THE BEAR'S LAIR
Gross domestic fudging
By Martin Hutchinson
French President Nicholas Sarkozy has leaped with glee on the proposal by a
commission headed by Joseph Stiglitz to redefine gross domestic product. After
all, if feminine attractiveness, length of vacations and quantity of garlic in
the food can be included, France will rank much higher than in more
old-fashioned measures. Plus, the existence of a new measure will enable
politicians to fiddle the figures some more, something they always enjoy doing.
In reality, Stiglitz and Sarkozy are right that gross domestic product (GDP) is
an inadequate measure of output and wealth, but they look in all the wrong
places for its replacement.
Stiglitz and his team believe that the gap between reported output
and what people experience has caused the public to distrust official
statistics. Apart from genuine statistical problems, he puts part of this
problem down to changes in income distribution, part down to changes in
relative weights within GDP (for example, an increase in the share of GDP going
to profits, as in the United States since the 1980s) and part to such factors
as traffic jams and pollution (and, inevitably global warming, though you'd
think that would improve the quality of life in say Scotland or Labrador) that
do not affect GDP but damage the quality of life.
The Stiglitz team then recommends that in the area of measuring production
itself, quality improvement in services be taken into account (a recommendation
incorporated into the US price data by the 1996 Boskin Commission) and
government productivity increases should be accounted for. They then believe
additional adjustments should be made to measure well-being, although this
would probably require a range of indicators rather than one number.
In particular, well-being measurements should reflect consumption rather than
production; should emphasize the household perspective, including tax and loan
payments; should consider wealth as well as income and consumption; should take
income distribution into account; and should include non-market activities such
as housework and leisure. Analysts should also take account of both objective
and subjective aspects of well-being, including health, education, personal
interactions and environmental conditions. Finally, the report should consider
sustainability, both environmental and in terms of resources.
One can understand why Sarkozy liked this. A society with lots of leisure, more
equal income distribution, massive recycling programs and fussy food service
would benefit immensely against a market-driven fast-food culture. Furthermore,
the immensely skilled graduates of the Ecole Nationale d'Administration, the enarques,
could adjust the subjective factors according to their own political goals,
thus ensuring that GDP statistics always showed France in a leading position
and the gradual aggrandizement of government as a wealth-enhancing measure.
The fallacy of this approach becomes apparent when you realize that the tastes
and preferences of the enarques at the top of French administration may
not fully reflect the wishes of the French people. France is after all a
country famous for its cuisine, and extremely proud of it, yet it is also the
most successful market outside the United States for McDonald's. Given the
legendary snobbery of the enarques, it would be perfectly possible for
them to produce statistics showing an ever-increasing wealth and sophistication
of French society, while the 99% of French people less elegantly educated found
their living standards in steady and irreversible decline.
The central fallacy of GDP statistics, however, and one wholly ignored by
Stiglitz, is that they include the output of government, measured by the cost
of its bureaucrats. Naturally, the traditional functions of government -
defense and the administration of justice - are not conveniently carried out by
the private sector (though privatized prisons work pretty well) and so some
factor should ideally be included for the cost of these necessary outputs. As
far as defense is concerned, this factor has tended to decline since the 1950s
in the United States, and to be considerably lower in Europe.
However, the rest of government more or less by definition consists of
regulators holding back the private economy or providing services that are not
worth the cost of producing (otherwise the private sector would be producing
them already). Stiglitz, a notorious supporter of government expansion, sees
nothing wrong in including these items at full cost, but if we are correcting
the figures they should be included at their actual value, always less than
their cost and quite often negative.
Under the current system, becoming less efficient in education, for example, so
that more administrators are hired per teacher, produces an increase in
reported GDP. That makes no sense. Overall, the inexorable growth in government
over the past century is counted as having added to national output and
welfare, thus deluding voters/taxpayers into thinking their wealth is
increasing when in fact only their burdens have done so.
If therefore we are to follow Stiglitz and calculate GDP by numerous
definitions, let's take the definition that actually represents the genuinely
valuable output of a real economy and switch to gross private product (GPP),
defined in Keynesian terms not as consumption plus investment plus government
spending plus net exports, but simply as consumption plus investment plus net
exports.
Real US GDP peaked in the second quarter of 2008 and has dropped 3.9%. GPP
peaked in the fourth quarter of 2007 (a closer match with the December 2007
estimate for the recession's start by the National Bureau of Economic Research)
and has dropped 5.5%. In other words, the recession for the American people as
individuals was 40% deeper and 50% longer (assuming the second quarter of 2009
marked the bottom) than the government has been claiming.
Since the third quarter of 2000, GDP has increased by 14.4%, or 1.55% per
annum. GPP has increased by 12.6% or 1.36% per annum. It is thus not surprising
that we're not feeling a lot richer, since the US population is increasing by
1% per annum, so private income per capita has only increased by 0.36% per
annum.
GPP doesn't always increase more sluggishly than GDP. Between 1982 and 2000,
GPP increased by 4.07% per annum while GDP increased by only 3.69% per annum.
Yes, that's a bottom-to-top comparison in terms of the business cycle, but that
differential is the sign of a healthy economy - as is the overall rate of
growth. The economy was growing rapidly, while government was growing more
slowly (by 2.3% per annum in those years, still double the rate of population
growth, but more slowly than the economy as a whole.)
There is of course a causality here. If GPP increases significantly more
rapidly than GDP, the economy is healthy and therefore grows more rapidly. If
on the other hand GDP dominates GPP, then not only is the economy itself less
healthy, with a tendency to sluggishness, but the populace feels even more
impoverished than appears from the GDP figure because the burden of government
on them is growing greater as a percentage of the whole. GDP may be increasing,
but the additional output is being consumed by extra bureaucrats.
Anecdotal evidence confirms the impression of economic deterioration and extra
government burden since 2000. The number of lobbyists in Washington has more
than doubled since then (their own output, incidentally, is counted as part of
the private sector - such are the deficiencies of economic statistics). The
average public sector remuneration has increased since 2000 from 66% above the
average private sector remuneration to more than double today. Washington, DC,
is the one real estate market that has already bottomed out and is beginning to
enter substantial recovery.
This is not a partisan point. For most of the period since 2000, we have been
governed by a nominally Republican administration, while for nearly half the
1982-2000 period we had a Democrat one. More detailed examination of government
spending statistics will show that control of Congress has a substantial effect
on the figures, with the change from Newt Gingrich to Dennis Hastert as speaker
of the house - both nominally Republicans - in 1998 producing a truly
lamentable decline in the ability to control government spending.
Nevertheless, the figures are significant and informative. It's not an
illusion; the rate of growth in private-sector income since 2000 has been more
or less negligible, whole government has absorbed an inexorably increasing
share of national output, depressing economic growth by doing so.
There is also a lesson for President Barack Obama in this. If he continues the
trend since 2000 of ever-expanding government, then he will get both sluggish
growth in GDP and an even more sluggish growth in GPP. However much he may
trumpet the modest increases in GDP as a sign that his policies are working,
the public gets to spend only GPP and so will rapidly become aware that they
are being impoverished by his rule. His chances of re-election will be
correspondingly diminished.
President Sarkozy is right; GDP is indeed inadequate as a description of
national output. But it is GPP, and not some politically convenient fudging to
suit the French enarques or the Washington bureaucrats, that truly
represents what the public actually sees happen to its living standards.
Secretly, he should keep GPP statistics as well as all the others; they will
give him a much better guide as to his chances of future electoral success.
Martin Hutchinson is the author of Great Conservatives (Academica
Press, 2005) - details can be found at www.greatconservatives.com.
(Republished with permission from PrudentBear.com.
Copyright 2005-2009 David W Tice & Associates.)
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