Grossing It Up

But don't be fooled by the radio
The TV or the magazines
They show you photographs of how your life should be
But they're just someone else's fantasy
--Styx

Many fixate on the value of Gross Domestic Product (GDP) as the primary measure of economic health. Austrian economists long ago dismissed this focus as not only a waste of time but downright dangerous. Frank Shostak summarizes the primary arguments.

One problem with GDP is accurately measuring output. As with most econometric series managed by the government, when you look under the hood you'd be surprised at the sloppy mechanisms used to collect and analyze the data. Assumptions, estimates, fudge factors. It is easy to conclude that these processes are readily subject to political influence and manipulation.

A bigger problem relates to what GDP actually tells us. As currently structured, GDP is a measure of consumption. To boost it, consumption must increase. If citizens don't want to spend, then government has to pick up the slack and do the spending.

This is precisely the course of action being taken by our current administration.

But does a measure that focuses on consumption provide an accurate picture of economic health and well being? Suppose for example that individuals decide not to work anymore. They dip into their savings in order to continue current consumption patterns and maintain their standard of living. All the while they are contributing to a healthy GDP number as measured.

It should be easy to see, however, that such actions will likely compromise standard of living down the road. Savings are lost, which in turn reduces investment in capital goods necessary to improve future productivity. And it is improved productivity (getting more output per unit of scarce economic resource) which increases future standard of living.

Efforts to boost GDP, like those we're currently employing, commonly result in capital consumption. And by consuming vital investment capital in order to 'make the number', we'll be worse off in the long run.