Why GDP doesn’t matter

Geoffrey Lawrence

Frank Shostak has a great and easily comprehensible article up at the Mises Institute today, aptly titled, “The Depression is Not Over.” The article explains why positive GDP growth in the third and fourth quarters of 2009 means absolutely nothing in terms of economic fundamentals.

There are several major problems with GDP as a metric that should also be considered when reading this article. First, as an aggregate number, analyses of GDP completely overlook the composition of economic activity. This oversight is what allows Keynesians (and monetarists) to arrive at their faulty conclusions. Monetary easing can boost the GDP measure but further deteriorate economic fundamentals by channeling available savings toward the same malinvestments that caused recession in the first place. Indeed, this is Shostak’s point.

Aggregate numbers such as GDP also distort the dynamics involved in individual market transactions because they rely on uniform price values for similar goods despite the fact that every good possesses a different value to every individual. Hence, wealth-increasing aspects of exchange such as “consumer and producer surplus” (the difference between the value that a buyer or seller, respectively, places on a good and the price at which it is sold) are overlooked. At the same time, the full cost of delivering government services (which may be of no value to anyone) is counted in GDP. In other words, taking money (or credit) out of the private sector in order to create an entirely new government agency (let’s call it the “National Recovery Administration” or, for the more adventurous, “General Motors”) might contribute to GDP growth, but this action would also cause a decline in living standards because those resources would not be allocated to their highest-value use.

Hence, government can artificially boost GDP through monetary easing and fiscal “stimulus” and, at the same time, deteriorate the value of economic output.

Indeed, this is what has likely happened over the last year.

Geoffrey Lawrence

Geoffrey Lawrence

Director of Research

Geoffrey Lawrence is director of research at Nevada Policy.

Lawrence has broad experience as a financial executive in the public and private sectors and as a think tank analyst. Lawrence has been Chief Financial Officer of several growth-stage and publicly traded manufacturing companies and managed all financial reporting, internal control, and external compliance efforts with regulatory agencies including the U.S. Securities and Exchange Commission.  Lawrence has also served as the senior appointee to the Nevada State Controller’s Office, where he oversaw the state’s external financial reporting, covering nearly $10 billion in annual transactions. During each year of Lawrence’s tenure, the state received the Certificate of Achievement for Excellence in Financial Reporting Award from the Government Finance Officers’ Association.

From 2008 to 2014, Lawrence was director of research and legislative affairs at Nevada Policy and helped the institute develop its platform of ideas to advance and defend a free society.  Lawrence has also written for the Cato Institute and the Heritage Foundation, with particular expertise in state budgets and labor economics.  He was delighted at the opportunity to return to Nevada Policy in 2022 while concurrently serving as research director at the Reason Foundation.

Lawrence holds an M.A. in international economics from American University in Washington, D.C., an M.S. and a B.S. in accounting from Western Governors University, and a B.A. in international relations from the University of North Carolina at Pembroke.  He lives in Las Vegas with his beautiful wife, Jenna, and their two kids, Carson Hayek and Sage Aynne.