GDP just a fuzzy economic measurement

John Mauldin July 23, 2014 15:26

The mainstream media regularly releases gross domestic product (GDP) numbers with the implicit assumption that they are in fact an accurate reflection of the general economy.

But GDP is actually a fuzzy reflection of the economy, derived from a model that is continually readjusted in a well-intentioned effort to understand the scope of the economy.

Also, GDP has always been a political construction, subject to the ebb and flow of the intellectual and political climate, the need to raise taxes, and the military needs of the day. It is also a tool used to argue for or against income inequality.

It should not surprise readers that every few years new rules are created on how to measure GDP. British statisticians just this year declared the UK economy to be 5 percent bigger than previously thought. What brought about this magical boost in productivity? There was no discovery of buried treasure hidden away in the vaults of the Bank of England. Instead, statisticians turned to counting the economic contribution of prostitution and illegal drugs. If you are borrowing money and your creditworthiness depends on cash flow and your debt-to-GDP ratio, you tend to look for sources of income that weren’t previously accounted for.

Did the size of the US economy increase by 3 percent last summer? According to the statisticians it did. They decided to include music and entertainment and make adjustments to how we deal with investments. These changes were then calculated for all previous years, and suddenly the economy was 3 percent bigger! Small positive annual changes can add up over 40 years.

The writer is an author, a commentator and publisher of the Thoughts from the Frontline newsletter.

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CG

John Mauldin

A noted financial expert, a New York Times best-selling author, an online commentator, and the publisher of investment newsletter Thoughts from the Frontline