GDP does not measure economic growth

Article by Colonel Nogov on Jan. 30, 2015

Say what?  That’s all the government and talking heads talk about.  GDP this.  GDP that.  The economy’s growing because GDP is X%.  How is it that GDP, which measures spending, became the measure of economic growth?

Economies grow by production, savings, and investment.  This is what the study of economic science teaches us.  The pseudo economists(Keynesians) have muddled the study of economics so badly, that people think the by-product of economic growth(spending) is the economic growth itself.

This, kind of, made sense in the past.  When people produced, they would save and invest a certain amount of their production.  After they had saved a portion of their production for the future, they would spend their excess.  So, logically, by calculating how much people were spending, you could make a general assumption about how much was being produced and saved.  As production increased, so did spending.

Because there was this, more or less, correlation between production and spending, the politicians started focusing solely on the spending.  The politicians, the central bankers, and the enablers (academics, pseudo economists, propagandists, journalists, etc.) like wealth and power.  In order to acquire and keep wealth and power, they must appease the masses.  They want the masses to believe the economy is growing, that their standard of living is improving.  In order to get the masses to believe the economy is growing, they do everything they can to keep the GDP number in the black.

There are several ways they keep the GDP number in the black.  One way is by including government spending in the GDP number.  Government produces nothing.  It takes the production of others and spends it.  It seems like it would be the same, the excess production is being spent, but there are several reasons why government spending others production is not the same as if the producers spent the money themselves.  When the government spends others production, there’s a lot of dead weight in between(bureaucrats, tax collectors, politicians), so the production to spending ratio is now reduced by the amount of dead weight in between.

The 2nd way government spending is not equal to producer spending is that the government is frivolous with its spending.  Government wastes money.  Shocker, I know.  Think about all the government waste there is.  Not only the dead weight parasites, but government spends money on things most people don’t want, or things that are consumed at a rapid pace.  When people spend their own money, they’re generally careful about how they spend it.  They try not to be frivolous.  Government spends frivolously.

The 3rd way government spending is not equal to producer spending is that government takes more than the producer would have spent on his own.  Because the government takes from the producer, the producer must save less or spend less, but usually both.  Had the government not taken from the producer, the producer would have saved a certain amount and spent a certain amount.  Now he’s forced to reduce both his savings rate and spending rate.  He has less to work with.

Another way the government uses to keep the GDP number in the black is in its calculations.  It changes the way GDP is calculated over time.  Essentially, it fudges the numbers or outright lies.  The latest craze in government’s calculations of GDP is to include the underground(unreported) economic activity in its area and include it in the GDP report.  As you can imagine, how do they know how much unreported activity is taking place if it’s unreported?  They guesstimate!  If GDP comes in lower than they want, they just increase the amount of underground economic activity they think took place.  And, Voila!  GDP in the black.

Another way the government uses to keep the GDP number in the black is it prints money and gives it to people.  In this case, there was no production at all.  It simply prints money and gives it to people to spend.  Welfare, food stamps, etc.  That spending goes into the GDP report, but there was no production at all.  No growth.  In fact the opposite is true, it is all consumption.  Negative growth.

Another way the government uses to keep the GDP number in the black is that it under reports inflation.  It’s called the deflator.  It measures the total GDP then it subtracts out how much of the growth was simply due to inflation.  For instance if GDP came in at 2% and inflation was 3%, that would equal a -1% GDP.  So by misstating the rate of inflation, the government can claim a positive GDP.  If the GDP came in at 2%, but inflation was only claimed to be 1%, the GDP would still be a positive 1% after the inflation adjustment.

Think of economic growth like this.  Let’s assume no inflation.  Calculating in inflation gets complicated and I’ll try to keep this simple.  You’ve got a job(your production) and you make a steady income.  You save a certain portion of your income after your fixed expenses (rent, food, etc.).  You invest your savings.  You always save the same amount from your regular income.  Your savings keep growing due to your regular contributions from your steady income, plus it increases at a compounding rate due to investments.  You are becoming wealthier.  This is economic growth.  Your savings is now $100,000.

One day, you decide to quit your job, you’re just going to party.  Your fixed expenses don’t change and you don’t change your spending habits.  You have to dip into your savings.  After a few months, you realize you’re blowing through your savings quickly.  You start borrowing money from credit cards to slow the rate of burning up your savings.  You still don’t change your spending habits.  You’re quickly becoming deep in debt and your savings are nearly all gone.  You take a part time job to try and slow your demise, but you’re now deeply in debt and your savings are gone.  The part time job is barely covering your fixed expenses, so you still have to borrow.

GDP does not measure economic growth, it measures spending.  Economic growth comes from production.  Production and spending were decoupled a long time ago.

In the above scenario, the spending never changed.  The spending represented GDP.  It was the production that changed.  From an outward appearance things seem fine, for awhile.  Your paying the bills and still spending at your normal rate, but you’re blowing through your savings and not producing anymore or producing very little.

This is what is going on in the U.S. and all over the world.  The economy is not growing.  In fact it has been shrinking for a long time.  We’ve been blowing through our savings and accumulating debt.  Using our savings and borrowing to increase spending is not growth.  It’s the opposite.  When was the tipping point.  I don’t know.  I suspect between 30 and 40 years ago.  Imagine a jagged chart sloping downward.  Yes, there were probably years when there was growth, but the chart trends down.

The government uses the GDP report to claim economic growth, but as we’ve seen GDP only measures spending.  They’re also manipulating the number like crazy through the ways described above to try and claim growth.  They’ve been doing it for years.

Today in the U.S. there are around 50 million people on food stamps.  That’s roughly 1 in 6 people.  It’s not as noticeable as it was during the great depression of the 30’s, because there aren’t the soup kitchens.  There’s snap cards.

The above number doesn’t include other welfare and food programs.  How many people are being supported?  I don’t know.

The government is 18 trillion dollars in debt.  It’s borrowing just to pay previous debt.  There’s no money in the treasury.  It’s all debt.

When people (and countries) go bankrupt, it happens slowly, getting progressively worse until one day they just stop paying the bills.  That day is soon.