How GDP betrays the Economy

Isn’t the crisis over, albeit the recovery may be slow? Hasn’t GDP contraction slowed down, been stopped, maybe reversed? Isn’t all that good news? Couldn’t it have been worse if the Fed hadn’t done the right things?

The problem with almost all macro-economic aggregates ist that

(See more statistical material in our References section!)

  1. they’re largely fictitious numbers,
  2. their data are collected rather arbitrarily,
  3. after arbitrary collection these data are, as a rule, processed arbitrarily,
  4. and, but what does that matter after 1.-3., they refer to no real entity in economic life.

The more elaborate proof of all these allegations has to wait until another post, however, since everyone eyes GDP as the rabbit does the rattle-snake, let’s just debunk the GDP myth here as it is, besides “inflation” as a CPI figure, one of the more dangerous illusions for investors, retirement planners and the population at large.

(Real) Gross Domestic Product is (loosely) defined as “what has been produced in a certain geographic region [normally a nation or a set of nation states, such as the EU, the OECD etc.] during a certain period [normally a year in year-on-year comparisons, so that even quarterly measures are e.g. quadrupled in a  "seasonally adjusted" fashion to give a full-year comparison with other periods]. Or so one would think … actually the trouble starts with GDP being more of what is consumed, not created.

Let’s just think about some things statisticians can’t find out:

  • they don’t know how much you worked on your own home last year in improvements
  • even if they did know, they wouldn’t know if any and how much of it had been due to necessary repairs, only to bring the house back to the former level or
  • which of your work as actually increasing your home’s value or
  • which, you and your two left feet, have actually made you poorer through shoddy work?
  • They also don’t see any of the “black economy“, or if, then record only those who get caught and who, after fines are deducted, likely are worse off than without having worked “illegally” in the first place
  • and then there’s criticism as to other intangibles.

But what’s probably worse, is what they actually put in (and some suggest to tweak even that a bit more) or how they calculate it:

Others are referring to this as “GDP fetishism“.

An article on Patrick Chovanec’s blog “An American Perspective from China” titled “China’s Quality of GDP” makes very interesting reading too and ties in with what we’ve said here:

“… my main concern lies in a concept I’d like to introduce called “quality of GDP.”
If you Google the phrase “quality of GDP” on the Internet, you’ll find a variety of articles relating to the reliability of the way GDP statistics are gathered in different countries.  … My concern is how even true-blue GDP figures can sometimes paint a misleading picture of the real health of an economy.
… All the government had to do was take all the laid off migrant workers and hire them to dig a hole in the ground one day and fill it up the next.  Since the total would be added to National Income, the government could simply pay them enough to hit whatever GDP target it had in mind. … Focusing exclusively on GDP, as a number, is a distraction.
GDP tells you how much the economy is producing; it doesn’t tell you whether that production is actually creating real value or not. … when the State is either directing economic activity without regard to prices, or when it is artificially influencing the conditions of supply and demand in a way that distorts prices, … Production may actually consume more value than it creates, destroying wealth, or divert resources from more productive pursuits, yet in the short term, still count positively towards GDP. … what, … if the government simply went out and bought 10 trillion paper clips that nobody needed at $10 a piece? … GDP would rise, but our quality of life would fall.  The same reasoning can be applied to a war economy that produces tanks, planes, and ships that blow each other up.  U.S. GDP surged during World War II, but don’t kid yourself: real wealth was being destroyed and/or supplanted.
GDP may overstate the real benefit of government spending or policies designed to artificially stimulate economic growth.
… all GDP is not created equal, and we need to be asking deeper questions about whether an economy is creating wealth, not just maximizing output.  To speak of “quality of earnings” (for a company) or “quality of GDP” (for an economy) is simply a reminder that numbers never speak for themselves. …” (Emphasis CrisisMaven)

Now, to all that add the margin of error that pertains to any statistical estimate or, worse,  prediction and it makes you wonder how the people that run the economy can actually gloat over a 0.1% rise in GDP month-over-month. Ru(i)n the economy? Run? Yes … run!

P.S.: This article has just been linked in: Friday Links: DC Snowmageddon Edition (February 5, 2010 by Nick Krafft) on his blog “Open Economics – Economic Encounters of the Plural Kind

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  1. 2010-02-06 at 08:58

    Yes, yes, GDP is as much an illusory measure as Inflation.

    I guess we’ll just have to show them up and do better, i.e. outsmart them since we can’t outpower them.

    Am still hunting for the right data to make the right points, but am glad to only have to plough through your list and not Google’s!

    I guess, I’ll stick to the CIA Factbook for now. It’s ever so “authorative”, isn’t it!?… Juxtaposing the growoth of CO2 and public debt, preferably per capita and per region, is still the best statement one can make, would you agree?

    S

  2. 2010-02-03 at 22:06

    Not only does the standard economic model give the same value to producing a million dollars worth of bombs as a million dollars worth of machine tools, it absolutely refuses to account for externalities like environmental damage and reductions in public safety. Is it any wonder that mainstream economists can’t predict things with any assurance of accuracy? It has been my opinion for a number of years now that economics is used primarily for justifying why things are the way they are rather than to describe why things are the way they are.

    • 2010-02-04 at 00:12

      Hi, thanks for commenting. As for environmental damage, in the current model it is not possible (unless one chooses arbitrarily) to put a “price” in monetary units on such effects. Thus even if some economists wanted to oblige they couldn’t use this in a “figure” such as GDP. But I’ll try to shed light on such issues in some fute “Economic Fallacy” piece. My immediate concern for the next few days is the Reference List though.

  3. 2010-02-01 at 00:12

    Crisis, Thanks for the link.

    Will keep reading in the future.

  4. Greg L
    2010-01-29 at 03:46

    crisismaven :Thanks for pointing out Brooksley Born – wasn’t aware of her story. At least she got a late recognition: “In 2009 Born, along with Sheila Bair of the [[Federal Deposit Insurance Corporation|FDIC], was awarded the John F. Kennedy Profiles in Courage Award in recognition of the ‘political courage she demonstrated in sounding early warnings about conditions that contributed to the current global financial crisis’. According to Caroline Kennedy, ‘…Brooksley Born recognized that the financial security of all Americans was being put at risk by the greed, negligence and opposition of powerful and well connected interests… The catastrophic financial events of recent months have proved them [Born and Sheila Bair] right. Although their warnings were ignored at the time, the American people should be reassured that there are far-sighted public servants at all levels of government who act on principle to protect the people’s interests.’”
    I feel like doing some research, after all, it wasn’t just Peter Schiff or Warren Buffett who could read the sign of the times, but, as you say, many many were probably afraid to come forth.

    Yes, many people have long suspected that we’d be in a bad spot. I think the basic problem is that financial alchemy, as I call it, replaced the real economy as we shipped most of that abroad. This financial alchemy just got out of hand and we’re about to encounter a giant blowoff. Unfortunately, the average American has absolutely no clue what’s going to occur unless they’re unemployed or one of these people that you describe your post re: the option ARMS; those holding on hoping things were going to turn and now realizing that they won’t.

    This will not be pretty and I’m really wondering what’s going to happen once the stuff really starts hitting. One thing is for certain–there will be profound changes in America.

    BTW, great writing and information here. I enjoy reading. Keep up the good work.

  5. Greg L
    2010-01-28 at 21:40

    crisismaven :
    AACLARIONCALL … you may have a point. What makes me wonder though is that whoever cooks the books has assistants and those have relatives and those have lost out big time (I mean, some of them must) – so why are there no whistleblowers?

    Crisis, well we have had whistle blowers– former CFTC chair, Brooksley Born comes immediately to mind, but she was slapped down by some of the same guys in the current administration (Summers). Most official pronouncements tend to be of a groupthink sort of nature where no one ever questions the convention wisdom mainly because that’s not valued and can get you in a heap of trouble thus ensuring a degree of silence. I think it’s just difficult for the government to give a dismal prognosis as once given they’re on the hook politically for doing all they can to avert the disaster and with this one, since there’s little that they can really do at this point, they don’t wish to appear to be impotent.

    A case in point–yesterday, the chamber of commerce in my area had a couple of economists in to provide their outlook and it was the standard spiel that the recession is over and that there will be slow job growth and etc. on the immediate horizon Absolutely no mention of the impending crises from option ARMS or commercial mortgages. It’s as if everyone want to put out the same standard talking points and that’s half the problem. We need heretics, but there are very few of those.

    • 2010-01-28 at 22:28

      Thanks for pointing out Brooksley Born – wasn’t aware of her story. At least she got a late recognition: “In 2009 Born, along with Sheila Bair of the [[Federal Deposit Insurance Corporation|FDIC], was awarded the John F. Kennedy Profiles in Courage Award in recognition of the ‘political courage she demonstrated in sounding early warnings about conditions that contributed to the current global financial crisis’. According to Caroline Kennedy, ‘…Brooksley Born recognized that the financial security of all Americans was being put at risk by the greed, negligence and opposition of powerful and well connected interests… The catastrophic financial events of recent months have proved them [Born and Sheila Bair] right. Although their warnings were ignored at the time, the American people should be reassured that there are far-sighted public servants at all levels of government who act on principle to protect the people’s interests.’”

      I feel like doing some research, after all, it wasn’t just Peter Schiff or Warren Buffett who could read the sign of the times, but, as you say, many many were probably afraid to come forth.

  6. Greg L
    2010-01-28 at 02:57

    Crisis,

    An excellent post here and a lot of food for thought. Not only is the GDP figure goosed, but as you point out, it’s not measuring those things we really need to know to manage the economy better. Is there any wonder why our nation is heading to hell in a handbasket? Is there any wonder why things seem so mismanaged? One can not manage what is not being measured or measured properly.

    • 2010-01-28 at 13:28

      AACLARIONCALL – a kindred spirit – absolutely true. What bugs me is that those “at the helm” seem to the least aware. If I drive my car in a fog I don’t consider the road ahead to be clear only because I can’t see anyone, quite to the contrary … but when it comes to macro-economic aggregates they behave as if they were taking the temperature in their fridge … “Fools rush in where angels fear to tread”.

      • 2010-02-06 at 09:03

        Those “at the helm” don’t know better. If they did, they would!

        I believe that this comes from “institutionalised cultures” that don’t facilitate the development of open minds.

        And those at the real helm do not care. They issue orders that do not have the best of people and planet in mind. That’s the only way I can make sense out of what I see and read…

  7. Justizia
    2010-01-26 at 00:58

    Never hesitate. Your are not alone. At least we are two. That’s a good basis.

    • 2010-01-26 at 02:08

      Thanks (you refer to the ef discussion, right?). Have kept your other comment private, but will “follow to the letter”, thanksfor the idea … CrisisMaven

    • Greg L
      2010-01-28 at 19:53

      Crisis,

      As I think more about this, I’m not convinced that these guys are totally clueless. Surely they must be aware of the impending option ARM and commercial mortgage problems. Surely, they must be aware of the impending fiscal crises revolving around entitlements and unbridled military spending, and yet they do nothing.–or I really should say, they appear to do nothing.

      But that’s really not the case.They’ve actually done something by letting the favored oligarchs exit with their billions. They’ve facilitated their rush for the exits and have left the rest of us with a dying corpse.

      I think the mis-measurements on the aggregates and the budget are for our consumption only. I think that the true measures of economic and fiscal health are well known by the powers that be and they’ve chosen not to make those measures widely available to avoid widespread panic and political upheaval. Both of those are likely to happen anyway, so I’d just as soon deal with them sooner rather than later.

      • 2010-01-28 at 20:49

        AACLARIONCALL … you may have a point. What makes me wonder though is that whoever cooks the books has assistants and those have relatives and those have lost out big time (I mean, some of them must) – so why are there no whistleblowers?

  8. Justizia
    2010-01-26 at 00:55

    Dear Graue Eminenz! This blog is absolutely fantastic. Setzen Sie Links bei Videos auf YouTube bei Peter Schiff Channel, Alex Jones, RonPaul, UKIP Nigel Farage. Mises usw. Celente, Mark Faber immer und immer wieder. Ihre Hausfrau. Freedom will win. Always.

  9. 2010-02-05 at 16:56

    Thanks, appreciated!

  1. 2010-02-07 at 20:35
  2. 2010-02-05 at 16:42

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