Thursday, January 10, 2013

GDP Has Built-in Bias

And the bias doesn't favor the market.  Government pumps money into the economy by way of inflation, taxes, or borrowing, and GDP grows.  Should we conclude then that government spending helps the economy?

Veronique de Rugy writes in the June, 2011 issue of Reason:

When the federal government pumps trillions of dollars into the economy, it looks as if GDP is growing. When government cuts spending—even cuts within the most inefficient programs—aggregate GDP shrinks.  
But that’s misleading. If Washington spends $1 a year on a bureaucrat’s salary, for example, GDP numbers will register growth of exactly $1, whether or not the employee has produced any value for that money. By contrast, if a firm pays an engineer $1, that $1 only shows up in the GDP if the engineer produces $1 worth of stuff to sell. This distinction biases GDP numbers—and the policies based on them—toward ever-increasing government spending.

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