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business newsWhy the GDP Is Useless and Deceptive
The basis for the so-called "recovery" was a rise in GDP, that measure of what we have spent in the economy. But GDP is a fairly useless bit of data. Here's why.
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We have not recovered from the Great Recession and thus our current economic stagnation is less a new event than a continuation of the original collapse. The basis for the so-called “recovery” was a rise in GDP, that measure of what we have spent in the economy. It’s a fairly useless bit of data.
As we all know, GDP measures private Consumption, plus gross private Investment, plus Government spending, plus Exports (X) minus Imports (M). It is a simple formula: GDP=C+I+G+(X-M)
According to Ludwig von Mises:
It is possible to determine in terms of money prices the sum of the income or the wealth of a number of people. But it is nonsensical to reckon national income or national wealth. As soon as we embark upon considerations foreign to the reasoning of a man operating within the pale of a market society, we are no longer helped by monetary calculation methods. The attempts to determine in money the wealth of a nation or of the whole of mankind are as childish as the mystic efforts to solve the riddles of the universe by worrying about the dimensions of the pyramid of Cheops.
If a business calculation values a supply of potatoes at $100, the idea is that it will be possible to sell it or to replace it against this sum. If a whole entrepreneurial unit is estimated $1,000,000, it means that one expects to sell it for this amount. But what is the meaning of the items in a statement of a nation’s total wealth? What is the meaning of the computation’s final result? What must be entered into it and what is to be left outside? Is it correct or not to enclose the “value” of the country’s climate and the people’s innate abilities and acquired skill? The businessman can convert his property into money, but a nation cannot.
--Human Action, 4th ed., p. 217.
At best GDP is a defective measure of a nation’s economic productivity. It isn’t as if the “economy” is a thing that produces stuff. Nations don’t produce anything, people do. I don’t know any business owner who uses GDP to tell him anything about his business. (I’m not talking about you traders.) Let’s face it, one can’t get any real important information by averaging the prices of Diet Coke and memory chips.
What does this mean?
Not much, yet that is what the GDP calculation does.
Let me give you another example of the problem in trying to measure economic growth. If GDP measures spending then, does the introduction of more fiat money into the economy represent organic economic growth or is it just a measure of the influx of new dollars. If we all wake up the next morning and find that our money has magically doubled and we go on a spending spree, does 2x spending mean that GDP has increased 100%? I think we know the answer to that. That is why economists and statisticians use deflaters to discount the impact of monetary inflation on prices. (Here is a thought. If Dr. Bernanke thinks that a little price inflation is good for the economy, then why would he or any economist believe in using a deflater for any data? If inflation “works,” as they believe, isn’t such “growth” always real and thus doesn’t need adjustment? Turning that argument around, if they don’t believe price inflation is good for calculating GDP because it isn’t “real” why would they believe it is good for the economy?) As Rick Davis of Consumer Metrics Institute points out, the inflation rate Bureau of Economic Analysis uses for the deflater is behind the curve and if revised upward to reflect the current CPI-U, it would put GDP at a 0.73% annualized rate.
Even if you believe that you can measure “the economy,” why does government spending get as much credit as private spending and investment? Talking about a deflater, it’s like comparing FedEx with the USPS in terms of efficiency and productivity. One could effectively argue that much of what the government spends is wasteful since they produce nothing. Yet, an important part of GDP spending measures.
That is why GDP doesn’t yield any useful information.
I don’t wish to get into the entire Austrian theory methodology (methodological individualism, as Mises put it), but it is an important concept in order to understand where I am going with this article.
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