Using GDP as a Tool of Policy

cropped-bob-shapiro.jpg   By Bob Shapiro

The Bureau of Economic Analysis (of the Commerce Department) calls the creation of the Gross Domestic Product (GDP) “One of the Greatest Inventions of the 20th Century.” I do not share their enthusiasm.

The concept of GDP was created due to the Great Depression, so that economists could see just how bad things were, allowing them to tinker with the US Economy even more than they already did.

Of course, the Depression was the result of the creation of the Federal Reserve (FED) and their easy money policy, which created the artificial

boom and stock market surge. Money supply growth went from 5% in 1920 to 10% in 1929, with prices rising around 8% a year. When the FED put the brakes on, the stock market crashed.

1929 Market Crash

Tracking the Economy as a whole can be interesting and useful, but there are a few inherent problems.

First, GDP includes government spending in its measure of the Economy, making it seem like it is just as important as activities by individuals and the rest of the private, productive sector of the Economy. Now, while it is possible for the private, productive sector to exist without taxes providing police, courts, etc, the opposite is impossible.

Try to imaging an Economy made up of 100% government. The Soviet Union collapsed long before the private sector got to zero. The private, productive sector is, well, productive. It provides all the food, energy, and everything else we need in a modern society.

Government spending is, by its very nature, a compromise. Taxpayers allow their money to go to government for certain purposes. The compromise comes in because there is only minimal accountability.

A second problem comes in when our leaders play fast and loose with the statistics so they can look good. Real GDP growth is the growth in the Economy after taking inflation into account. As we’ve seen in a previous post, the government is grossly under-reporting CPI figures. So, when they adjust for inflation, GDP looks higher than it should.

GDP Charts

While the official GDP chart looks anemic (red), adjusting for 1990s based CPI (blue left) shows we’ve been in recession since 2004, and adjusting for1980s based CPI (blue right) shows recession since 1994, when Clinton was President.

Finally, using ANY measurement to plan government policy is bound to cause problems. Using GDP, government has grown “like Topsy”, since government spending is included in GDP – more spending means higher GDP so everybody’s happy (NOT).

But suppose Electric Power Production were the metric used. It should be easy to imagine government policy discouraging more efficient appliances or ordering all government offices to keep the lights on 24 hours a day. Hey, it’s good for the Economy.

Q: So, without using some metric, how would the government plan the Economy?

A: The government should set stable ground rules within which the private, productive sector will be encouraged to grow.It shouldn’t be planning the Economy (that’s socialism!).

Part of setting stable ground rules is doing away with the FED’s manipulation of the money supply, interest rates, the stock market, etc. Another part is requiring a Balanced Budget. A third part is by controlling how much government can spend.

Action Item: Pass a Constitutional Amendment which sets a Dollar Limit on Federal Spending, perhaps $5 Trillion. This amount would NOT be adjusted for Inflation. (A Revaluation or Devaluation would cause the amount to be adjusted.) Until the National Debt (including Agency debt and Unfunded Liabilities) is paid off, a minimum amount, perhaps $1 Trillion, would be earmarked for this purpose.

4 thoughts on “Using GDP as a Tool of Policy

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