GROSS DOMESTIC PRODUCT

What Is It Really Measuring?

Don’t we all think we know the definition of GDP? Until 1934, the definition was just adding up all the private production and services for the year; what we made as people and companies. But that isn’t the definition now. As I learned from Jeffrey A. Tucker in the Epoch Times, the definition changed radically as a way to make the economy look better after the Great Depression. Stay with me; this is not only interesting, but critical to our understanding of the way our government works.

Would you be shocked to know that at that time, on top of huge spending by our government which also ran deficits, our government (and others) decided to include government spending in the GDP, even though it isn’t “producing” anything? To date, it has been done this way for 100 years.

GDP = Consumption + Investment + Government Spending on Goods and Services + (Exports – Imports), which looks like this: Y = C + I + G + (X-M)[1]

Noted socialist economist, John Maynard Keynes really loved the idea of using government spending to make things look better than they actually are. As it involves pumping money into the system (does this sound familiar?), he really supported the idea of Modern Monetary Theory, backed currently by AOC and Sanders. Government spending is not “output.” Sadly, as I discovered, most of us don’t know that this is what is happening.

Is This a Problem?

If you understand clearly the impact of government spending, the answer is an unqualified “yes.” Governments have NO resources of their own; they take everything from the private sector through taxes, fees, inflation and anything else they can dream up. How could that possibly seem to be part of a “product or service?” When we and/or companies incur higher taxes, neither have more money to invest in products, services or growing a business. That means hiring goes down too. Every cent spent by the government has the potential to hurt the economy.

Did you ever hear that WWII caused a huge growth in the economy? Did you ever wonder why? Who was buying the planes, ships and armaments produced by companies who otherwise would have made consumer goods? The government, of course. We had to suffer through ration coupons and deprivation; that is NOT the sign of an economic success. Yet, too many people believed the myth, despite how poor they were.

Words From Rothbard

Murray Rothbard, well know to libertarians, wrote “Man, Economy and State,” which explained why this method of calculating GDP was wrong. He suggested it be fixed or ended, as GDP provided no useful information.

“Since governmental services are not tested on the free market, there is no possible way of measuring government’s alleged ‘productive contribution.’…Furthermore, the government’s tax revenue and deficit revenue are both burdens imposed on production and the nature of this burden should be recognized.”

How did the miscalculation of GDP last so long, given these flaws?

The New Way Forward

With President Trump being given four years to figure out who could implement his ideas and provide input to him, he selected Howard Lutnick to be the new Secretary of Commerce. It’s important to note that most of us couldn’t name ANY Secretary of Commerce; but this position is important. Lutnick spoke on March 2 that he would separate government spending from GDP in the calculations. Some accuse Trump of doing this to manipulate the numbers in his favor, but if you have followed with me (and Tucker) this far, you know that this is mathematically correct.

What could be fascinating and revealing is to take the correct formula and go back in time, to see what the real impact on us had been. Have we been as prosperous a nation as we thought we were? Ignore who is doing it; focus only on the mathematical correctness of it. If you’ve ever been scammed by a financial advisor, making this change in the way GDP is calculated is like going to an honest person and getting the correct assessment of your financial situation.

Imagine if the GDP numbers were then re-calculated throughout the Biden administration? After all, while Trump did grow the spending at the onset of the China virus, we were all scared and had too little information. Fauci hadn’t been forthcoming with how some of our “GDP” had gone to Wuhan. But it was Biden who doubled (or tripled or worse) down on government spending. If you eliminate that from the GDP, how well would his term in office look? We all know how much poorer we felt; soon, we may have the numbers to validate it.

No More Shell Games

We are Taxed Enough Already (TEA). Once we can see what proportion is government spending versus actual economic gain, we can understand more clearly why DOGE is not just important, but essential to our survival. As other governments continue to use the wrong formula, we may look bad on the international stage, but…. We will be wealthier and happier.

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[1] https://online.hbs.edu/blog/post/why-is-gdp-importan

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