The Economic Growth Illusion


Over at National Review's The Corner, Reason Foundation's Samuel Staley writes

The problem with the way we count economic growth is that it focuses on spending, not investment, efficiency, entrepreneurship, or technological innovation. Anything that boosts spending is automatically assumed to produce growth. Spending, no matter what the source, is the lever government pulls to produce jobs and income.

This is the growth illusion embedded in economic forecasts and in the way we calculate gross domestic product, and we are seeing its negative effects in the anemic numbers posted by the general economy. Increases in nondefense spending are almost exclusively redistributions of revenue from one group (working individuals, or future generations through debt) to current non-earners or non–wealth producers. Even the business spending may be illusory, particularly if the increases in inventory built by domestic manufacturers were based on distortions from gimmicks — cash-for-clunkers, housing tax credits, or stimulus infrastructure projects that literally involved digging holes and then filling them back in again. That's hardly a recipe for growth, but the GDP estimates and economic models forecasting future growth don't take this into account; they report these expenditures as spending and therefore economic growth.

Full thing here.