Tuesday, 29 January 2013

GDP: nonsense on stilts by Terry Arthur

Terry Arthur, a Fellow at the Institute of Economic Affairs, shares some of his thoughts on GDP as a measure of economic prosperity in his short article titled GDP: nonsense on stilts,
Economic growth, or just growth, is today’s holy grail, on every politician’s lips. Any tiny uptick in GDP, even over a single quarter is a new dawn, while a downtick a disaster. Yet there are two glaringly obvious reasons why the whole concept of GDP is pure piffle.
Mathematical accuracy is impossible because it is derived largely from surveys of tens of thousands of firms. Simon Kuznets, the inventor of national statistics (of which GDP is one) argued that an average margin of ten per cent, yes ten per cent, is reasonable. You don’t need to be a statistician to realise what that can do to the difference between two readings to arrive at ‘growth’.
But far more important is the nature of GDP itself. In particular, to what extent does it measure current consumer standards as opposed to prosperity in future? These two are entirely at odds with each other, because future prosperity is governed largely by the role of capital goods. But an increase of capital (i.e. savings and investment) means that current living standards are held back in the short term. So guess what: GDP statistics take little or no account of saving, the sine qua non for long term growth!
It gets worse. We can write off most public expenditure as far as prosperity is concerned. Margaret Hodge (MP for Barking) admitted that the Department of Health ‘is not going to achieve its original aim of a fully integrated care records system across the NHS’. Bang goes at least £5 billion. In addition, half a billion pounds has gone west in a failed attempt to mesh 46 fire control centres into 9 regional centres (Fire Control system). Stories like this are commonplace. Government does not do investment; it is concerned only with its term of office.
We should all understand that taxation of any kind whatsoever necessarily reduces the division of labour leading to a loss of production.
He also includes what Ludwig von Mises says about the matter
...any macro-economic concept of national income is a mere political slogan devoid of any cognitive value. In fact it is worse than that because the GDP concept totally obliterates what is actually going on in a market economy.
And Murray Rothbard argued
...that all government spending should be subtracted from private spending as depredation on private production, and then we should subtract the resources drained from the private sector, to arrive at ‘Private Product Remaining in Private Hands’. Which brave economist will sign up to calculate this? Whatever, we must wean ourselves off GDP and all its works. 
And don't forget that politicians can easily window-dress the reported GDP figure by growing the public sector, which is hardly a good thing. Still, politicians, the media, many economists and financial analysts are as obsessed as ever applying GDP as an appropriate measure to define periods of growth and recessions. Using a faulty yardstick to guide policy decisions cannot lead to much good.

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