contribute to US GDP and US productivity?
I guess you have heard that like CNBS economists and spinheads, the San Fran Fed are continuing to be sad about how poorly Q 1 GDP numbers are. So - they want to institute some new seasonal adjustments that if implemented would simply goose Q 1 GDP numbers arbitrarily by .5 - 1.5 %. Sigh - what a bunch of sick puppies.
Great article, thanks.
Finally I made the associtation that China is just another Soviet Union with more people - duh (pun intended).
And let's not forget the influence of hedonic regression modeling that renders all pricing calculations dubious.
The GDP and most of other indexes are not Keynesian nor have any other "scientific" background. These are just number fudges as pleased by ruling class to justify their particular policies. Economists are just propaganda stooges of their masters.
They count what they want and omit what they need in goal-seeking effort no matter what. Author himself introducing even more confusion by trying to suggest fixing of this whole utter nonsense. It is impossible to express anything of social value in terms of fiat currency raped daily.
While we can criticize USSR for manipulating their numbers, their concepts of accounting of state of economy was much more sound. They just counted items and tonnage of production and number of service "units" served. In most of economical reporting no Russian currency was used as units. So for example they counted number of graduates and number of specific job openings for them, they counted number of housing built and number of newly married, no currency involved. There was number manipulation and no real price discovery then in USSR as is now in the US, since assets prices were and are set by governmental bodies in both countries.
USSR failed mainly because of permanent ZIRP and TBTF policies regarding to all state owned enterprises. Today in US TBTF corporations are also fused with government unable to survive a day without its support.
For brief comparative analysis of “real” socialism and “real” capitalism i.e. systems that actually were implemented under these names regardless of their academic definition and discussion of what were causes of the respective crises in US and USSR I found at:
https://contrarianopinion.wordpress.com/2015/01/06/pools-and-propaganda-...
The blunt account of economic con men as well as corrupted pseud-scientific establishment as propaganda producing puppets of the regime I found at:
https://contrarianopinion.wordpress.com/2015/01/07/triumph-of-con-scienc...
An honest and interesting discussion on origin of money within human society and its derivative namely financial system and its “products” can be found at:
https://contrarianopinion.wordpress.com/2015/04/14/plutus-and-the-myth-o...
For those still infatuated with “free” markets, benchmarks and indices I suggest fresh look at financial propaganda of deceit at:
https://contrarianopinion.wordpress.com/2015/01/29/invisible-hand-and-other-paranoid-delusions/
For those believing that economy is rational science and economic conditions are result of laws or rules of economy I suggest interesting read on wage economy at:
https://contrarianopinion.wordpress.com/2015/01/28/slaves-of-wage/
And for those who after years of being bombarded by propaganda about Marxism and K. Marx from both sides of political divide, want to separate facts from political fiction I suggest very interesting and comprehensive read on politically motivated myths and misconception about Marx and his writings.
https://contrarianopinion.wordpress.com/2015/03/02/subversive-ideas-of-karl-marx-lessons-unlearned/
GDP is not only invalid because its spending has no relation to services rendered.
GDP is invalid because its activities are largely a transfer payments from private sector people to government people and government dependents. That money is double-counted, once when the private person receives it in payment and again when the government taxes it away and gives it to someone else.