Monday, January 21, 2013

Quote of the Day: GDP Fetish

"GDP fetish"—the belief that increases in GDP are good whether or not they represent increased production of things that people actually value. If the government spends $100 billion digging holes and then filling them back up, then GDP can rise by $100 billion or more even if the $100 billion is totally wasted.
This is from Professor, Econlog blogger, and research fellow at Stanford University’s Hoover Institution David R. Henderson in a book review of former Federal Reserve of vice chairman Alan Binder’s “After the Music Stopped” at the Wall Street Journal (hat tip Mises Blog).

The fetish for GDP is really a statistical illusion

5 comments:

Nonoy Oplas said...

Hi Benson, that hypothetical example of spending $100B to dig holes and filling them again is simply idiotic. How could that be possible?

GDP is only a measurement or an estimation of growth of output, by demand side or supply side. Low GDP growth shames the governments of many rich, welfarist and near socialist countries.

benson_te said...

Hi Nonoy,

Thanks for your comments

I am quite surprised by your unfamiliarity with this rather popular mainstream concept. It’s called Keynesianism, which Professor Henderson referred to.

Here is John Maynard Keynes from Book 3 Chapter 10 of The General Theory of Employment Interest and Money

"If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing." (p. 129)

http://en.wikipedia.org/wiki/The_General_Theory_of_Employment,_Interest_and_Money

The general idea is that an economy can prosper by government spending and by inflation

Statistical constructs don’t reflect on the actual output, as such methodology encourages interventionism.

GDP=C+I+G+(X-M)

Assume
C=0
I=0
G=$100
(X-M)=0

GDP=0+0+100+0
GDP=100

Hope this helps,

Anonymous said...

So you're not a Keynesian?

Nonoy Oplas said...

Thanks Benson. I have heard or read that "spend to dig, spend to cover" story many times and I never believed it. Even in the example you gave above where C, I, (X-M) is zero while G is 100, this is hypothetically impossible. In the case of the Philippines, C is 70% of GDP while G is only around 12%.

I don't think that "GDP fetishism" is bad because it is precisely that "low/anemic GDP growth" stories that shame the socialists and interventionists in many welfare states. cheers.

benson_te said...

Thanks Nonoy

You must remember: there is a gulf between human action and statistics. When you say “hypothetically impossible” that’s premised on human action. And is true. No economy can survive on digging and filling from government spending. But based on the GDP equation this is an unquestionable fact, because the GDP equation is an generally accepted accounting or arithmetic principle. And this why Keynes proposed such an absurdity.

That’s the reason why applying accounting principle to social policies are hazardous—and so with the GDP fetish.

The construct itself is a mistake for the simple reason that it treats government spending (taking money from productive Peter to give to unproductive Paul via Uncle Sam) as productive (hence the + operation), and it treats imports as a negative (X-M) which is why mercantilists have used the GDP equation as justification for protectionist measures.

Hope this helps

Benson