“Data Shift to Lift US Economy by 3%”

I thought this was funny. Apparently, the Bureau of Economic Analysis (BEA) is changing the accounting methodology for GDP to add a few new categories that will have the effect of increasing GDP by a few %. Here is the money quote:

“…so we are essentially rewriting economic history” – Brent Moulton

Isn’t that hilarious? Look…All you really need to know about GDP is that it is a completely bogus number…and yet…the pursuit of GDP is the dominant focus of nearly all economic policy. This error is responsible for a huge misallocation of global resources…but I digress.
In 1982, nominal US GDP was $3.3T…30 years later in 2012 it was $15.7T almost 5 times higher. So…think back to 1982…are you 5X better off? Are you any better off? Is the nation any better off? Sure…some of that is inflation, and population growth, but most of it is something else…Dark GDP being converted into something economists can kinda-sorta pretend to count.
Perhaps the best example of this is has been “housewives” leaving the home and entering the workforce. Imagine a community where 100% of the women are housewives. They perform the role of housekeeper, caretaker, chef, chauffeur, gardener, nurse, and psychiatrist…for their own families. Then…due to the changing times… all of the women in our hypothetical community decide to join the workforce and all find jobs making wages equivalent to their husbands. The economist will go crazy!!…GDP has doubled…or more. The community is obviously twice as well off right? Well…not so fast.
The truth is, in our hypothetical economy, GDP hasn’t come close to doubling. All that has really happened is that all of the work that had been done by the housewives off the books in the shadows of Dark GDP…has now come into the light to be counted by the economist. And while the working woman now has a wage, she now has to pay someone to do all of the things she used to do. So, when it is all said and done…I would grant that yes…GDP has definitely improved some because there are bona fide efficiencies to be gained in the outsourcing of the housewives duties. However, were true accounting even possible, I think it would show that around 80% of the gain was simply due to finally being able to count (and tax) the activities that were already going on. This is the true, and mostly untold story of the supposed”economic growth” we have seen over the last 50 years.
So my prediction.. only half joking is…that someday soon, the BEA will come up with a new change to GDP to somehow include in GDP not only the economic value of housewives, but also the value of the millions of people who are opting out of the labor force rather than be counted in the “unemployed” category. Currently, the rent an owner occupied home could have generated if the owner didn’t live in it is a part of GDP….so doesn’t it just  makes sense that we include the value of the services these people could be doing.. but instead have chosen not to? After all, it’s already a fairy tale number…why not give it a happy ending?

What Does Deficit Spending Accomplish

I wanted to expand a bit on my earlier post. The economic Witch Doctors are firm in their belief that deficit spending is the cure to jumpstart an ailing economy. They promise that at some point, the spending can be weaned, and the economy can stand on it’s own. We’ve been trying this for a decade and are now working on our 5th straight trillion dollar deficit, with no weaning in sight. I think it’s time to think just a little bit harder about the true affect of deficit spending. The symptom deficit spending tries to cure is declining GDP, or even just a reduction in the rate of growth….in other words, people are deciding not to transact.
In a prior article, we looked at a scenario where a buyer and a seller had a desire to transact, but were simply too far apart on price for a transaction to occur.
After haggling for a bit, the buyer is at $25, and the seller is still at $75….no transaction occurs. Oh no…GDP is crashing…prepare the soup kitchens right? Well…no. You see, the buyer has determined that the value of a massage to him is only $25. Spending $75, would mean taking a loss….which he won’t do, because he can take his $75, and get something he personally values at greater than $75…even if that something is nothing at all. On the other side of the transaction, the seller values his time at greater than $25. He would rather call it a day and spend the extra time with his kids…or watching TV, or sleeping….all things he may personally value more than the marginal $25. In this case, a non-transaction is the optimal economic outcome.
I would offer that this scenario…the decision not to transact is the natural state of things. For example…the Bugatti Veyron is a phenomenal machine, one that I would love to drive and park in my driveway, and yet…I drive a substantially less phenomenal vehicle. The problem, you see, is price, and utility. While I would surely have a blast driving a Veyron, to me, those occasional adrenaline rushes simply are not really worth a decade or two of pay…at least not to me. And if I walked into a dealership…and offered say $25k….they would almost certainly politely, or not so politely decline. And so…Bugatti, and I, though never having met, have collectively decided not to transact. The same thing happens every time you go to the grocery store. Out of tens of thousands of potential products…you politely decline on all but a few dozen….And yet the world keeps turning.
Deficit spending, in one way or another, alters this equation by temporarily subsidizing either the buyer, or the seller, or both.  This initiates transactions that otherwise wouldn’t have taken place, spiking GDP, which sounds fine…except that it leaves an extra trillion of debt on the federal governments balance sheet each year. So back to our Bugatti example, maybe the government offers Bugatti a rebate…$1.5M per vehicle sold. Now, Bugatti can afford to sell them for $25k, and with the government’s rebate, make enough to cover production cost and a healthy profit. GDP increases, Bugatti hires thousands of new employees, and all is right with the world right? Well…no, because someday…all of the new Bugatti owner’s kids and grandkids have to pay back the Billions borrowed. Furthermore….we know that the amount of marginal enjoyment these owners will get from their cars us substantially less than $1.5M….or else they would have bought them before, so while we get a temporary increase in GDP and employment, over the long term, the losses are huge.
Now of course, our Bugatti example may be a bit silly. (or is is…anyone remember the Chevy Volt?) Rather than handing out high performance sports cars, our government tends to be a little more subtle. Typically, they will just buy things nobody needs or wants, and hire people to do things that don’t really need to be done. It doesn’t have to be something completely useless…it will generally be something we would all like….just not at the going price… They will send $100 a month to a family for food…which frees up $100…now they can go buy an I-phone, which helps Apple and AT&T. They can send the money to schools, so they can buy overpriced laptops for students to misuse…saving parents money, and helping out computer manufacturers like Dell.. Or…they could just offer to give everyone over 65 a stipend and more or less free medical care…for about $1.5T per year….so those people, rather than saving for retirement over their career…can spend that money on other things.
 While all of these things do increase GDP and employment, they all actually result in suboptimal economic outcomes….overriding optimal decisions not to transact by hiding and shifting the true cost. My theory is…that you can never wean, because if you stop paying sellers to sell and buyers to buy…those transactions would simply cease. GDP would revert back to its natural, and optimum state. Only the debt would remain. Since there is no capacity, or even intention to repay, every dollar of deficit spending simply devalues the dollar. Now, official statisticians cleverly hide this in CPI, but it is quite obvious…just look at this selection of commodities from 2002-2012:

2013-03-23 Commodities 2002-2012

So…over this 10 year period, deficit spending was about $10T…and coincidentally, the price (in $) of this selection of commodities just so happened to increase…excluding natural gas, from 200% to 700%, averaging a 332% increase? This isn’t your grandfather’s inflation….this is a government intentionally debasing it’s currency based on the advice of economists who clearly have no friggin clue what they are doing…If you haven’t seen some iteration of this…it’s worth a view. It’s a series of clips of Ben Bernanke before the last financial crisis…Basically whatever this guy predicts based on his models and fancy book lernin…the complete opposite actually happens…this from the cream of the crop….best of the best of what modern economics has to offer. Get ready kids…this fairy tale will not have a happy ending.