Economics

God Bless the GDP? No, God Damn the GDP!

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Over at Big Government, Mercatus Center at George Mason University economist and Reason columnist Veronique de Rugy reports on the phoney-baloneyness of new GDP numbers coming out of the Bureau of Labor Statistics (BLS, though can be shortened simply to BS). BLS reports a whopping 3.5 percent growth for the third quarter, but don't start breaking out the bubbly any time soon.

Note that de Rugy's point is not about this particular administration vs. the previous idiot one or anything like that. The methodology overall just stinks to high heaven. Off the bat, GDP numbers include government spending. So if the feds break the bank (which they've done of late), that automatically gets counted in the plus column.

What's more, the way the GDP accounts for government spending is totally biased: It assumes that if the government is spending $200,000 on a contractor to repave a road in the middle of nowhere that it will create $200,000 of genuine economic value.  By contrast, GDP measures are tougher on private-sector spending. As my George Mason university colleague Garett Jones explained to me recently "So if Exxon Mobil pays an engineer $200,000 per year, that only shows up in GDP if the engineer finds an extra $200,000 of oil to sell, or builds a new machine that sells for $200,000, something like that.  So our GDP measures of "government spending" are awful–and when the government is in a race to spend money as quickly as possible, these measures are going to be even worse than usual."

 This is an very important point. Especially when we think of  this particular data. First, the current dollar GDP increased $150.3 billion in the third quarter.  In the same time period, the government injected about $174 billion dollars into the economy in the form of personal tax cuts, unemployment assistance, student aid and nutritional assistance, and grants. In other words, the amount of cash the government injected in the economy exceeds the current GDP increase.

Another point: the GDP doesn't capture any changes in personal stock benefits. This is key because high ranking executive are getting the majority of their compensation from that. That's got to be looking pretty bad right now. But the GDP doesn't capture that.

GDP also doesn't capture Research and Development spending. The cuts in this area were large and unaccounted for. Also not included in the GDP figure:  Pension benefits and the flow of funds accounts of the United States Balance sheet information from the Federal Reserve Board.

This is some of what's wrong with the numbers.

Read the whole thing and cry. Then read it again, and cry, cry again.

De Rugy appeared in this Reason.tv/Center for Freedom & Prosperity joint earlier this year:

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  1. Excellent use of Rev. Wright quote for the title.

  2. Why can’t you libertards just shut up and taste the hope?

    [/preemptive troll]

    1. Five straight Single Malt Scotch’s can’t get the taste out of my mouth.

      1. Well sailor, get a taste of me and you won’t EVER want to taste anything else!

        Kisses!

        1. Ew!

          What do I need to roll on my twelve sided die to get rid of that horrid beast?

          1. its actually a 2d6 saving throw from trollspit…

        2. I live for your kisses!

  3. Um, the issue shouldn’t be how much total money the government injected into the economy, but how much *more* money was injected than previous quarters.

    If the government had injected the same amount of money into the economy the previous quarter, then the growth could be real growth. If this is new government spending, then the last quarter’s growth is spurious.

    I didn’t RTFA, but the citation doesn’t make it clear.

  4. The other day I went to a shopping mall near me in northern Virginia for the first time in a little while. A few years ago, this mall was bustling and full of open stores.

    Now, the mall seems practically empty and is about a third to a half boarded up, with the old stores gone. And this is hardly an economically depressed area here, so I can imagine what things must be like in places like Michigan and Ohio.

    There’s no doubt in my mind that this economic growth they’re trying to doubt is a bunch of B.S. We are still in the midst of a mini-depression.

    1. I think malls are dying from the same cancer that’s killing newspapers… the internet. Most of the shopping that I used to do at malls is now done online. Now I only go to those places for last-minute gift purchases. I think a lot of people are similar. I don’t know what constitutes good anectotal evidence of a mini-depression, but abandoned malls aren’t it.

      1. Fair point, and no doubt that people are buying more stuff online all the time, but I believe there’s more going on than just that.

        I think that for the first time in a long time, average people are trying hard to save their money as opposed to just spending it all on junk, as is our usual national habit.

    2. Malls have been dying for years, from well before the current recession. It sneaks up on you unless you haven’t been to one for a while.

    3. The thing about most places in Michigan and Ohio is that they never really felt the boom. Thus, they’re, comparatively speaking, adjusting better to the bust.

  5. What’s more, the way the GDP accounts for government spending is totally biased.

    No! You think????

  6. This is just an attempt by those mainstream economists at GMU to keep Romer and the rest of The One’s economic advisers marginalized. Why do you hate America, Katherine?

    1. I fail. For some reason I thought Veronique’s first name was Katherine.

  7. It [the GDP accounting] assumes that if the government is spending $200,000 on a contractor to repave a road[,] in the middle of nowhere[,] that it will create $200,000 of genuine economic value.

    Which is to say, the accountants that calculate GDP believe in the old Marxoid Labor Theory of Value, because what else could explain their belief that spending $200,000.00 on anything will *Poof!* generate an instantaneous economic value, without the benefit of exchange?

  8. The biggest lie about GDP is the way the government acts like GDP measures wealth, so that when GDP goes up they act like we are all getting wealthier. However what GDP actually measures is Economic Activity, this activity does not necessarily mean activity that is increasing our wealth. The reason why the government loves to see the amount of economic activity is that the government taxes economic activity not wealth so the more economic activity there is the more taxes they get and the more wealthy the government gets

    1. The reason why the government loves to see the amount of economic activity is that the government taxes economic activity not wealth

      Really? We’re missing that… Time to call Timmy.

    2. Except that it fails in even measuring economic activity.

      Government spending is merely transfer payments. It counts the tranferee side but does not offset it by counting the transferor side – which would take the number back to zero.

  9. Reports to be released Friday on the government Web site Recovery.gov are expected to show that the $150 billion in grants and loans made so far under the economic stimulus package have created or saved about 650,000 jobs, White House officials said Friday morning.

    Now, some simple math:

    Cost: $150,000,000,000

    “Created or saved” jobs: 650,000

    Cost per “created or saved” job = $230,769.23

    And the White House call this a success?

    Yes, yes it does. Joe the-vice-president Biden’s chief economist, Jared Bernstein, says:

    “Good news, folks?But as we applaud these unprecedented efforts in transparency and this new confirmation that the Recovery Act is successfully creating jobs across America, we are also acutely aware that even the highest estimates of jobs created or saved by the Act only partially offset the extent of job losses since the recession took hold last year. For this reason, we plan to continue to squeeze every job out of every dollar left to spend in the Recovery Act, and to do so with the same level of transparency achieved thus far.”

  10. Note to sef: Buy more ammo.

  11. Re: DJF,

    However what GDP actually measures is Economic Activity[…]

    That is true – it certainly does not measure productivity, only consumption, even when expenditure are not of a productive kind (like repairs and other services.)

  12. Then read it again, and cry, cry again.

    Sweet fancy Moses…

  13. GDP also doesn’t properly account for resource depletion, environmental damage, “broken windows”, or prosumption.

    In fact, there is very little it gets right. Yet we keep worshiping this damned number, and it is killing us.

    1. Re: Chad,

      GDP also doesn’t properly account for resource depletion, environmental damage, “broken windows”, or prosumption.

      It it not that it does not account properly for such things (although I have a prblem with the term “resource depletion”, since that concept is meaningless in economic terms) – it does not account for any of those things AT ALL!

  14. The data is produced by the BEA, not the BLS.

    Also, it’s very easy to calculate what the growth figure would be without cars and homes (areas of massive intervention) and government spending. The BEA provides the data. Take a look at Table 2:

    http://www.bea.gov/newsrelease…..09_adv.pdf

    So without “motor vehicles and parts” and “residential investment,” growth would have been 1.96%. Take out government spending, and it becomes 1.48%. Certainly not as robust as 3.5%, but not a decline either.

  15. I’m becoming convinced that, if a year from now we have a booming economy with 4% unemployment (which I strongly doubt), Reason would find a couple of economists somewhere to tell us how this is terrible news and a sign of the end times.

    1. We had that, and more than a few economist warned the edge of the cliff was approaching rapidly. Maybe the underlying assumptions and measures used are more important than the big pretty bread shaped number. God knows the people touting the number look like the circus.

  16. The false GDP number created a nice cat out a window moment for people shorting.

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