Why GDP Measures Waste and Not Growth

I have saying that contra mainstream impression, statistical measure of growth the GDP hasn’t been immaculate, in fact given that they are government constructs, they latently imbue political color, as I recently wrote (bold original)

So if politics has been the underlying force behind the statistical GDP then naturally since GDP have been conducted by governments then the most likely their output may curry in the direction of the political flavor of the moment.

In the Philippines, for instance, the International Labor Organization (ILO) estimates that anywhere 40-80% of the labor force are in the informal or shadow economy. The informal sector signifies part of the economy that is not taxed, monitored in any form by the government, according to Wikipedia.org, therefore not included in the GNP. This means that even statistical estimates of labor participation in the informal economy should be doubted since, if we follow Wikipedia's definition, they have NOT been monitored. How can subjects that are not monitored be quantified or aggregated?

Moreover, how can statistical growth accurately measure output when about half of the labor force are in the informal economy? So what Philippine GDP has been showing has been the performance of the sectors mostly controlled by the politically connected elites. So with the BSP's invisible redistribution scheme via aggregate demand (credit expansion) policies, which had been implemented in 2009, and which have been part of Financial Repression policies, naturally the beneficiaries of the transfer will experience G-R-O-W-T-H. But at what costs? Such costs (like bubbles) are not seen in the GDP.

But aside from the political and statistical context, there are other economic issues which the mainstream growth measures doesn't cover, which makes the even more GDP defective.

Economic analyst Charles Hugh Smith in his blog explains why instead of measuring growth GDP measures waste: (bold and italics original)

Any system that has no way to measure, much less prioritize, opportunity costs and maximization of utility is not just flawed--it is terribly misguided and structurally destructive. 

We're told the gross domestic product (GDP) measures growth, but what it really measures is waste: capital, labor and resources squandered in quixotic pursuit of waste masquerading as "growth."

50 million autos and trucks stuck in traffic, burning millions of gallons of fuel while going nowhere? Growth! All that wasted fuel adds to GDP. Everyone who works from home detracts from "growth" since they didn't waste fuel sitting in traffic jams.

Repaving a little-used road: growth! Never mind the money could have been invested in repairing a heavily traveled road, or adding safe bikeways, etc.--in the current neo-Keynesian system, building bridges to nowhere is "growth."

GDP has no mechanism to measure mal-investment or the opportunity costs of squandering capital, labor and resources on investments with marginal or even negative returns.

Buying a new refrigerator that could have been fixed by replacing a $10 sensor: growth! GDP has no mechanism for calculating the utility still remaining in roads, vehicles, buildings, etc. that are replaced--throwing away all the fixed-investment's remaining utility to buy a new replacement is strongly encouraged because it adds to "growth."

Building and maintaining extraordinarily costly weapons systems that are already obsolete: growth! The gargantuan future costs of interest paid by taxpayers on the debt borrowed to pay for the obsolete weapons is not calculated by GDP. The staggering costs of indebting future taxpayers is ignored by GDP--the only thing that counts in GDP is "growth."

Tearing out a functioning kitchen to install granite countertops and new appliances: growth! GDP has no mechanism to measure the decline of quality in new appliances, or the marginal utility of granite countertops over the existing surfaces.

Writing complex derivatives designed to defraud the buyers: growth! The immense profits booked by investment banks and the bloated salaries of the financiers who wrote and sold the guaranteed-to-default derivatives add greatly to GDP.

Creating another huge bureaucracy to oversee the financiers: growth! Squandering taxpayers' money on more layers of bureaucracy adds to "growth" and GDP--never mind that the labor is all wasted, since a 12-page law could have achieved the same results at near-zero cost.

GDP has no mechanism to measure the value of alternatives that use less capital, labor and resources to get the same results.

Read the rest here