Dear Friends,
It seems to me, to bring sanity into economic figures and government decision making, government spending should not be considered part of gross domestic product. Gross Domestic Product, (GDP), is a measure of national income. The number is used in a variety of ways… to determine the wealth of a nation, the prosperity of it’s people, it is a way to compare the efficiency of various nation’s economies against each other, ETC… Basically, GDP is a benchmark of a country’s economy. GDP is figured by adding together all government, consumer and business spending, investment, and exports then subtracting imports, and you have the expenditure method of calculating GDP. Which is to say, it uses national spending as an indirect means to estimate national income. Why should you care how it is calculated? Because GDP is used for so many economic policy decisions that directly effect your personal financial well being.
Government’s addition to GDP is problematical, because government doesn’t really produce anything, it only consumes. As such, government doesn’t add to national income and does not support the economy… it is supported by it. You can’t say borrowed money should be added to a person’s income, but economists do, when it comes to government spending. Welfare spending is one example. If I take a dollar from you and give it to someone else, does that make two dollars of income? No, it still only one… counted twice. If any government spending is included, it should only be that portion taxed and spent that year, and even that would distort the real picture due to the debt that has piled up, the service on that debt, welfare spending and the negative incentives government largess creates.
If the economy outside government folds, government spending must stop as well, because it is in fact spending and not income, but if government went away the real economy would hum along fine. Oh, government alone can go on a while by printing money and buying bonds, (monetizing debt), essentially stealing the wealth of everyone who holds the currency, but even that extraordinary measure must end in hyper inflation and the repudiation of a fiat currency, as in Argentina, Hungary, Yugoslavia, Zimbabwe etc… If the currency is backed by gold or some other commodity however, government cannot print money to keep up spending, because it would have to create that backing commodity out of thin air, which is why economists and politicians hate gold backed currencies, it limits their ability to fudge the numbers.
GDP is supposed to be an analog of a nation’s economic income and so adding in what should be subtracted distorts the picture. A nation’s real economic growth cannot be effectively measured when a drag is called a boost. In the most simple terms, if you are driving to a place, and want to know how long it will take to get there, normally you would discern the distance and your speed, divide the distance by your speed to get the time it will take to get there. We have all done similar calculations in our heads when the kids in the back seat say, “Are we there yet?” But what if we stop to eat? The calculation then would have to add in the time you spent at the restaurant, what if you subtracted the time you spent at the restaurant instead? Your calculation would be very different than reality wouldn’t it? Adding in government spending is like subtracting the time you spend eating instead of adding it, performing the opposite function than is called for, it gives a very distorted idea of what is really happening.
This provides a pernicious incentive for politicians to spend more to make GDP appear higher than it really is. Let’s say a nation is experiencing a recession and it is an election year. Government officials could borrow money and increase money printing to raise government spending, making the economy appear to be growing, even as it is really shrinking. Moreover, that raise in debt and corrosion of the currency to fund the spending, actually lowers real economic growth! That might help with an election campaign but it is certainly not a real calculation of that nation’s economy or income. Further, it skews the incentive for politicians from helping the real economy with actual reforms, to fudging the numbers with government spending, to make it look better. That is a recipe for eventual economic disaster.
Take GDP per person, a typical use of GDP to figure the income of each person on average. A nation with 10 people with a GDP of $10.00 a year would have GDP per person of $1.00 a year. What if in one year, a country’s government increased borrowing and spending an equal amount to the rest of the economy? Since that spending is included in the GDP figure it would make GDP appear to grow 100 percent in a single year! Would an average person’s income double though? Of course not, they would be poorer, because they would have to carry that debt… and if the scheme went on, that country would sooner rather than later go belly up, destroying all the prosperity of the people.
In the pseudo science of economics the wants and desires of those who do the measuring are included in their measurements. Unlike a physicist weighing the mass of a particle, the economist put’s his or her wishes into the measure, because they lack the perspective, testability and observability of the assumptions of real science. An electron has a testable verifiable charge that is consistent anywhere it is done, while no economic theory can be tested, they cannot be verified and are not universal. We all have egos and want to be more important than we are. None of us have a real perspective on ourselves, it goes back to Jung’s theories, that there is that we know about ourselves, that which everyone knows, that which others know but we don’t and that which no one knows. New class economists want government spending to be included in GDP, because they can effect government spending with their theories and assertions, therefore, adding government spending to GDP makes them more important. It serves their egos and the egos of those in political power. Sadly, it doesn’t serve us at all. That is why government spending should not be included in GDP… it calculates borrowing as income and calls a drag a boost, creating pernicious incentives and distorting the real picture of an economy.
Sincerely,
John Pepin
