Fiscal Spending - The Steroids of GDP

Last week, first quarter GDP numbers came out—they weren’t pretty: GDP grew at a pace of 1.8% per year, during January through March. These figures are supposed to be adjusted for inflation. But if you think as I do that the Bureau of Labor Statistics is off in its inflation estimates, then at this pace, the American economy is probably contracting.

Body-builder, after a round of Keynesian steroids— I mean, “stimulus”.

Apropos of the announcement, Brad DeLong said, “Contractionary fiscal policy is contractionary.” Andrew Leonard at Salon added, “When you cut government spending in a slack economy, you practically guarantee a slowdown.”

DeLong and Leonard presuppose several things by these statements. One, of course, is that there have actually been cuts in government spending. Two, that the GDP number would have been better if there had simply been more government spending—so therefore, anyone opposed to increasing government spending is also against increasing the GDP.

But the third assumption they make is the assumption I’m interested in discussing: The notion that the GDP number is something we always want growing. The notion that a positively growing GDP number is always and with absolute certainty the thing we want most, as a society.

First off, let’s put away DeLong and Leonard:

Government spending has increased—drastically—at all levels of American government—under any and every metric you’d care to name over the last year. After all, there is a reason the Federal deficit has ballooned to .6 trillion in fiscal year 2011: FY 2009 government spending was .896 trillion. FY 2010 spending dipped to .798 trillion—a fall in billion, roughly 1.6%. (data is here)

But for fiscal year 2011, which started this past October 1? The fiscal year where first quarter GDP figures are firmly nestled? Spending increased to .163 trillion—a bump up over FY 2010 spending of 6.29%.

So according to DeLong and Leonard, a rise in spending of 6.29% is contractionary? Please alert Merriam-Webster—tell them to update their definition of the word “contractionary”.

(Leonard also rather dishonestly claims that “Cutbacks in government spending -- local, state and federal -- shaved 1.09 percent off the growth rate. Plug that spending back in and you've got almost 3.0 percent GDP growth.” Where he gets this figure he leaves unsaid, just as he leaves unsaid that much of the local and State spending cuts were necessary in order to avoid local and State insolvency. Crap like this is why Leonard shouldn’t be taken seriously. (Well, then again, he’s not.))

Second, of course the GDP number would be better had the government spent more—government spending is one of the components of GDP.

Review the definition of “Gross Domestic Product”: The sum of private consumption, gross investment, government spending, and exports minus imports.

DeLong and Leonard and most other Neo-Keynesians implicitly believe that anyone opposed to more government spending is opposed to the growth in the GDP—and anyone who is opposed to the growth in the GDP is necessarily opposed to prosperity in the U.S.A.

This is the fallacy I’m interested in pointing out: The conceit that growth of the GDP is the same thing as national prosperity.

On its face, identifying GDP growth with prosperity seems sensible: After all, as a society, you want a simple measure of whether or not things are going good in the economy.

The problem with this need—and with the worldview that identifies GDP growth with prosperity—is that it uses GDP as the measure of an economy’s health, but without ever examining what the GDP is really measuring.

As per its definition, GDP is merely a measure of spending—nothing more. Spending on what is left undetermined—

—and right away, you can see the problem with measuring the health of an economy by the growth of GDP. Presumably, increased spending on hookers and blow would be a good thing, by the metric of GDP; so long as the hookers didn’t send remittances back to their home countries, and the cocaine was domestic-made, they’d be golden for the GDP.

I’m being facetious, of course—but not by much: The GDP has been turned into a fetish number by economists and—much more troublingly—by the politicians and the electorate, who view it as the be-all-end all.

The mise en place that economists and their discipline have laid for politicians and the general society makes it all but impossible for people to consider economic prosperity by any other metric—all is spending. All is GDP.

But consider this simple real-world hypothetical:

Suppose you earn ,000 a month—but you spend ,500 a month. The extra 0? You get that from your credit card.

Now of course, you can’t go on like this forever: The bill’s gonna come due. After a whole year, you earned ,000—but you spent ,000.

Which means you have ,000 worth of debt—plus interest.

Question: Would you ever claim that you actually earned ,000 a year? No—of course not, that’s absurd.

But that is exactly what economists who kowtow to The Great God of GDP—and the politicians they advise—claim it measures:

They confuse spending with actual wealth—irrespective of how that “wealth” is financed.

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Novelist, Filmmaker, Economic Commentator