Wednesday, 15 April 2009

Schiff explains the GDP delusion [update 2]

There is a delusion stalking economic reasoning that is the cause of more mal-think than any other -- a delusion peddled in nearly every mainstream report you read. Let's call it the GDP Delusion (about which I'll have more to say tomorrow).

The biggest and most destructive myth of the GDP Delusion is this: that consumer spending is "the biggest part of the economy" -- a ridiculous delusion repeated in today's report at Bloomberg on the US economy [hat tip Bernard Hickey] worrying that US retail sales dropped in the last quarter? So?  And that's a problem why, exactly?  In a recession retail sales have to drop -- that's part of the solution, dummy.  Expecting them not to drop, or hoping they don't -- or, worse, throwing taxpayers' money at shopping subsidies to keep them propped up -- that's just one more example of how bad economic thinking, which got us into this unholy mess, is making it ever more difficult for us to get out.

Peter Schiff explains this whole delusion in this short but enlightening video blog.

But there's more.  Given that Bloomberg is dead set mainstream, and that the same Bloomberg report peddles yet another economic fallacy -- that falling producer prices somehow represent a threat, instead of another part of the solution -- then it's no wonder that mainstream economics has little ability to understand what the hell is going on, or what the hell to do about it besides shovelling cash we don't have at a problem they don't understand.

UPDATE 1: You can see the GDP delusion at work in this abjectly ignorant column from National Business Review's Michael Coote calling for "emergency US fiscal stimulus, with Uncle Sam becoming the face of enlarged public consumption" in place of shrinking private consumption -- which amounts to nothing more than idiocy squared.

UPDATE 2:  The GDP fetish is a delusional nonsense: it sees no difference between consumption and production; between productive expenditure and money thrown down the drain; no difference between capital accumulation and eating the seed corn--which means "stimulus" to boost GDP figures is simply money down the drain, or worse.
   In fact all GDP really measures is the growth in the money supply. No wonder countries deep in recession can still pretend to show “positive growth.”  If you want to know more about the whole failed measuring device that is the Gross Domestic Product, check out these pieces on the GDP Delusion in increasing order of thoroughness:


  1. Schiff says that counting what you earn and what you spend is double counting. But in this case, money has being swaped twice and goods and services have also being produced exchanged twice. I don't think it's double counting is it?

  2. My respect for ancient cultures that practice human sacrifice is growing now. With the responses to the perceived economic situation amounting to much the same thing for much the same reason.

    Also, James: money has been swapped twice, and in each case it has been recorded by two people. If you record only what you spend, your earnings are recorded by your employer/clients. If you record only what you earn, your consumption is recorded by everyone you pay.

  3. Hoover caused the great depression and FDR saved American from it. Conventional wisdom.

    Banks, Bush, greed & capitalism caused the current crisis. Conventional wisdom.

    Obama knows exactly what he is doing. The bigger and longer the crisis the more power & govt
    influence he gets.


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