GDP: Lies, Damned Lies, and Statistics

It is said that there three kinds of things we hear from politicians: lies, damned lies, and statistics. In discussion of the Gross Domestic Product, all three are employed.

WASHINGTON, August 10, 2012 – It is said that there three kinds of things you can expect from politicians, and they all wind up being pretty much the same: lies, damned lies, and statistics.

When it comes to talk of the Gross Domestic Product, all three are employed. They’re not exposed, though, either because of a “great media conspiracy” (possible) or because of a general public that’s ignorant of how these liars can manipulate the truth.

I shall soon have several topics available on this blog. Following a discussion of GDP statistics and their misunderstanding and misuse, I’ll go on to the Consumer Price Index (which the ignorant think is “inflation”) and the jobless rate.

OK – here’s the part we all hate, and therefore ignore: the US GDP is a measure of the total of goods and services “activity” within our borders. It is made up of four broad components: consumer spending, government spending, net investment, and net exports, commonly forming the acronym CGIX.

All these figures are collected and crunched by our government’s bureaucracy, and then “adjusted for inflation” (which is another trick – more on that in another post), and compared to previous periods to determine if GDP is growing or falling. The absolute number is used to compare over longer periods, and across national borders.

A quick note on the older benchmark, GNP, or Gross National Product: this was compiled in the same way, but counted production by US companies, worldwide. As international ownership and labor got too complicated to chart, the more-useful GDP came into favor.

Politicians count on the idea that nobody wants to know what’s going on. Make it complicated; throw economic terms into the discussion, and people’s eyes glaze over; they don’t notice their pockets’ being picked. Since government is in charge of both collecting and reporting these numbers, we can be sure that this number is rock solid. (There’s an LOL in here, somewhere.) Still, the errors are assumed to be consistent, so we swallow GDP numbers as-reported (and adjusted – by government).

So, we have CGIX. Consumer spending (“C”) is pretty easy to understand, so we’ll assume we’ve got it, and we’ll move on.

The “I,” or net Investment (we’ll come back to government spending later) is the amount of money invested in the US from abroad, minus the amount of money Americans invest outside our borders. Our government can encourage swings here (through taxation, proposed or threatened taxation, tariffs, and other law changes). When a tariff gets too high for, say, a Japanese car maker to export to the US, the Japanese invest in a plant here, and raise their prices. That investment raises our GDP (as do the higher prices for their cars). When, for example, environmental or labor regulations get too tricky here and an American builds a factory in Mexico, that’s a reduction in net investment.

Net exports (“X”) are even easier: how much stuff and service we export, versus how much we import. Here, exports add to the GDP. If we sell an airliner to the Chinese, we’re exporting. If we sell an airplane factory to the Chinese, we’re exporting. Of course, when we later buy an airplane from that factory, we’re importing. Exports raise GDP; imports lower it.

Now for the fun: government spending (the “G” in “CGIX”). Government can boost GDP simply by spending more. When any Administration needs to pull out of a recession, all it needs to do is throw money at… anything. Even if that money is borrowed, it will raise the GDP. Even if that money doesn’t go to greater production, but only to cover cost overruns, it will raise GDP. (Yes, GDP is “adjusted for inflation, using the Consumer Price Index as the equalizer; but the government doesn’t buy consumer goods – price hikes in government-only items and services don’t raise the CPI. Presto – no “inflation” for which to adjust!)

Government spending is usually within broad trends, as a percent of this whole GDP thing, but since 2008, it has escalated at a faster rate than consumer spending has slowed. An extra trillion dollars of deficit each year is hard to miss.

When it’s just a matter of the “tipping point” whether we’re in a recession (continuously declining or flat GDP) or recovery (any uptick that breaks the pattern), a few trillion dollars here or there can make the difference.

What I’m saying is what everybody outside the beltway feels: the “recovery” is an illusion. The statistics are right – the combination of CGIX (GDP) may indeed be rising – but we don’t see things getting better.

We’re the patient with terrible pain that the doctor can’t diagnose. If his instruments and tests don’t show the cause of the pain, then we’re obviously not in pain.

That’ll be $6000. Thanks, doc.


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Tim Kern

Tim Kern taught economics for fifteen years, and discovered that understanding life is easy; it’s recognizing reality that takes practice. He holds a music degree, and later earned an MBA in finance from Northwestern University. He has lived across the US, and now makes his home in Anderson, Indiana.

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