When GDP is a Scam

Look, just… think about this for a moment. How does a group in which 65% are unemployed and can’t speak the language add anything to the economy?

You could do some sleight of hand where a few very productive workers, a random billionaire like Carlos Slim or Steve Jobs, get lumped in with a bunch of people they have nothing to do with on the grounds that they are all “Syrian,” and come up with numbers like this, but that would be a sleight of hand. It’s deceptive, and it’s obviously lumping together completely disparate groups in order to make one group look much better than it is.

How to tell if someone is lying to you with GDP:

  1. Consider splitting the population in two. Say, Germans and non-Germans. Would GDP for one group go down?If yes, then you’re being lied to. Simply “growing” the GDP by drawing a bigger circle on the map and adding up the GDP inside of it doesn’t mean the people inside the circle have more money. It just means you drew a bigger circle.
  2. Is this GDP “growth” entirely due to government spending to deal with the problems brought by the newcomers, like funding schools to teach them German?If yes, then it is not real spending. Everyone who was already in Germany was just taxed to provide service to non-Germans. You could do that without anyone immigrating to Germany.
  3.  

    Does this “growth” translate into a higher standard of living or happiness for the average or median German?

    If not, you are being lied to.

  4.  

    If you could magically replace every one of those migrants with a German of the same age and sex, would GDP go up or down?
    If Up, then these migrants are a bad investment.

  5. If these immigrants are so great for the German economy, why were they so bad for their home economies?

Let’s summarize these varieties of “GDP” abuse: 1. Not looking at Per Capita, 2. “Growth” that doesn’t help the locals, 3. Growth that goes to elites, 4. Opportunity cost, 5. Not making any sense.

GDP is one way to measure the economy, but it isn’t the only way–and it certainly isn’t the only thing that matters.

Let us consider the simplest possible economy:

Joe and Bob are sailors who have been marooned on a desert island. They have plenty of fish to eat and two coconuts, which they use as currency. When Joe wants something from Bob, he pays him one Coconut. When Bob wants something from Joe, he pays him one Coconut.

Bob and Joe are also economists, so they keep track of their local GDP, tallying up every Coconut exchange. After two months, they have a robust GDP of 4,000 Coconuts per month–and then the coconuts sprout. For the next two months, Bob and Joe abandon the Coconut and just do favors for each other. The economy crashes. The island has a GDP of 0 Coconuts–but oddly, Bob and Joe are doing just as well and eating just as much fish as before.

You might be objecting that the Coconut Economy is a bit contrived, but it is relevant to our real world.

Over in our economy, if I hire a maid to vacuum my carpet, this is “economic activity” and it counts toward the GDP–but If I vacuum it myself, it doesn’t count. If I am hired as a nanny to take care of someone else’s children, this is “economic activity,” but if I take care of my own children, it doesn’t count. Even hiring a prostitute is “economic activity” as far as GDP is concerned, but having sex for free is not.

It is easy to see how something like “women entering the workforce” might generate a substantial GDP boost–while not actually changing anything but the location where particular jobs are done. There is no more economic value to vacuuming my carpet or yours. It’s all carpet.

There are plenty of non-economic arguments relevant here. I might be happier hiring someone to vacuum my carpet so I can spend my time on other activities, or I might be happier tidying up my own home to get everything just the way I like it. I might provide more nurturing childcare to my own children, or a professional might be able to invest in expensive toys and games that can be enjoyed by the many children in their care. People may enjoy consensual sex with their spouses more than with prostitutes–or may hate people and just want to visit the occasional prostitute. Etc.

All of these nuances of life are missed in any simple argument about GDP.

Any argument that hinges solely on what immigrants add (or subtract) from GDP is misguided because ultimately, people don’t exist to make economies better–economies exist to make people better.

Would you try to “improve” the lives of the Amish by inviting a bunch of Silicon Valley executives to settle in their area and boost GDP?

Of course not. It wouldn’t even be a meaningful exercise–the Amish are perfectly happy the way they are. Different people want different things in life. Sometimes that’s more money. Sometimes it’s community, free time, health, or nature. The Silicon Valley folks wouldn’t be too happy having to deal with the Amish, either.

About 30 years ago, economists-on-TV and pundits became convinced that the key to the economy was “spending” and therefore we had to convince people to spend more. Tracking things like “how much people spend on Christmas shopping” became an annual theme.

Of course, spending comes at a cost (future saving), and future saving comes at a cost (current consumption).

Here is a good article on why GDP and CPI are Broken:

Imagine China is implementing a mercantilist policy. An American spends cash to buy goods exported from China. The Chinese recycle the money earned from exporting goods to America into buying mortgage backed securities. The American takes out a big mortgage to buy a house, mortgage bought by the Chinese. The American is effectively borrowing from the Chinese in order to fund current consumption. The net result is that America is a net seller of home equity and in return has recieved goods. The price of homes will be pushed up. In the GDP statistics this will actually show up as economic growth (since the cheap Chinese goods will push down the GDP deflator). But in reality, there has been no growth, the U.S. is simply selling off its own wealth and getting poorer.

Of course, this is what is actually happening.

Meanwhile:

The GDP numbers do not include depreciation. So if existing infrastructure is crumbling faster than it gets replaced, GDP might show the country as actually growing while in reality things are falling apart.

If the entire city of Detroit gets destroyed in riots, fires, crime waves, and ethnic cleansing, and is left in ruins, this catastrophe not show up in GDP numbers. In fact, GDP might actually increase since the destruction would spur the creation of new housing (which does show up in the numbers) and the average home price might actually fall (reducing the GDP deflator) due to violence making the neighborhoods unlivable.

GDP for GDP’s sake is burning houses down just so you can rebuild them–or importing foreigners just so you can spend money to teach them to speak your language.

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5 thoughts on “When GDP is a Scam

  1. “Yet the gross national product does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile. And it can tell us everything about America except why we are proud that we are Americans.” – Bobby Kennedy

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  2. GDP is a classic case of Goodhart’s Law – when a measure becomes a target, it stops being a good measure. If no one would try to specifically “boost” GDP it could be a good if simple rule of thumb about how things are going in a country compared to others – after all if you rank all countries by GDP and by how much you would like to live there, you will still see a 80% correlation. But when they are trying to boost it, this happens. Exactly as you said.

    GDP is basically like income. It is flows, not stocks. And of course if all other things are equal a higher income is a good thing, who turns down a raise? But if my income is 10% higher but the houses in my dream neighborhood are 40% more expensive, and both was caused by the same thing, then that thing is obviously bad for me. GDP boosting is pretty much like printing money, pretty much like inflation. It is a scam for screwing over the dumb.

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