GDP Is The Real Fraud

It's all Goldman Sachs all the time now that the SEC has charged them with fraud. For the first time in a long time, observers are talking about ethics and morals (or lack thereof). That's a welcome but no doubt short-lived development in an Empire that lost its way sometime in the 1980s. Rather than add to the Giant Squid discussion, I want to briefly demonstrate that fraudulent Gross Domestic Product (GDP) calculations are far more important in the Grand Scheme of Things. Let's look at retail sales.

 The New York Times' Broad Group of Retailers Had Big Gains in March described the Good News—

Sales rose robustly in March across a wide range of retail stores, another sign that American consumers were beginning to spend more freely even as the job market remained weak.

The Commerce Department said Wednesday that retail sales climbed 1.6 percent last month compared with February, largely because of a jump in car sales. Analysts had expected a 1.2 percent increase. The report provided the latest evidence that consumers were gaining confidence, despite pervasive unemployment and large debt burdens. Pent-up demand is anchoring much of the growth, economists say, though there are signs that credit is becoming more available...

“Across the board, you’ve got robust gains,” said John Ryding, chief economist at RDQ Economics. “To maintain this momentum, we’ve got to see a pickup in job creation.”

Sales were up at stores of many types: building materials climbed 1.3 percent and clothing sales increased 2.3 percent. Spending is “growing more than we originally anticipated,” Dan Greenhaus, chief economic strategist for Miller Tabak, an investment firm, wrote in a research note. “This is a fact that cannot be ignored.”

Unlike the Times, Calculated Risk compared total sales to sales without (ex-) gasoline.

You can see that ex-gasoline, retail sales have risen only slightly. And you can also see that the gap between total sales and sales sans gasoline is widening again just as it did after 2005 in the years leading up to the "Great" recession. This is cause for concern, not a cause for celebration.

The reason for this nascent trend is not hard to find—the retail price of gasoline has been rising for months. Vehicle miles traveled has been falling for a long time now, and underemployment is approximately the same as in previous months—actually it's over 20% now according to Gallup polling. Those buying gasoline are paying more for it. That's all there is to it.

Final sales are final sales, whether it's you treating yourself to some new clothes or you making non-discretionary purchases of gasoline. All final sales get added into GDP. It's exactly the same if you're spending money to cheer yourself up or if you're getting screwed at the pump.

The veneration of GDP is not without its critics—

While a growing GDP remains the chief object of veneration in most so-called market economies and is the one statistic that tells policy-makers how the overall economy is doing, it is not without its critics. In fact, notable Canadian economist John Kenneth Galbraith saw the GDP as one of the "lingering fallacies of American capitalism," referring to it as "one of our socially most widespread forms of fraud."

Even Mr. [Simon] Kuznets, the inventor of the GDP, forewarned the U.S. Congress in the 1930s of the inherent flaws and weaknesses of GDP figures. Among other things, he stated that "the welfare of a nation can scarcely be inferred from a measure of national income as defined by the GDP."

John Kenneth Galbraith, who knew more about financial shenanigans than any living human being, and Simon Kuznets, who invented the damn thing, both say that the real fraud is using GDP to measure our societal health & wealth.

When the Powers That Be start to question the validity of GDP as a measure of human welfare, I'll know we're getting somewhere. But until that day, which I never expect to see, we will continue to live in fraudulent world.

Comments

[rjs]

a couple of things play on retail sales: the number of people not making mortage payments, 7.9 million (10.2% of all mortgages), who are using that freed up cash at walmart, quantified here: http://www.clearonmoney.com/dw/doku.php?id=investment:commentary:2010:03:02-quantifying_the_stimulus_effect_of_missed_mortgage_payments
and the excess amount of tax refund checks, quantified here:
http://blogs.investors.com/capitalhill/index.php/home/35-politicsinvesting/1682-extra-tax-refunds-giving-consumers-a-short-term-boost

even with that, the reported retail sales are far greater than what you'd expect to see reflected in sales tax returns:
...what I've been catching in my peripheral vision over the past year has been a disconnect between what I've seen in the occasional state sales tax reports I link to and the retail sales i see reported monthly...

Links for the above are in my comments on my post: http://marketwatch666.blogspot.com/2010/04/go-figure.html