GDP Is The Real Fraud — Part 2

Every time I talk about a "slowdown" or a "double dip" coming in the economy, I have go through some weird contortions in order to write about it. What I have to dance around is the actual Gross Domestic Product (GDP) number as measured in billions of chained 2005 dollars by the BEA. Generally speaking, we might think of a declining GDP number as a necessary, but not sufficient, condition for calling another recession.

But the relationship between GDP and recessions is not straightforward. During 2008 the U.S. had a couple of quarters of growth, although the NBER had declared that the recession began in 2007 Q-IV (4th quarter, October-December). The St. Louis Fed, which hypothesizes that the recession ended in 2009 Q-II, presents all the voodoo required to calculate whether the economy is expanding or contracting.

Suffice it to say that in normal usage, GDP is the number used to measure where we are. When Calculated Risk talks about a "slowdown" in the economy, or Barry Ritholtz says we will avoid a another recession, they are literally referring to billions of chained 2005 dollars. And of course they are not the only ones. Politicians and economists—I assume we can tell the difference—almost invariably use GDP to tell us the economy is growing, which is considered a Good Thing, or not growing or growing only slowly, which is considered a Bad Thing.

Everyone agrees (or should) that GDP is a deeply flawed measurement of human well-being, as I first described in GDP Is The Real Fraud. Even the keepers of the Holy Grail at the BEA acknowledge that. Wealth inequality? GDP doesn't care. Bubbles? GDP grows. Soaring health care costs? GDP is happy! 

But few people have a deep appreciation of just how fraudulent the GDP measurement truly is. Toward explaining this, I present Exhibit A.

Data from the BEA for the years 1970-2009

The Services part of GDP has never shown an annual decline since 1970. Never! During the Great Recession, which some would contend we're still mired in, the Services component of GDP showed miniscule declines in two quarters, 2008 Q-III and 2009 Q-I. In so far as Services is by far the largest component of GDP, and in so far as it can not go down, or down much, we are forced to conclude that GDP is as phony as a three dollar bill. 

Our economic world was literally falling apart in late 2008/early 2009, but the growth in Services marched on. At the beginning of the recession, Services was $8262.3 billion. And at the end (as hypothesized by the St. Louis Fed) that number stood at $8341.8 billion. Slow growth, to be sure, but growth nonetheless. Case closed.

The next logical step would be to determine exactly how this nonsense arises. That would require teams of people, millions of dollars and a high tolerance for boredom, so I can't delve more deeply into the numbers today. However, the following charts give us a clue about what's been going on for decades now.

From Health Care Spending And PCE by Calculated Risk

From Seeking Alpha's GDP By Category

Both graphs point to the same conclusion: it is soaring health care costs that predominantly push up the Services component of GDP. It is inevitable that we will disagree about various things, but perhaps there is one thing we can all agree about—skyrocketing health care costs are a disaster. In fact, health care is the single biggest factor that will bankrupt the United States in the next decade and beyond unless some radical policy changes are implemented.

People say GDP is growing, which they regard as a Good Thing. But this data says that if GDP is growing, America is dying, which most would regard as a Bad Thing. So which is it? Growing or Dying?

Citing rising GDP to bolster arguments about the economy's "health" and to score political points is mindless drivel. GDP is the Real Fraud.

Comments

[Edward Boyle]

So medical costs to maintain life beyond normal bounds plus to "heal" societal illnesses (high sugar, low nutrition diet, sedentary lifestyle) with high cost pharmaceuticals and miracle high tech gadget treatments creates huge profit for companies, impoverishing the people (and companies and local and state governments) simultaneously. So my last commentary about high productivity in goods production creating debt was not on the wright track completely. Demand is created elsewhere - plastic surgery ads or similar.

Other idea:

Avg. societal EROEI (Net Energy) X Technology = Disruptor Effect(D.E) or (productivity Accelerator)

D.E. x G.D.P. = Noninflationary Growth Potential (NIGP)

Net Energy has declined from say 100 in 1880 (Spindletop) to say 10 today and maybe 1 in some years. Significant revolutionary technology leverages energy to do significant things (transport, heating, lighting, cooking, food storage). Patents have declined in real usefulness over time. Cars, Telephones, refrigerators, maybe radio and TV were really important. Changing one molecule to get a new patent drug on the market with no real improved effect is no improvement. A slightly better form of Windows program or a slightly more effiicent automobile is not massive game changing technology. So we could say that technological leverage is falling similar to Net energy over time to 1 from original "100" (how we measure difference between 1 Horsepower horse to a Model T then compare that to a Prius is the question.)

So if NIGP peters out over time (no procentually revolutionary ideas and increasingly expensive energy) then printing presses and financial bubbles are the only way to maintain the appearance of societal growth as the people are not really getting a better life quality or quantity from what is being added to the system (McMansion , Trip to Cancun, McDonalds, plastic surgery). These things are just consuming energy inefficiently on credit or at least instead of real investment in a better future. Rome used wood and slave labor and had to go ever further to get the slaves and wood and it was wasted on more and more luxury without serious purpose. Only the center of power can maintain this illusion of NIGP over longer term due to financial and military leverage (US Dollar as global reserve currency/Troops stationed globally like in Roman money and troops) to suck up all energy/finances (Gold/Silver/Coal and slaves to Rome/Saudi oil/ US Bond investments and Chinese imports to USA).

Energy Intensive Technology(always more complex and less revolutionary to get 1% more efficiency) loses advantage as EROEI goes to unity so the total assumed civilizational(Imperial) organizational architecture collapses unless the transition to lower intensity energy technology and civilizational structure is made in a reasonable time to stop collapse (Eastern Roman Empire). Alt-enrgy with localization and Transition Network type ideas implemented on a WWII type top down manner might have right effect, who knows.

So Net Energy (100) x Technology (100) = Productivity Accelerator= 10,000 in 1880. GDP (and population)had a lot of growth potential from that basis.

Carrying Capacity for Earth was increased enormously due to this by maybe ten times in human numbers and 100 times in production of goods and services. As this number approaces unity we are in a no growth scenario, a static world, dreamt of by our alternative future friends. However we cannot simply maintain the status quo without growth, everything goes backward, as the infrastructure basis of the population and civilization is a high value for these named variables. So basic goods and services will become rare and expensive. Inflation(high price levels) and depression(generalized poverty)simultaneoussly as the NIGP falls.