July 31, 2003

Stephen Moore and Phil Kerpen talk some uncommon good sense about a deeply dishonest term of art intentionally used by economists to bamboozle the public -- and themselves -- "Gross Domestic Product":

The headline number of 2.4 percent growth — immediately applauded throughout the media as strong — is about double the real rate that the private economy grew. While the private economy grew near a 1.3 percent rate, the federal government component of GDP increased by a staggering 25 percent, the largest quarterly increase in more than three decades. The increase was due almost entirely to the high cost of the war in Iraq.

The important word there is “cost.” Wars are a cost not an asset. You fight wars because you have to — because there are bad people in the world. But to suggest that the war was good for the economy would be as dimwitted as to suggest that Saddam Hussein deserves a medal of honor for helping revive the U.S. economy ...

And a modest proposal:

The conventional GDP numbers should be replaced with private-sector GDP. Private-sector GDP would omit government spending from the calculations. This would allow us to measure how much the market-based economy is expanding over time. By excluding government spending, no longer would economists and policy makers automatically assume the Keynesian theory that increasing government spending increases economic output.

Let’s measure GDP correctly. Activities that add to wealth should be included; expenditures that reduce wealth excluded. Sorry to say that when we calculate economic growth correctly, our performance is still underwhelming. We would make the case that the single most productive thing that Congress could do to revive prosperity and jobs would be to cut government spending by as much as possible. By all means, bring a chain saw.

But this advice is exactly the exactly the opposite of what the GDP calculators would tell us to do. The New York Times just published a front-page story arguing that the reduction in state and local government spending this year is having a contractionary effect on the U.S. economy. Here we have the perfect example of how statistics lie, and liars figure.

Posted by Greg Ransom