Perhaps the most painful aspect about reading (or watching) debates about economic policy is that everyone cites government economic data that are completely unsuited and useless for the purpose cited. I'm not talking here about obscure data; I'm talking about the main and most widely cited and used data, about which the ignorance of just about everyone is appalling.
In fact I assert that the principal government economic data are uniformly fraudulent. And not in little ways; rather, in fundamental ways that go to the heart of how the data are designed to be used and how they are used. Now, I am not accusing the United States government of systematically falsifying or putting out inaccurate data, the way, for example, Argentina puts out inflation data that everyone knows are completely made up. But what our government does is just as bad or worse. Our government issues data in categories that are defined in ways to that are designed to and do deceive the people. And the deception is always of the same sort, namely, making bigger government appear more desirable in order to achieve the support of the people for that end.
This proposition is decidedly true with respect to the three categories of economic data that are the most important in terms of their use in the argument over economic policy. Those categories are: (1) GDP, (2) the rate of poverty, and (3) the cost of obligations to retirees for pensions and health care.
Today I will start with GDP, the principal measure of the overall size of the economy, and of whether the economy is growing or shrinking and by how much. There is a fundamental problem with the compilation of GDP data, which is that government spending on goods, services and salaries is added into GDP dollar for dollar. This fact makes the GDP data completely useless in a debate over whether government spending should be increased or cut. Of course, that is the principal use to which GDP data are generally put.
The portion of the GDP that comes from the private economy is based on the assumption that voluntariness and markets mean that transactions of equal dollar value should be given equal weight. That assumption does not apply to government spending. How should the value of government spending be measured? The assumption used is that a dollar of government spending gets added to GDP as if it were completely equal to a dollar of private spending. When the government was a small percentage of the economy, and the government thought that thrift was a virtue, this assumption may have been as good as any other.
But as soon as you count every dollar of government spending at full value, you can immediately see that pure wasted spending counts to "increase" GDP just as much as the very most necessary expenditure. Suppose you pay someone to dig holes and fill them in (an example actually extensively discussed in Keynes' General Theory). At the end of a year he has produced exactly nothing -- but the GDP numbers add in an amount equal to whatever the government paid him. If the government pays every one of 300 million Americans $50,000 each to dig holes and fill them in all year, they have produced absolutely nothing by the end of the year, and the government records a GDP of $15 trillion. If the government doubles everyone's salary to $100,000, then it just doubled the GDP to $30 trillion, even though they are all starving (because they were too busy digging holes to produce any food).
These are extreme examples, but we live in a time when the acceptance of the GDP numbers as measuring real changes in the economy is so great that the government can completely just pass out hundreds of billions of dollars of totally wasted spending to its friends, cronies and supporters, and count that as a dollar for dollar increase in GDP. Yes, I am talking about the so-called "stimulus." And they get virtually no push-back from the media, including most of the conservative media. And the "stimulus" is just a small part of it. How about "green" energy spending, specifically designed and intended to impoverish the people by preventing them from using cheaper energy and driving up the cost of electricity and driving. Yes, that kind of destructive spending also is measured as increasing GDP dollar for dollar.
And of course, it works the same way when there is any proposal to cut spending. Under GDP accounting, cuts in government spending, no matter how wasteful that spending, are recorded as reducing GDP dollar for dollar. Thus here we have President Obama a few days ago opposing the upcoming spending cuts:
"Our top priority must be to do everything we can to grow the economy and create good, middle-class jobs," Obama said during remarks at the White House, standing alongside a group of emergency responders. "That's why it's so troubling that just 10 days from now, Congress might allow a series of automatic, severe budget cuts to take place that will do the exact opposite."
Thus, you can't ever cut any government spending, because that will shrink the economy. Under this logic, we just head inexorably for a world where the economy is 100% government. North Korea!
Over the next couple of days I'll consider poverty and pension accounting.