|GDP Growth Is Akin To "Magic Illusion 101"|
The usefulness and validity of the GDP numbers in determining how rapidly the economy is growing has been disputed over the years. Let us face the fact the illusion the economy continues to work its way forward is completely based on "government deficit spending" coupled with the Fed's very easy monetary policy. At the same time, we should concede much of the perceived growth is because all the money being printed has to go somewhere. Sadly, economic growth does not guarantee a healthy economy. At a time when the government in its wisdom has just completed a program to pay over 30 million workers to not work the "false economy" tag sticks like glue.
The original formula for measuring economic growth was full of flaws but over the years we have allowed numbers that mean "nothing" to seep into how the GDP is calculated all in an effort to create the illusion of growth. In years past America far outproduced the rest of the world and manufactured goods that it exported across the seas. Today much of our economy is dominated by the service sector, this means if you wash my windows, then I will mow your yard. Another huge problem is that the GDP counts government spending, and politicians spend (other people's) money on stuff simply to get reelected. If this isn't the clearest cut case that the calculation of GDP is meant to obscure, rather than to inform, I can't imagine what would be.
Years ago, the Bureau of Economic Analysis (BEA) has made a significant change in the way they calculate the GDP. It slid by unnoticed by many people but they changed how they classified and recorded expenditures for R&D and 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 comparing today's growth to that of prior years.
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 existed as to what it really tells us. When we delve into all of this it is easy to see this is not simple at all and that the GDP can be a master illusion when we look at how it filters 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 US Congress the formula was problematic.
In 1962 Kuznets again emphasized that we must keep in mind the difference between quantity and the quality of growth. He made 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 economists 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.