GDP is a False Prophet - Outside View by John Tamny

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

GDP is a False Prophet
Oct 29, 2011

Nobel Laureate Robert Mundell long ago observed that the only closed economy is the world economy. As such, U.S. production (think the globalized manufacture of Apple's iPad, or Boeing's 787 Dreamliner) is a function of it ties to economic activity occurring around the world. GDP presumes a countries economy in isolation as well as uniformity between economies.

Worse, what often drives GDP up is far from something that would be considered economically stimulative. Indeed, government measures of inflation are notoriously slow to pick up on the horrors of dollar devaluation. Yet when devaluation leads to higher prices, GDP increases.

Government spending - which has no resources that it hasn't first extracted from the private sector - also boosts GDP, and then if imports to the U.S. decline (a flashing negative economic signal if there ever was one), this actually registers as growth in the calculation of this most worthless of measures of our economic health.

It's time to abolish GDP because its existence as the accepted measure of economic activity means that we cannot achieve the necessary reforms that would really allow our economy to grow. With so much of our economy directed towards work of little to no economic value, but which ultimately factors into the GDP calculation, we're restrained from doing what we need to do to truly advance ourselves.

First up is regulation. As even President Obama acknowledges, regulation frequently serves as a barrier to productivity. We'll see if he's ever willing to back up his rhetoric with action (signing the REINs Act would be a big step), but for now regulations serve as a massive hurdle to businesses seeking profits for their shareholders by virtue of giving their customers what they want, along with things they didn't know they want, but now can't live without - think Google, Facebook and just about anything Apple produces.

Of course if there occurs a massive regulatory overhaul based on the correct kind of analysis which will show regulations merely inhibit profitable activity at best, and frequently miss corrupt actions at worst (Madoff), many in the U.S. whose livelihood is dependent on either regulating what they cannot, or helping businesses deal with regulators, will find themselves out of work. Their unemployment will in the near-term show up in reduced GDP, but the end result will be undeniably positive.

Looking at the estate tax alone, it discourages the very saving that authors our economic advancement, but its existence is a windfall for the myriad estate planners and attorneys in possession of the skills necessary to help those with estates to avoid the tax. Abolishing the death tax would be a major boon for economic growth for it releasing those reliant on it into worthwhile professions, but for a time their adjustment would detract from GDP "growth."

Considering the floating dollar itself, the utter chaos caused by the latter has created whole industries meant to soften the blow of a dollar without definition. The currency market alone is a $3 trillion per day exchange as myriad great minds are forced into facilitator roles as traders of needless uncertainty, as opposed to producers. We'd have to invent hedge funds if they didn't exist, but their growing footprint can to a high degree be laid at the door of President Nixon's fateful 1971 decision to sever the dollar's link to gold.

Banks and investment banks on their own have growing compliance staffs in place to deal with all of the rules foisted on them. Abolishment of what won't work in the form of Dodd-Frank, not to mention the stabilization of the dollar such that it becomes the proverbial foot would release countless agile minds from facilitator roles, some who will cure cancer, some who will create the next Microsoft, and some who will render the hell that is commercial air travel to the dustbin of history through making private travel as common as cellphones.

But to achieve the above, there would have to be a "recession" that would drive down GDP early on, but boost it in staggering ways long-term. In a nation brimming with talent, too many of our best and brightest are serving as facilitators to the detriment of real economic growth.

Lastly, a powerful reduction in government spending would surely bring down GDP substantially. Governments can only create jobs and economic activity to the extent that they take from the private sector, so major spending cuts at first would bring great pain to sectors of the economy in and out of government, but wholly reliant on government largesse.

All of the above is true, but then it's also true that government spending is almost tautologically about capital destruction, as opposed to wealth creation. If this is doubted, ask yourself if any company in the private sector could ever remain in business if it had lost money for decades, with decades more of losses ahead?

But assuming serious downsizing of the government, workers and the capital destroyed to keep them employed would quickly find other, market-driven uses in the private sector. Government spending presently looms large when it comes to boosting GDP, true austerity would as a result reduce nominal GDP substantially up front such that dim economists would scream "recession", but the long-term and economy-soaring result of such a move would be profoundly good for us all.

The problem now is that so worshipful and fearful of GDP are economists and politicians that reducing regulations in a credible way, stabilizing the dollar and slashing the burden that is government is a distant object to many. It is at least partially because GDP remains the benchmark for our economic health. Let's abolish it so that we can start growing again.

This article is sourced from Whiskey & Gunpowder, a Agora Financial company, one of the most credible source for insights on US and World economy.

John Tamny is editor of RealClearMarkets and Forbes Opinions, a senior economic adviser to H.C. Wainwright Economics, and a senior economic adviser to Toreador Research and Trading

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Equitymaster requests your view! Post a comment on "GDP is a False Prophet". Click here!

  

More Views on News

Inflation & Your Investments (Fast Profits Daily)

Mar 4, 2021

Inflation is the buzz word in the world of finance these days. It impacts all of us. Here's how it affects your investments.

What India's Positive GDP Reading Means for Your Equity Mutual Fund Investments (Outside View)

Mar 4, 2021

Given the risks involved, we may witness a sort of 'W-shaped' recovery wherein we would dip again before moving up, explains Rounaq Neroy in this edition of the Daily Wealth Letter.

I'm Back to Where It All Started (Profit Hunter)

Mar 4, 2021

Join us in welcoming research analyst, Aditya Vora, to Equitymaster.

Dollar at 80? (Fast Profits Daily)

Mar 3, 2021

Can the rupee depreciate to 80 against the US dollar? In this video, I'll show you what the charts say.

Motilal Oswal Asset Allocation Passive Fund of Fund: Aims to Benefit from Investing in Multi-Asset Passive Funds (Outside View)

Mar 3, 2021

PersonalFN analyses the features of Motilal Oswal Asset Allocation Passive Fund of Fund and explains the potential this fund has to offer to its investors.

More Views on News

Most Popular

It's the Beginning of a New Bull Phase in Smallcaps (Profit Hunter)

Feb 24, 2021

Last time the smallcap index crossed 19k a big correction followed. Here's what makes it different this time.

Make Rs 5,000 Per Day Trading the Market (Fast Profits Daily)

Feb 25, 2021

In this video, I'll show you how to get started on the path to daily trading profits.

I Believe the Investment of the Year Will Be...

Feb 19, 2021

In this episode, ace trader Brijesh Bhatia talks to us about the best investments of 2021, his profitable trading system, and much more.

The Hidden Tesla in My Great Indian Wealth Project (Profit Hunter)

Feb 23, 2021

An Indian company founded three decades ago in a garage caught my attention...

More

India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get this Special Report,
The Secret to Increasing Your Trading Profits Today, Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


Mar 4, 2021 (Close)

MARKET STATS