Why Gross Domestic Product Is Just That---A Gross Distortion Of True Capitalist Growth

By John Tamny at Forbes

It’s not a widely known, but in gross domestic product (GDP) terms, President Jimmy Carter presided over one of the longest and most expansive periods of economic growth in postwar history. Most readers would say the latter can’t be, that the ‘malaise’ president delivered only contraction and misery, but GDP said otherwise.

Of course, the fact that GDP registered growth is the first clue that it’s a more-than-worthless number. Diane Coyle, author of a new book GDP: A Brief But Affectionate History, wouldn’t agree that the number is worthless, but she does acknowledge that it does not measure human wellbeing or welfare. No it doesn’t, and while Coyle doesn’t hide her bias in favor of the hubristic conceit that says economists can credibly measure country economic activity, her book is still an important read for, if nothing else, revealing to readers just how unwittingly fraudulent the practice of economics is.

For those who don’t already know, gross domestic product (GDP) is the standard measure of the size of a country’s economy, and depending on whom you speak to, it carries with it great importance. When a growth deficit called into question the ability of Greece’s government to pay its debts, the country’s GDP loomed large according to Coyle; the irony there that Greece’s borrowing capacity was allegedly decided by a “handful of people” in a “dusty room” in the suburbs of Athens attempting to divine its output. You can’t make this up.

Yes, it’s true, the economics profession believes that country economies comprised of millions, and sometimes billions of individuals, can be measured. No doubt GDP in the U.S. is calculated with quite a bit more sophistication than in Greece, but the naive arrogance underlying the statistic remains for all to see. A profession that was largely blind to the economic crack-up taking place inside Iron Curtain countries back in the ‘70s (GDP signaled actual growth) still thinks unimaginative office drones in Washington, D.C. can divine the dynamism – or lack thereof – taking place in the real world.

First up, it’s worth it to address the number’s origins. Though attempts to measure country economic growth go back to at least the 17th century, Coyle writes that what we know as GDP today “is one of the many inventions of World War II.” War is the health of the state as Randolph Bourne correctly uttered long before WWII, so it wouldn’t surprise him that a number explicitly designed to increase the size of government reached full flower during the last global war.

Where it gets interesting is that prewar measures of economic growth explicitly showed “the economy shrinking if private output available for consumption declined, even if government spending required for the war effort was expanding output elsewhere in the economy.” Of course those numbers did. Though it would be folly on the best day for number crunchers to divine economic growth, there was at least some honesty in the numbers: government spending correctly subtracted from growth.

If the reason why government spending reduced growth isn’t apparent, it’s important to remind readers that governments have no resources. This is true no matter one’s ideology. They’re only able to spend what they tax or borrow from the private economy first. In that case, for government spending to be counted as economic growth would be for those attempting to measure economic activity to engage in fraudulent double counting. The growth already took place; that’s why there were resources for government to consume in the first place. Thinking about this further, while WWII will be discussed in greater detail in a little bit, readers ought to think about the popular view inside the economics profession about WWII “ending” the Great Depression with all of this in mind.

For now, what’s important here is Coyle’s acknowledgment that for the longest time “’the economy’ was the private sector.” (my emphasis). Government couldn’t add to economic growth through spending simply because government spending very definitely was the process whereby government shrank the real economy through political consumption of capital extracted from the private sector. The money that politicians spend must come from somewhere, so for every dollar spent by politicians, that’s one less dollar for the private sector to allocate toward consumption, investment, or both.

In short, Keynesianism is the ultimate economic fantasy, which helps explain why it’s so popular with the deluded types who enter politics, not to mention academic economists shielded from the real-world implications of their droolings. Wouldn’t it be nice if government spending could boost growth during troubled times, but by definition it can only reduce it. If readers feel otherwise, they must explain how it is that Barack Obama, Mitch McConnell, Harry Reid, Nancy Pelosi, and John Boehner can allocate capital better than you, Amazon’s Jeff Bezos, FedEx founder Fred Smith, Paul Tudor Jones, Warren Buffett, and Ken Fisher. This isn’t about ideology. Politicians simply can’t allocate capital more skillfully first because they’re arguably not suited to it, but most important because they lack the market signals that happily starve the bad ideas of Bezos, Smith, Jones, Buffett and Fisher.

Some will reply that government must consume when the citizenry is not consuming, but this form of thinking is every bit as silly as the thought process that says political allocation of capital is the path to future Microsofts, Intels and Cisco Systems. Lest we forget, short of stuffing money under a mattress, money saved does not lay idle. Banks don’t take in deposits in order to stare lovingly at the cash; rather they pay for deposits (liabilities) by immediately turning those liabilities into assets. Money saved is immediately lent to those with near-term consumptive needs, or it’s lent to entrepreneurs and businesses eager to grow. Keynesianism presumes a world that has never existed in which banks warehouse deposits, and that is defined by politicians who are more expert than the private sector at investing funds extracted from the private sector.

That’s what’s so interesting about Coyle’s faux evenhandedness about whether or not the comical notion of a “fiscal multiplier” is real. She writes as though sometimes it multiplies growth and sometimes it doesn’t, but whatever government spending does to the false measure that is GDP, it can’t boost real economic growth. It can’t unless Coyle and her fellow astrologers really can say with a straight face that Sens. Ted Cruz and Chuck Schumer are better allocators of capital than are Cliff Asness and Tom Steyer. Not very likely. And if they believe it, it’s time for this debate to take place.

Considering the calculation of GDP, expenditure is the most common approach; and it’s one that reveals the Enron-fiction that is GDP in living color. Once again, government spending adds to growth despite it plainly subtracting from it, and then if we import more than we export, GDP actually declines. In short, that which reduces the size of the private sector boosts economic growth in the deluded GDP sense, while that which plainly reveals a growing private sector (imports which reflect increased production stateside, and increased foreign investment in the U.S.) actually reduces the economy’s size per GDP.

GDP can also be measured by output, but as history reveals, China and the old the Soviet Union (Coyle acknowledges this) could claim lots of “output,” but under communism this output had little to no economic value. In short, GDP signaled economic growth in China and the U.S.S.R. that plainly did not exist. More modernly, the bailouts of GM and Chrysler surely boosted U.S. output, but obviously at the expense of much greater output down the line for two failed companies being propped up on the backs of the more productive. Quicken software is presumably output, but it merely helps Americans fill out hopelessly complicated tax returns. Thinking about Silicon Valley, and Coyle addresses the center of U.S. innovation while still defending the indefensible, a $600 iPad today would have cost over $3 million in the early ‘90s….

Coyle once again acknowledges throughout that GDP doesn’t measure welfare, because if it did, government spending wouldn’t be so additive to growth. What’s confusing, but perhaps not surprising for a GDP apologist like Coyle, is that she doesn’t draw clearer conclusions. While she admits that government spending can bring about a massive GDP increase overnight even if a country lays in ruin from war, she fails to take the next step.

Interesting about the above is that Coyle alludes to what would take place. She writes late in the book that a weaver could produce more with a mechanical loom than with a hand loom. Yes indeed, and considered through the prism of government spending, imagine all the investment lost over the decades and centuries thanks to the obnoxious spending habits of politicians with the money of others. More to the point, how many mechanical loom equivalents have never seen the light of day thanks to excessive government consumption that “increases” GDP.

All of which brings up what is arguably the biggest indictment of the fraudulent economics profession today. Almost to a man and woman, those who are “economists” agree that World War II ended the Great Depression. What a horrifyingly obtuse belief.

As Coyle acknowledges in GDP, “Germany, Japan, Spain, and Italy all ended the war with their countries and economies in ruins.” This is so important. Coyle doesn’t connect the dots other than acknowledging yet again that GDP does not measure welfare, but if she were more willing to be up front, she would make clear just how wrong her profession is, and has been.

War does not stimulate, rather it’s the process whereby customers around the world are snuffed out, that human capital is incinerated, that wealth is destroyed, that individuals work to kill one another rather than working to please one another. World War II didn’t end the Great Depression, it prolonged it, by definition. Wealth was destroyed, cooperation through the division of labor was hamstrung, and human beings, the biggest source of growth of all, were robbed of life by the millions.

Going back to an earlier truth about governments lacking resources, World War II didn’t stimulate the U.S. economy as much as the figurative end of the New Deal in 1938 (by then it was discredited in the eyes of both political parties) allowed for a resumption of economic activity that provided the Roosevelt administration with the resources to fight the war to begin with. Coyle had a chance to begin cleansing the economics profession of this horrid stain tying death and destruction to prosperity, but she sadly punted.

And while she’s properly skeptical of postwar GDP growth that was rooted in recovery from destruction, Coyle oddly asserts that the “Marshall Plan remains one of the most visionary acts of statesmanship ever put into practice.” To the economics profession the Marshall Plan is further “proof” that government spending is stimulative, but it’s about as credible as the idea that WWII revived the U.S. economy. Lest we forget, Japan enjoyed no such foreign aid after WWII, in fact it had to pay for its own rebuild, yet its economy took off far more substantially than did many of the country economies in Europe.

Coyle remarks positively about the lack of postwar inflation, but never bothers to tie the latter to a world that was on a dollar standard; the dollar pegged to gold at 1/35th of an ounce. She also acts though Say’s Law doesn’t exist. In her discussion of the postwar “Golden Age” there’s lots of talk about a consumption boom in the U.S., but no mention of the production that logically took place so that consumption could take off. We trade products for products, but an economics profession that worships at the altar of consumption acts as though we can consume without producing first.

Arguably the book’s weakest chapters were the later ones. Though Coyle tried to explain the crack-up of capitalism in the ‘70s, she completely missed the point. Most comical to this reader was her assertion that the “oil-producing countries in OPEC “ “dramatically increased the price of oil in 1973 and again in 1975.” If only OPEC or anyone had this power.

Correct about there having been a crisis of capitalism in the ‘70s, Coyle doesn’t take it further in the book simply because reasonable monetary policy doesn’t inform her thinking. To make basic what is, economic growth is about information, good and bad, reaching the economy. We attain information through investment in new ideas, through experimentation, through leaps funded by intrepid investment.

But when money is losing value, investment flows into hard assets representing wealth that already exists, and at the expense of investment in stock and bond income streams which represent wealth that doesn’t yet exist. Periods of devaluation are information blackouts in a relative sense because investment becomes conservative; thus explaining the ‘70s and the ‘00s. It’s perhaps no surprise that Tim Berners-Lee invented the Worldwide Web in Geneva in 1991. When money is mostly good (the dollar enjoyed its greatest period of stability in the ‘80s and ‘90s), investment in the ideas of tomorrow is more prevalent (see the number of IPOs in the ‘70s and ‘00s versus the ‘80s and ‘90s) such that we’re able to take information-enhancing leaps; some that lead to life and economy-changing advances. Coyle touched on none of this, while instead falling for another falsehood so popular among economists; this one the popular belief that says inflation (meaning devaluation) creates jobs.

As Coyle put it, “Many governments, especially ahead of an election, naturally preferred to tolerate a little bit more inflation to get unemployment down.” Oh my. In truth, jobs are a function of investment, and investors are buying future currency streams when they invest. In short, devaluation is bad for job creation simply because it harms the investors who create the jobs. Coyle points out that “For all of our faults, economists do pay attention to evidence.” Really? If true, why do so many promote monetary devaluation as a path to jobs and prosperity despite its horrid track record?

That Coyle either ignores or is oblivious to the importance of stable money means that just as the ‘70s confused her, so too did the ‘90s ‘New Paradigm.” To her, and with what she presumes to be clear hindsight, “the New Economy hype [from the ‘90s] looks almost delusional.” Really? Think of how the advances from the ‘90s have profoundly transformed the present. Lost on Coyle is that during times of relative monetary stability, investment in new ideas soars. The ‘90s reflected that, while the Bush/Obama ‘2000s represented a rush back into the Keynesian thinking that seems to most animate Coyle’s thinking, and which always ends in tears. The value of the dollar was pushed down, so was the cost of credit, and government spending soared. As usual, the Keynesian fantasy has predictably failed to live up to the hype, but since GDP as ever double counts in the most fraudulent of ways, this “standard measure” of country economic health continues to miss what’s really happening.

Ignored by Coyle is that 2008 was all about governments running away from free markets and deregulation such that a natural and healthy correction was turned into a crisis. In a blinding glimpse of the obvious early on, Coyle wrote that the financial crisis was “not predicted by mainstream economic forecasters.” Of course it wasn’t,, and this is not a comment on what is an increasingly worthless economics profession. In truth, economists couldn’t have predicted what happened simply because what happened was manmade; as in it was created by politicians, central bankers and bureaucrats. Unless economists are skilled at forecasting government error, they’ll never be good at forecasting “crises” that are inevitably caused by government mistakes.

A third of the way through GDP, Coyle observes that “With the benefit of hindsight we can see that the idea that bureaucrats could possibly know enough in detail about a large, complex economy to plan it from the center successfully is ludicrous.” Coyle was writing about communism, but a much greater irony was apparently lost on her.

Though she acknowledges that GDP is dated, she’s not ready to ditch it. She simply feels it needs to be tweaked to account for a changing global economy, along with the absurd possibility that our economic advances now may rob from future growth. Henry Hazlitt would have had a field day with the latter.

What she missed is the bigger story, and one that would have made her book more worthwhile. Just as communism and socialism were ludicrous, so is an economics profession that presumes to measure the infinite decisions taking place among individuals every day, and every millisecond. In a perfect world, the future will pray bring us the hindsight revealing Coyle’s much loved statistic as the loser it is; full of pretense and conceit that only the economics profession could muster.

It’s not that GDP once made sense; rather, it’s that it never made sense. Coyle possibly knows this deep down, but very much a part of a profession reliant on the comical falsehood that says it can measure human action, she dare not speak ill of what’s impossible to do.

Problematic for her is that others will. Not only will GDP eventually be laughed at with good reason, so eventually will the economics profession itself be a punchline. Individuals were once paid to measure infinite decisions made by billions of humans? Surely you’re not serious!

Published at Forbes.com

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