Gross Domestic IncompetenceTuesday, August 21st, 2012
Gross Domestic Incompetence James the Wanderer August 20, 2012
The economists speak of something called the Gross Domestic Product, a quantity intended to determine how much a nation produces, across all products and industries. The formula found in Wikipedia says
It is the third term I wish to demolish today.
First, the sign; government spending is a positive? If we keep spending, whether on cities no one lives in or roads no one drives on (China), on military items both overstocked already or obsolete (America), on social programs for people who cannot / will not work (all Europe plus America plus most of the developed world), the GDP becomes greater? How can this be defended?
Second objection, if spending were only sourced by taxes, well, that might be one thing, although the formula would still be inaccurate. But America is now borrowing quite a lot to make ends meet (sort of). Shouldn’t there be an adjustment for the amount borrowed against total government spending? Especially since we haven’t paid it off (had zero national debt) since the Andrew Jackson administration? (More about Old Hickory below).
Third objection: what about waste, fraud and abuse? Is a million spent on meals for soldiers the same as a million spent on hookers, blow and booze on a Congressional junket to determine the state of rural farming in Thailand? How can it possibly be the same, it wasn’t even spent in this country!
It seems like there ought to be a multiplier attached to that third term, government spending. If the money is spent in a worthwhile, beneficial way (roads, bridges, sewer plants, similar) then it should be counted as a positive. If it is wasted, whether on GSA trips to exotic resorts, payoffs to political friends (Solyndra, First Solar, Fannie & Freddie, bank bailouts, etc.) then it has actually diminished the “GDP” and should be subtracted. The lack of a multiplier, let’s call it “Alpha”, indicates that economists do not understand the fundamental difference between productive spending and waste, fraud and abuse.
Further, the sign problem: every dollar the government spends is stolen from the taxpayers, borrowed from outsiders, or created out of thin air by the Federal Reserve. If it was taxes, the real, productive economy has lost those funds, and is reduced to that extent. If borrowed, it carries an interest rate, and that should be factored in as well, And if conjured out of thin air, then it creates inflation, which diminishes the overall economy and the value of capital saved from previous efforts. Where does inflation appear in that equation? Oh, yeah, it doesn’t, because GDP is meant to be instantaneous, or calculated over a short period. But the way inflation works (especially hyperinflation, when ignited) the overall domestic product is still diminished, even in an instantaneous sense; inflation takes no holidays, you simply cannot determine with certainty where it is THIS WEEK, or this month. You need some numbers that take a while to collect to calculate inflation, and while you are counting the numbers change. (Sort of like calculating the population of a nation; during the counting interval, some will be born, others die, and without total, instant knowledge you can only estimate, within limits, what the population really is at a given moment).
All this means is that economics is not a dismal science at all; it isn’t science, since the hypotheses are almost never falsifiable. You can’t say “on April 12th the inflation rate was 8%” and ever really know what it was. You can’t say “on May 12th the inflation rate will be 10%” and know if you were right or not afterward, even within those limits. Economics cannot predict future growth, future collapse, or anything else; it is not a predictive process. It can sometimes generate insights from past history, but never suggest what course of events might impact it. But economists LOVE numbers, formulae and equations; it lets them think that they might have stumbled onto something, something useful, reliable and predictable.
The last time there was a general understanding of how buying, selling and borrowing impacted the economy was probably the Jackson Administration. A noble Scotsman left his fortune to pay OFF the national debt; it was the first, last, and only time this has been accomplished. The noble Scot probably understood that debt was a failing, a lack of discipline and understanding that leaves individuals and nations weak, broken and in poor moral character. He might have had words for us today, about spending more than you earn and failing to save for the future “difficult days”.
In sound money, governmental structure and restraints, and minding your own business, the good sense and practical experience of our Founders was codified into a Constitution. We have now “grown beyond” their wisdom on modern theories and practices such that we are broke, under tyrannical bureaucracy and interference, and subject to endless snooping and monitoring.
We will re-learn our Founder’s wisdom the same way they acquired it. Observe, prepare, and ride out the storm to better days beyond.