Thursday, September 30, 2010

The Short-Sightedness You Get From Staring At A Single Number

Update 10/2/10: Some sloppy writing on my part led to me seeming to imply that the trade deficit added empty calories to the GDP—this of course isn’t the case: As everyone ought to know, the net of imports and exports are added to consumer spending, government spending, and gross investment, to arrive at the GDP figure. Therefore—obviously—the trade imbalance is factored into the GDP. Please excuse my error. 
  
Because of the need to repair this mistake, I decided to touch up a few other aspects of this post—specifically drawing attention to the fact that the private sector is just as guilty of the myopia that I describe as the public policy sector. GL. 
  
So: Revised gross domestic product numbers came out—the U.S. economy grew 1.7% (annualized) during the second quarter. 
  
Whoop-dee-fucking-doo—if this keeps up, does it mean that each person living in the United States will be 1.7% richer by the end of 2010? 
  
Richer how? Because most people won’t be feeling richer by the end of the year—they’ll likely be feeling poorer. With good reason. 
  
Over the last 40 years or so, “the growth in the GDP” has been the totem every politician, every economist, even most citizens hang their hat on—as if this percentage figure all by itself embodied all the goodness (if it was ≥4%) or evil (≤2%) there was in the world. 
  
High GDP?—America happy!!! 
  
Low GDP?—America sad! 
  
(God forbid) Negative GDP?
  
AAAaaaaahhhhhhhhh. . . . . . 
  
But all by itself, growth in the GDP number means absolutely nothing. The fact that so much of American industry has been demolished by the bulldozer of Globalization over the last thirty years—all while GDP steadily accreted—proves that growth in GDP means nothing. 


Example: The owner of a textile mill in New England who shuts it down and moves his operation to Vietnam or Guatemala is certainly richer—his greater riches are duly added up, riches large enough to offset the reduced standard of living of his former workers, aggregating a little sliver to the U.S.’s growth in GDP for that year. 
  
GDP up—everybody happy, happy, happy!!
  
But what of the workers left with lower-paying jobs, or without jobs altogether? What of the New England town where the textile factory used to be, raped and slashed and left for dead by the side of the Global Superhighway of Free Trade—are the townspeople happy? Their unemployed workers needing assistance, the children of the marginally employed needing free lunches at school, the tax base dwindling, forcing the township to cut back on needed services like firemen, ambulances, police, schools, libraries, etc. 
  
Are they happy? They ought to be happy: GDP up—America happy!! 
  
Why New England town so sad? 
  
Current American economic policy both in the public and the private sector has been so perverted by the myopia of a single number that it has lost sight of what macro-economic policy in a representative democracy is supposed to bring about: A better society. 
  
I am not talking solely about GDP—in every individual aspect of macro-economic policy as well as finance in the private sector, that aspect is analyzed by the metric of a few, or even a single number. In macro-economic policy, it’s GDP. In finance, it’s yearly profit—or more likely, quarterly profit. 
  
This myopia of the single number points to the core problem of economics as an academic discipline: In its rage to import physics, and thereby give itself a patina of “scientific” accuracy, it has needed to make constant numbers which are not constant—numbers, rather, that are constantly in flux. 
  
Or else, for the sake of mathematical simplicity, they have ignored certain numbers—numbers which matter. 
  
That’s why so few economists saw the Global Financial Crisis coming—whereas a lot of non-economists saw it coming clear as a tornado on the horizon. 
  
That’s why U.S. GDP has steadily increased—while the U.S.’s industrial base has eroded. While the middle-class has shrunk and the very rich have become obscenely hyper-rich. While the fiscal deficits have expanded exponentially, making the growth in GDP a lie. 
  
Because fiscal deficits are not included in GDP figures: Only fiscal spending is included in traditional GDP metrics. 
  
That’s why U.S. GDP since 1975 has been a lie—the ever-growing fiscal deficits (especially since 2000) show it to have been a lie: Anyone can fake being rich with a high-limit credit-card—but does that mean that you really are rich? 
  
No it does not. 
  
Likewise with corporate profits: If you fire 10% of your company’s workforce every single year, your company’s profits will rise every single year—Wall Street happy!! GDP happy!! America happy!!
  
And you? Sad, the day you realize you’re the only worker left in your company.
  
That’s what I mean by the near-sightedness of staring at a single number: If you only stare at the one number—GDP or quarterly profits—you miss all the other stuff going on all around. 
  
Like now: Ben Bernanke and the Fed are concentrating on another number—inflation. 
  
According to the minutes of the FOMC, Benny and his Lollipop Gang are actually trying to increase inflation. They seem to think it is a measure of the health of the U.S. economy. 
  
Inflation low? America sad! 
  
Inflation “at a moderate pace”? America happy!!! 
  
They don’t seem to understand what inflation is: It’s just a number, a number that can mean a whole host of things. 
  
One of the things it could mean is, the economy is expanding, producers are bidding up wages and consumables, so inflation is on the rise. Yeay team! 
  
But it could also mean (as I have been arguing), the markets are losing faith in the dollar as a currency, so they’re exiting dollars and going into foreign currencies (especially emerging markets), or commodities. 
  
The myopia of the single number makes Bernanke and his Gang push for inflation—they think that at this stage of the Global Depression, inflation is a sign of absolute good. 
  
They don’t recognize it as a sign that the economy is getting closer to the edge of the cliff. 
  
How happy is everyone going to be then?

19 comments:

  1. You should really take the time to learn a little economics. If production moves to Vietnam, U.S. GDP would go down. You see, gross domestic product measures what is produced in the borders of the U.S.

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  2. You should learn a little more Anonymous. GDP also measures what is SPENT within the borders of the US.

    Nice write up Gonzalo. The herd is fixated on on the horizon, unable to see the chasm just before that. Let them run over the cliff I say. Idiots.

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  3. G,

    Doesn't Keynesian theory dictate looking at one number? In other words, if my "worldview" produces a bias, that bias will be the filter through which I look at everything. Keynes primary assumption (worldview) that any money, even that from government debt, will stimulate the economy, which in turn IS measured by GDP, therefore, that's the number I need to look at.

    Second, look at inflation. If GDP is moving up, then the way you tell if the government spending (debt) was enough, is if "enough" inflation is taking place. Therefore, GDP up = good and Inflation up = good enough.

    The problem seems to be a primarily "liberal" phenomenon; not letting past results get in the way of future policy. Every time redistribution of wealth has happened in the past the results were not beneficial to that country...hence your "Treasury Theory".

    Barring "axiom 6", the only other explanation is an intentional plan to transfer the wealth of this country to other parts of the world, via "free trade" and/or dollar devaluation. If that's the case, then "inflation good".

    Which brings us back to GDP. If government spending pushes GDP up AND inflation is also up, then the movement of wealth away from "evil America" is right on target.

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  4. Hey Anonymous,

    Here's your economics lesson for the day.

    If Bob owns a company in the US which does $1B in business, with domestic or international clients, then $1B is counted toward GDP.

    The $1B is still counted toward GDP even if Bob outsources $500M of manufacturing to Vietnam, because as far as the government is concerned, Bob's US company did $1B in business.

    It gets even worse.

    GDP also counts government spending (to keep this simple, we won't discuss government debt). GDP not only counts Bob's $1B in gross revenue, even though only $500M stays in the US, it also counts the government spending of his taxes, even though his tax dollars came from the dollars already counted in the gross revenue!!!

    This is why GDP is the ultimate shell game and is truly an irrelevant number. All the matters is whether economic benefit is increasing or decreasing. GDP does not measure this, which was Gonzalo's point.

    Note - trade balance/deficit may also miss Bob's $500M in expenses sending money to Vietnam, depending on the nature of those expenses.

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  5. GDP stinks as a metric. By it, someone who gets in a car accident while talking on his cell phone on the way to meet a divorce lawyer is a highly productive citizen. (I owe credit to someone for that line, but in my quick googling, I can't find who said it first.)

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  6. But the age of chivalry is gone. That of sophists, economists and calculators has succeeded.
    Edmund Burke

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  7. From wikipedia: "GDP is a measure of a country's overall economic output. It is the market value of all final goods and services made within the borders of a country in a year."

    Michael: Yes, an alternative way to measure GDP is by summing all spending (expenditures) within borders MINUS import spending. You forgot about that part; when it comes back in the country it is subtracted off.

    Any way of measuring it has to be consistent with the above definition. Any freshman who's not failing macroeconomics can tell you that. Apparently, Gonzalo can't even correctly write about the most basic economic principles.

    Panzerdude, you forgot to subtract imports too. Also, regular taxes don't count as part of GDP in the income approach to calculating it. Your jumping between the income approach and the spending approach in the same sentence. When the government spends that is included in the spending approach. When the government taxes that is not included in income approach since it is just a transfer of income as you state. Take a look at wikipedia or any basic macroeconomic textbook before you comment again...you're just misinforming people and we already have enough of that in this world.

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  8. Anonymous,

    From the very same website you failed to read:

    "GDP = private consumption + gross investment + government spending + (exports − imports), or GDP = C+Inv+G+(Ex-i).

    http://en.wikipedia.org/wiki/Gross_domestic_product

    My example was a simple 1 company contribution to GDP and stated the company's $500M to Vietnam MAY not be included in trade balance depending on the nature of the expenditures, because purchasing items/services doesn't not always make to GDP.

    Also, as you can see from your "quoted website" government spending is included in GDP, which makes my point; the government counts the same dollars twice.

    Having taken college economics I am very familiar with these terms and will be happy to start laying out formulas, curves and other non-necessary information, which does nothing to address the logic of this discussion

    GDP is a farce, if only because the government can increase GDP simply by spending money it doesn't have and count "real" money twice.

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  9. Let me put it this way if I may......

    If your chef is grilling a bone in rib eye a la BĂ©arnaise, GDP good... If your wife is mixing Hamburger Helper with dog food, GDP bad.....

    Those who state that Gonzalo doesn't know anything about economics are absolutely correct..... Stay that way Gonzalo, trust me on this one.... Economics is the art of Kissing Ass and self importance.

    Ciao,

    Econolicious

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  10. Unfortunately, GDP, for all its faults, is still a principal barometer employed by the Government and their propaganda mouthpiece, MSM, to befuddle the American people. Stock market performance is another. Without such gross and unprecedented government intervention, both metrics would be more telling of the dire straits we, the Western World, are in.

    These empty "single numbers," are illusions -- smoke and mirrors -- as everyone here knows.

    This said, is there really a viable option to continued hoodwinking? As I see it, Washington can either self-immolate by being truthful (the economy would collapse now), or continue fighting with the firewall of lies (the economy will collapse, but not yet).

    Either way, 'tis a sorry sight: we're burnt toast. Prognosis: 18-24 months unless we muster the political stomach for a trade war with China.

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  11. Gonzalo,

    Si el Producto Bruto no mide nada, en que se diferencia EEUU de Chile?

    Yo diria que el vino chileno es mejor. Me seguis la logica o te perdiste?

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  12. Panzerlude, Michael, and Gonzalo,

    Since it is not immediately obvious to you that if some production is moved from the U.S. to a foreign country, that the measure of production in the U.S. goes down rather than up, I'll use some of the specific numbers brought up in your above examples to help you over your mental challenge.

    Bob owns a company in the US which does $1B in business. The cost of production in the U.S. is $700M. In this situation, Bob's business adds $1B to GDP. $1B of value was in FINAL goods produced in U.S. By spending approach, $1B was spent in U.S. on final goods. By income, Bob's income was $300M, the other $700M was received by workers and material suppliers at the factory.

    If Bob outsources production to Vietnam since he can do it for cheaper there say $500M cost off the boat at U.S. port, then Bob's company only adds $500M to GDP ($1B sales price minus $500M import cost). Bob's income goes up by $200M (from $300M to $500M) for his sales and support services (that's why he does it) and U.S. worker and material supplier incomes decline by $700M for a net overall loss of $500M to incomes within U.S. borders, which is the same as the decrease in U.S. GDP.

    It's really not that hard.

    And no Panzerdude, the government tax dollar has not been spent twice. When the government builds roads or spends money on the military, that adds to GDP. I don't know about you, but when I pay the government taxes I never got to spend that money first...I send it to the governement and then they spend it.

    Go back to you college economics book, and you'll figure it out. Like I said, it's really not that difficult.

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  13. Good point...and it illustrates the short-sightedness [ by accident/design ] of the voters for the last years.

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  14. The US debt was 11,909,829,003,511.75 on 9-30-2009 which was the last day of the preceding fiscal year. This is according to a US Treasury website.

    On 9-30-2010 the total debt had risen to 13,561,623,030,891.79 which is almost an increase of almost 1.662 trillion dollars.

    The US GDP is about 14.250 trillion dollars but that includes government spending.

    If you took out the 1.662 trillion dollars of federal government spending financed by borrowing, our real GDP would be 14.250 dollars minus 1.662 trillion dollars or 12.598 trillion dollars.

    We are actually in a period of a great contraction of the real economy but an expansion of the paper money economy goes on. You can verify these figures at that US Treasury website here:
    http://www.treasurydirect.gov/NP/BPDLogin?application=np

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  15. Anonymous,

    You said,

    "I don't know about you, but when I pay the government taxes I never got to spend that money first...I send it to the governement and then they spend it."

    As you seem to realize, the money the government has came from you.

    What you don't seem to get is that the government's money came from you. In the example I gave, Bob's company revenue (even with your analysis of $500M) of $500M was counted toward GDP!!! Then he pays taxes out of the $500M (reducing his spendable income) which the government spends on roads. That's counting the money twice toward GDP. Once in Bob's business contribution and once in his taxes from the same money.

    I've seen this over and over, where economically illiterate people assume government spending is the same as private sector spending. Its not. Government spending is money taken from its citizens. Whenever that money is taken from companies, the money is counted twice for GDP purposes.

    Someone else mentioned GPD is still the measure we use. The reason its the measure we use is because it is the measure that allows politicians to spend money and make it looks like its helping the economy.

    The fact we allow our government to use bogus numbers to tell us how we're doing is why we've gotten into the mess we're in. Debt going through the roof, but hey, GDP is up....

    We get what we deserve in the end...

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  16. GDP means absolutely nothing. Let me prove it.

    You have two countries, A and B, and each produces 1 unit of X every year. However, A destroys each unit of X it produces, while B accumulates it. The GDP of each country is 1, yet at the end of 5 years, B is 5 times more wealthy than A. According to GDP, though, both countries are equally wealthy.

    If you want to make it more specific: suppose you had an economic policy that, to pick a title out of a hat, we'll call "Cash for Clunkers" . . .

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  17. Perhaps there is some actual, real, legal recourse.


    From chinkinthearmor.net:


    Here’s what you do and here is a reasonable expectation of what could happen:

    1) Mail a form letter in accordance with 15 USC sec. 1641(f)(2) (which is part of the Truth in Lending Act(TILA)) requesting the chain of title information to the note and Deed of Trust which, by Federal law, the lender or servicer must give you. The loan servicer will probably blow you off. The filing is free and even though you can do this part yourself, it is better you have an attorney do this for you. Two reasons: first, and most importantly, the lender or loan servicer is less likely to blow off a letter from an attorney requesting this chain of title information than he is a letter from you and second, the attorney can craft a series of interrogatories in a discovery request which you probably cannot. These two letters should cost you between $250 & $500. For all those DIY types who want to get in there and roll up your sleeves, this is the only step in this process you can possibly think about attempting yourself. It does not involve the courts but it is a big step towards the courts.


    2) When you are blown off, have your attorney sue the servicing agent & lender to prove this chain of title.


    3) Send your monthly mortgage payment to the court in an interpleader arrangement. That way, the other side cannot move for default or foreclosure during the process you are all about to endure.


    4) At trial, if the defendants prove to the court’s satisfaction they are indeed able to prove chain of title information, the court will release all back payments to the other side and you should continue with your obligation as before.



    5) If, at trial, the defendants are unable to prove chain of title, have your lawyer move for quiet title in your name and ask the judge to order all the money you have set aside be returned to you.



    6) If you are really ballsy, request the return of every mortgage payment made during the period where the title is clouded.



    7) Assuming all of the above and you are granted your order, you will end up with clear title to your house, no more mortgage payments and and windfall of cash you can do with as you please.

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  18. I'm pretty sure this must have been one of the things which inspired this post.

    http://www.happyplanetindex.org/

    http://www.happyplanetindex.org/public-data/files/happy-planet-index-2-0.pdf

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  19. poor smart bastardOctober 18, 2010 at 2:43 AM

    how can u guys say that money spent by the government is counted twice?

    y=c+g+i+x-m its that simple. like was said before, " when i pay taxes, i dont get to spend my money first"

    guys, lets not get crazy on the conspiracy theories. Deficits are indeed not included in gdp. u can increase gdp by increasing deficit. its the aforementioned "creidt card trick"

    and the outsourcing thing is also wrong. Anonymous is right, the outsourcing does not add to gdp, it subtracts, like it ought.

    u will find that the solution to the contradiction of america's dwindling industrial base yet rampant, resilient prosperity is due to two "creidt card effects" the fiscal deficit, and the trade deficit.

    but the these tricks wont last forever. the world will eventually sour of accepting US IOU's.

    America is, in the near future (10 to 15 years) facing a downfall in gdp equal to the sum of both deficits, which are unsustainable. about 20% of gdp or something, i'm not looking it up, its late.

    ps: gdp is imperfect, it does not take into account deficits, and it does not take into account accumulation of wealth (infrastucture and so on). but isnce this stuff is destroyed/renewed at a near constant rate worldwide, we can assume this effect to be negliglible. Thats why gdp goes up in wartime, even though weapons don't feed any babies, or amuse me at the movies...

    pps: Gonzalo, u don't know anything about economics.. I myself have only a degree in it, and i barely remember what was lectured, but i can still poke gaping holes in your well writen, amuzing posts. get another hobby, dude.

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