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| source: mises.org |
Many of us took a course or two, perhaps more, of Economics as undergraduates. Everything taught in those foundational courses is known as Keynesian Economics, and as students we are led to believe that it's the only proper way to understand economic phenomenon. One of the things we learned about is something called "Gross Domestic Product". This number attempts to measure how much the economy has produced over a given period of time, usually on an annual basis. The media, politicians, authors, and various television "experts", constantly discuss how vital it is for the GDP to increase in order for the nation to be prosperous and avoid disaster. On any given day, the media will have extensive coverage of Congress and it's actions in regards to the government's budget, the decisions made at the Federal Reserve, and a mention will be made about Wall Street and the Dow Jones Industrial Average. This has convinced entire generations of people that government has a vital role to play in the economy, and without an ever increasing GDP the world will end. However, the truth is something altogether different. The GDP is a tool of politicians and politics, not economics.
We must understand that the economy is made up individuals and businesses making decisions that will affect their daily lives. Government has very little to do with the economy on a daily basis. Government imposes taxes, laws, and regulations that can certainly affect people's lives, but these things do not make economic choices. People make economic choices. People can decide to buy a used vehicle instead of a brand new vehicle, or they can buy a house, or they can decide to spend their money on illegal activities: drugs, gambling, etc. In a free society, people are allowed to spend their money as they see fit. And it should not be a surprise to anyone that when allowed to make choices most people will usually make good economic choices.
Most everyone is probably asking: how is all of this connected, and what does it have to do with anything? GDP fails to account for several very important factors. First, illegal activities are not taken into account. In the US, hundreds of billions of dollars worth of illegal drugs are bought and sold every year, but these activities are not measured. Second, the market for used goods is ignored. In 2016, 41 million used cars and trucks were sold in the US, at an average price of $19,227. This comes to roughly $788 Billion worth of sales just in the used car industry, and none of it is considered part of GDP. Last, and most importantly, GDP fails to accurately account for the change in the value of money, also know as Inflation. Inflation can raise or lower prices, having a significant impact on how GDP will be measured. The Bureau of Economic Analysis is responsible for measuring GDP in the US, yet they depend on the Federal Reserve to provide information in regards to inflation. The Federal Reserve has many detractors that argue it's models and ideas are outdated, some of those detractors are found within the Federal Reserve itself.
I have mentioned this before, inflation is the giant monster hiding in the basement that nobody wants to acknowledge. To quote the great economist Ludwig Von Mises, "The great inflations of our age are not acts of God. They are man made or, to say it bluntly, government made. They are the off shoots of doctrines that ascribe to governments the magic power of creating wealth out of nothing and making people happy by raising the "national income".
Let's replace the term "national income" with something used in current society: GDP. Congress and the Federal Reserve have to simply push more money and credit into the marketplace, by either borrowing trillions of dollars as does Congress or by the various creative tricks employed by the Federal Reserve. In either case, they are creating wealth out of nothing, and it appears as if the economy is strong and growing. Politicians can then make televisions appearances and make grand proclamations at election time. |
| The Lying Politician |
There is an important question which nobody wants to ask. If the GDP is measuring the output of the economy, and a positive number indicates the economy is growing, why hasn't everyone gotten wealthier? If the nation is getting wealthier, as indicated by GDP, why does Congress feel the need to continue a "War on Poverty" that began during the 1960's, has cost trillions of taxpayer dollars, and has no end in sight? For the simple reason that government can not create wealth, government can only create inflation. People create wealth by making good economic choices. A government handout may help some folks pay bills just to get by, but ultimately it is up to the individual to build their own wealth by making good choices in life. Any person, regardless of their income level, has the ability to save and spend wisely, and to make other choices in life that will decide the outcome of their lives.
https://mises.org/library/gdp-tool-politics-not-economics
https://www.businessinsider.com/where-drug-money-goes-2016-3
https://www.cnbc.com/2016/12/05/used-vehicle-sales-look-set-to-hit-all-time-high.html
https://files.stlouisfed.org/files/htdocs/publications/review/11/07/bullard.pdf
https://thetruthstillmatters.blogspot.com/2017/01/the-economy-is-still-sluggish.html