Friday, December 25, 2015

Show Me The Growth!

GDP Is A Poor Indicator Of Growth
America and other countries have allowed numbers that mean "nothing" to seep into how the gross domestic product (GDP) is calculated in an effort to create the illusion of better growth. Decades ago America far out produced the rest of the world and manufactured goods that it exported across the seas, but today much of our economy is dominated by the service and retail sectors, this often translates into if you wash my windows, then I will mow your yard. Gross Domestic Product is defined as the total market value of all final goods and services produced in a country in a given year, equal to total consumer, investment and government spending, plus the value of exports, minus the value of imports. Within that definition it appears those in power have discovered some wiggle room and even before that a debate exist as to what it really tells us.

Fraud Is Common In Our "Photoshop world"
We live in a "Photoshop world" and this means we should scrutinize everything, if not we risk we will be very surprised. The Bureau of Economic Analysis (BEA) has made a significant change on how they calculate the GDP and measuring our economic growth that went by unnoticed by many people when they changed how they classified and recorded expenditures for R&D and for entertainment, literary, and artistic originals. An announcement of this change was made by the BEA during February of 2013, this resulted in an increase in the GDP. This kind of "bump" means that a gain of 2% today is in reality less than a gain of 2% years ago. This means we are comparing apples to oranges. When delving deeper into all of this it is easy to see the GDP is a master illusion designed to filter down to both society and the Main Street economy.

The first comprehensive set of measures of national income was developed by economist Simon Kuznets who in 1934 told the U.S. Congress the formula was problematic, he said. "The valuable capacity of the human mind to simplify a complex situation in a compact characterization becomes dangerous when not controlled in terms of definitely stated criteria. With quantitative measurements especially, the definiteness of the result suggests, often misleadingly, a precision and simplicity in the outlines of the object measured. Measurements of national income are subject to this type of illusion and resulting abuse, especially since they deal with matters that are the center of conflict of opposing social groups where the effectiveness of an argument is contingent upon oversimplification."

In 1962 Kuznets again emphasized that we must keep in mind the difference between quantity and the quality of growth. He made it clear a distinction exist between cost and returns, and between the long and the short run. Kuznets went further to specify we needed goals concerning both growth "of what, and for what." Other economist have agreed that GDP is an empty abstraction with a very weak link to the real economy. The framework fails to reflect the difference between real wealth expansion or capital consumption. Kuznets used the example of the government building a pyramid that added nothing to the well-being of individuals, it would be viewed as economic growth, but in reality divert funding away from real wealth generating activities harms the generation of real wealth. Unfortunately, this is happening far too often.

What is not stated can be far more important than what is. The numbers we are often spoon fed and await with such glee has little to do with real growth but most likely mirrors or is merely a reflection of monetary pumping. The GDP number fails to highlight a slew of important factors that feed directly into our standard of living and the health of our economy, such as;

    * How wealth is distributed and inequality
    * Taxation and how it effects both the economy and society
    * Non- market transactions like volunteer and off book work
    * Underground economy, illegal trade and many cash transactions.
    * Asset value, meaning GDP ignores changes in what things are worth
    * The non-monetary part of the economy, bartering of goods and services
    * Distinguishing between production that is subsidized and that which is not
    * Quality improvements and new products
    * What is being produced, bombs or butter and a better educated populace
    * The sustainability of growth or misallocation of either capital or resources
    * Cross border parity and changes in currency value
    * External factors such as negative environmental effects or the health of the people

One way a country can kick their gross domestic product forward is to build a false economy based on infrastructure or war. When a country gorges at the trough of deficit spending it can easily manipulate a big temporary boost in its GDP. Some countries have even gone as far as to add things like prostitution and other illegal activities in a way to boost GDP and by doing so they can lower their ratio of GDP to government debt. In 2013 in advice to their government the UK's Natural Capital Committee highlighted some of the failures of GDP when they pointed out its focus on flows can allow an economy to run down its assets while recording high levels of GDP growth until a point is reached where this begins to impact future growth. They went on to make it clear the recorded GDP growth rate is prone to overstate the sustainable growth rate. This number as with most numbers once put out there is subject to full blown manipulation and spin.

Bottom-line in the words of its creator, "The GDP framework is more or less an empty abstraction devoid of any link to the real world." All economic growth is not created equal and quality is a critical factor that must not be ignored when it comes to the issue of growth. History shows that when you spend money and afterwards have little to show for it you have simply wasted your money. Sadly, much of the money America claims to invest in itself each year falls directly into this category. True economic growth is well directed and focused in a way that is both sustainable and yields long lasting benefits. The quality of growth directly effects its value to both the economy and eventually society, but sadly government shows little interest in a more honest reflection of economic growth. Proof of this is that absent in almost all government numbers is a reflection of how bankruptcies effect the economy and the fact many debts don't get paid off but are simply written off.

Footnote;  The article below titled. "Building A False Economy On Infrastructure Or War" explores how countries can create short-term prosperity.

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