Monday, August 10, 2009

GDP as Mass Mind Control

The role of GDP as mind control was recently highlighted by the market’s reaction to the release of the second quarter numbers. Traders cheered and markets bumped up, as the fall was revealed to be only 1.0%, contrasted with the fall of 6.4% for the first quarter. Commentators are already calling the end of the recession, predicting a positive GDP for quarter three.

As the People’s Economist, it is my job to examine and explain the reality behind the mass of abstract economic shibboleths, and today I will explain the common sense reality behind GPD numbers.

The definition of our GDP is actually really simple: the sum total, measured in dollars at market prices, of all good and services produced on US soil.

[note: Some of you old-timers may remember hearing announcements about GNP, but that was discarded in favor of GDP at the start of the era of globalization in the 1980s. Why GDP is the preferred measuring tool for the pro-globalists include such gems as the fact that GDP includes illegal immigrants and foreign factories in America, whereas GNP would exclude them.]

The weird fact is, GDP can be constantly rising while we all get poorer and more miserable. For example, the expansion of police forces is paid in dollars, as are the salaries of correctional officers. So, is the arrest and imprisonment of masses of people a good thing? It contributes to GDP!

Obviously, since GDP is the sum of all cash transactions, GDP is highly dependent on inflationary money creation. So, it is basically axiomatic that if the government stimulates the economy with lots of printed-money bailouts, GDP will go up.

The central role of government expenditures on GDP showed up in a big way in the 2nd quarter numbers just released. To wit: “Real federal government consumption expenditures and gross investment increased 10.9% in the second quarter, in contrast to a decrease of 4.3% in the first. National defense increased 13.3%, in contrast to a decrease of 5.1%. Nondefense increased 6.0%, in contrast to a decrease of 2.5%. Real state and local government consumption expenditures and gross investment increased 2.4%, in contrast to a decrease of 1.5%.” So, all this government spending was skyrocketing while personal consumption and investment was still plummeting: “negative contributions from nonresidential fixed investment, personal consumption expenditures (PCE), residential fixed investment, private inventory investment, and exports.” So, government spending helps GDP, but does it really help our economy?
Now, Chris over at Casey Research [here], expressed the traditional libertarian understanding of the matter, which is that all government spending is inferior: “You see, GDP records the dollar amount of goods and services produced in the economy during a given period. But it equates government spending with private spending. And it ignores the wealth and potential growth destroyed by taxation.”

Chris is definitely correct that government spending out of taxation is almost always an economic loser. At best, the government adds a middle-man layer of expense, at worst, government is sponsoring complete malinvestment. As a general rule, there is no doubt, Chris’ instincts are correct: government spending is worse than private spending for creating wealth. Government spending primarily creates paychecks for government workers and other economic parasites.

However, Chris’ analysis is inappropriate in this case, because government is not spending out of taxation. In fact, the government is spending out of debt, which complicates the analysis. Spending out of debt means that government is simply creating money and spending it into the economy. Thus, it avoids the inefficiency problem that accompanies the diversion of tax money (although it does perpetuate malinvestment).

Regarding stimulus money created by government, the main question is, what is it used for? Money used as capital investment could prepare the economy for future growth. But money used for current welfare simply delays the day of reckoning. Money used for make-work employment also simply delays the day of reckoning.

Money used to fund welfare and make-work has additional problems because it is climbing up an economic hill, fighting economic gravity, so to speak.
For one, it encourages and perpetuates malinvestment. Wealth-destroying activities can be sustained indefinitely as long as money continues to flow into them. That is what malinvestment is by definition: a money losing activity. In the normal course of events, malinvestments get shut down, but government money can keep them going indefinitely, transferring the negative cost to society as a whole.

The second reason stimulus is fighting economic gravity is because it is financed by debt. Future debt repayment will suck economic juice out of future recovery. Thus, welfare and make-work stimulus makes the eventual day of reckoning worse, by adding the weight of debt to future economic activity, which will have to snuff out malinvestment regardless, but may snuff out marginally profitable activities if the debt load is too heavy.

A third reason stimulus is fighting an uphill battle is its inflationary effects. Newly created dollars decrease the value of existing dollars. This temporarily privileges government economic actions, but undermines everything else.
Thus, in order to be economically justified, today’s stimulus can’t be used just to cover current costs. Stimulus has to create sustainable economic growth, strong enough to overcome the debt payment drag and its own inflationary effects.

We can all see that today’s government stimulus is NOT meeting the criteria of targeting economic growth. In fact, stimulus money is mainly being used to plug budget gaps in the government and banking sectors. It is exactly analogous to using a credit card to pay your monthly bills. Eventually, unless structural changes are made, the bill will come due, and you have not increased your income, but only added to your debt.

Any dollar spending is good for GDP. In the real world, pumping money into unsustainable money-losing malinvestments is a bad thing, but it makes GDP bigger! GDP hides these fantasy gains, making them look like a positive thing. GPD numbers also directly reward inflationary debt spending.

Its all a form of mass mind control, so that our government/economic leaders can proclaim the economy has turned around. In reality, we are all poorer as malinvestments continue and our purchasing power is undermined, but GDP hides the spreading poverty.

Many alternative-oriented thinkers have attempted to calculate alternatives to GDP which take account of hidden costs, but there are only two real, non-falsifiable, and non-manipulatable statistics that speak to our rising or falling standard of living: average time off and retirement age. Less time off and later retirement ages mean we are getting poorer, no matter what other statistical garbage is invented.

A truly advancing economy means that we have to work less, and can quit working sooner. Anything else is strictly a statistical mind control technique like GDP.

The collapse of the one-earner family, and the evaporation of pension/retirement benefits, are testimony to our increasing poverty as a people. It is a preventable tragedy that money-based illusions like GDP keep people from recognizing the negative consequences of our economic policies.

1 comment:

John Regan said...

Yes, Justin. All quite right. We are getting poorer and have been for more than a generation. GDP is bullsh*t