Saturday, April 28, 2012

Meaingless metric

Here's a pretty amusing piece from the permanently bullish Keynesians over at CNBC:

Friday's gross domestic product report confirmed what a drag government can be: While consumer spending grew at a 2.9 percent clip, state and local governments cut back spending by 1.2 percent on an annualized basis and the federal government pulled back by 5.6 percent.

As a result, the GDP number showed just a 2.2 percent improvement. The report disappointed economists, some of whom had the number as high as 3 percent and beyond, and cast an uncertain future on a stock market dependent on Federal Reserve stimulus for growth.

Thus is revealed the inherent meaninglessness of GDP.  Our economy would have grown more had the government only spent more on, well, anything.  Bombs, bridges to nowhere, pyramids: all increase GDP and therefore help the economy, at least according to the metric.

The problem with GDP is twofold: it gauges production without regard to usefulness.  In the private sector, utility is factored in to some degree, because a company that manufactures goods which it cannot sell will quickly go out of business.  Sometimes, as with the housing bubble, this takes a long time to play out, and the consequences are troubling, but a GDP that reflects bubble activity will, sooner or later, come down to earth. 

Roughly the same is true of government spending, but over a much larger time frame.  The Department of Energy, to take but one example, was started by President Jimmy Carter to insure Americans would no longer be dependent on foreign energy.  Clearly, the department has failed in its mission, yet money spent on bureaucratic parasites still appears, in GDP, as growth.  That it is not so should be obvious; the only reason the department exists is because there is still a private sector that produces useful goods and services.  Hence, to describe the government as a parasite is not a cheap slight, but an accurate description.

The second problem with GDP, or rather, with the attempt by Keynesians to ensure the government spends more money so as to boost the meaningless metric, is that money spent by government displaces spending--or saving--that would have taken place in the private sector.  Now, Keynesians argue that during a recession, there is a gap in aggregate demand that, as it is not being met by the private sector, must be filled by the Government.  Yet this conclusion only holds if we believe that the people cannot be trusted to do what they will with their money, and that only an interventionist State prevents the people from falling into penury.  The central paradox here is that while the State does not trust its citizenry from making the right purchases, it believes that it does not ultimately matter on what the money is spent, so long as it contributes to GDP.

It's becoming apparent that the American economy is at risk of falling back into recession.  Since this is an election year, Obama, with the help of Bernnake, will do everything he can to goose the metrics so as to prove to people that the recovery is going along swimmingly.  Yet the more the government spends, the less remains for the private sector to do the necessary job of clearing goods and services to restore health to this economy.  This truth remains, however much the GDP is sent upward through dubious stimulus programs.

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