Tuesday, December 23, 2008

#154 - GDP... WTF


This is a great article on GDP and the problems with it as an economic indicator. I thought I would expand on the premise just a little bit but first let me summarize. The point of the article is that GDP applies a framework where demand/consumption is the ends of of economic growth. Which in the end has the following pitfalls

1) Ignores the reality that demand is meaningless without means to meet the demand

ex. There can be no demand for eggs, but I can still produce an egg which could one day be valuable. But you can have a demand for time machine which doesn't exist so no underlying wealth is created by this demand.

Like if the government did it's job and stayed away from the auto industry and let these companies fail, in there wake there would still be the oversupply of cars which currently is no demand for but as the oversupply was consumed at lower liquidating prices would grow in value.

2) Government spending creates a fictional view of actual demand in the economy

since GDP takes government spending as a factor the growth can be overstated cause most government spending does not improve anyones standard of life, and sometimes is spent with money they don't have.

Like if I max out my credit card, my spending increases GDP, but am I really better off with all this debt?

Essentially, Consumption shouldn't be how you gauge growth, cause this means people must have needs/wants to be fulfilled but isn't the goal for people to have their needs/wants fulfilled. So why should growth depend on people needing more?

The article goes on and explains all this much poignantly than I can. Then goes on to talk about how the Fed foolishly believes inflationary monetary policy can fix the problem by increasing consumption.

Bottom line, when you change the enviroment, behavior changes. People don't save more cause they have more... they have more they spend it, and then spend some more they don't have.

Point is, feeding the consumption fire only feeds debt, like an ecosystem, the economic ecosystem needs to balance itself out and be free from outer manipulation.