Imagine this: an entrepreneur decides to build a ship. The boat is an exorbitant investment – lumber, fiberglass, aluminum, cement, et cetera – and is constructed to fish for salmon, provide tourists with impeccable scenery, or to transport cargo. Unfortunately, it doesn’t catch any salmon. It doesn’t carry any passengers or cargo. But it does achieve one thing: contribute to the nation’s gross domestic product (GDP).
GDP is often described as the greatest measure of economic activity across the country. But is it?
Last week, the New York Federal Reserve revised U.S. GDP growth in the third and fourth quarters. In the July-to-September period, the economy grew by 1.46%, down from 1.70%; and the economy is forecast to grow 2.61% in the October-to-December time frame.
Every three months, traders and politicians anxiously wait for the Bureau of Economic Analysis (BEA) to report the country’s GDP. Each quarter, these individuals clamor to hear if the economy contracted or expanded, and by how much. If it’s above 2% or 3%, investors and officials cheer; if it’s below 2% or 3%, they twiddle their thumbs until the next quarterly figures – political opponents play the blame game and allude to failed economic policies.
Rather than sweating over the latest GDP numbers, we should all just collectively shrug. The GDP is the worst instrument for calculating if the nation is flourishing or languishing.
Stop Obsessing Over GDP
Former President Barack Obama became the first occupant of the White House to never achieve 3% annual GDP in his entire administration. President Donald Trump has promised to expand the economy by at least 3% in every quarter of his presidency.
As you can tell, the GDP is imperative to historians whether an administration is successful or not. But why do we care so much?
According to the Mises Institute, the Soviet Union’s GDP was about half of the U.S. GDP in 1990. Despite the widespread misery, suffering, and unhappiness, the Soviet Union matched about 50% of the quality and quantity of the goods and services that were produced in the Land of the Free. However, once you comb through the details, you start to figure out why it was so high.
Russia baked bread, but nobody could consume it. The steel was smelted, but it could not be used in construction. Roads were paved, but they didn’t lead anywhere.
Indeed, the GDP does not correctly judge the true value of products and services that enhance the country’s standard of living. As the libertarian think tank’s Christopher Casey writes, “It is a ruler with irregular hash marks and a clock with erratic ticks.”
What makes the GDP even more flawed is the fact that it includes government spending as a major component. The U.S. government spends about $4 trillion every single year, and a significant portion of this is thrown into crunching the GDP – let’s just start a new war! Now you know why presidents and parties are apprehensive about spending cuts.
GDP is a Manipulative Tool
Before the 1992 election, President George H.W. Bush and his aides wanted to paint the economy rosier than it was. Bush 41 accomplished this by using the GDP, something that usually assists debtor nations more than other measures like the gross national product (GNP).
Whether it is to boost the GDP or portray the country as an economic powerhouse, politicians tend to use the GDP as nothing more than a political tool, including those of the Keynesian persuasion.
The Republicans and Democrats have realized since the Great Depression that they can give the GDP a shot in the arm with certain spending policies. As Diane Coyle, former economic adviser to the British government, notes “the definition of GDP was constructed around [John Maynard] Keynes’s model of how the economy works.”
What this line of thinking breeds is a kick-the-can-down-the-road mentality with debt and deficits.
To win elections now and be heralded as the economic heavyweight champion tomorrow, our esteemed representatives must inflate the money supply, which leads to a boom and a surge in the GDP. Later, when some of those elected officials leave office, resources are malinvested, the recession commences, and the GDP starts to dwindle, causing the public to blame the incumbent, who then decides to follow his or her predecessor’s ideas: turn on the printing presses!
The Real Rate of Growth
By now, you may be asking: so, what exactly is the real rate of growth and how do we calculate it? That is indeed a difficult question to answer.
Some prefer to utilize the GNP; some opt to focus on the consumer price index (CPI). Others fixate on the M2 money supply.
We may just need to come to an uncomfortable conclusion: there is no idyllic rate of growth. The economy grows, the economy subsides, the economy collapses. It is whatever the market dictates to us.
But central planners can never be satisfied with the unknowable. The so-called smartest men in the room want it to be calculated and quantified, and, of course, achieved with the right Keynesian prescription: money-printing and intervention, no matter the consequences.
Like legendary economist Murray Rothbard penned, any type of economic measure that attempts to come up with an average price level that consists of adding or multiplying various units of goods – boats or breads – is “meaningless and illegitimate.” When a decades-old economic instrument fails to include profitability, rationalization, or quality, then you know governments and economists have gone bananas.
Do you like using the GDP? Let us know in the comments section!