Why GDP doesn’t matter
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.