Regular readers know that I have long railed against the use of GDP, which I see a being close to useless, if not positively dangerous. This analysis just highlights the point. It was therefore extremely encouraging to find an article by Bob McTeer, a former Dallas Fed President, who recognises the danger in the use of GDP:Paul Ashworth, chief US economist at Capital Economics, said in a note that while the initial impact of the storm on the economy could be quite large" when the clean-up is taken into consideration the "overall impact on GDP growth could even be positive."
He said, assuming all output was lost in the two regions for two days, it could mean a 0.7pc loss for the quarter as a whole.The economy expanded 2pc in the last quarter.
However, he cautioned that this was an extreme assumption: "These back of the envelope calculations undoubtedly overstate the loss of output. Not all output has been lost, particularly not across the whole East Coast region. Some people will be working as normal, others will be working from home."
Generally and loosely speaking, a higher GDP, reflecting both higher spending and higher incomes, is a good thing. However, if the higher GDP is boosted by hurricane clean-up and repair, that’s not so good. The problem is we don’t get a subtraction for the destruction of existing assets; just an addition for replacing them. At least one might think of the clean-up as “shovel ready” projects. Wars are similar in that they generate GDP without bringing with them a higher standard of living.The article seems to imply that the faults of GDP are well recognised, but this is not apparent when considering the almost fetishistic focus that is made on the GDP measure. One of my biggest bugbears is the government debt to GDP ratio. It is now a commonplace, and frequently replaces the hard number of the actual cumulative total of debt and GDP growth is used as a signal that an economy is capable of servicing debt. In the case of our earlier commentator, we can see quite how dangerous GDP actually is.
My favorite example in school of the short-comings of GDP (GNP then) was provided by the question what happens if a man marries his maid. If she keeps doing the household chores as a wife, they are taken out of the market place and GDP shrinks. Getting hair cuts at home or eating at home more and eating out less would have a similar impact on GDP without necessarily reducing standards of living. Just remember that GDP was designed to measure output in the marketplace, not to measure economic well-being.
In the case of Hurricane Sandy, hurrcane damage will apparently be able to improve the governments capability to service debt. Never mind that the government will be borrowing a bucket load of money to pay for the clean up of the devastation and destruction of assets; this will better allow the government to pay back its debt because, you see, GDP will grow from the fallout of a hurricane. I can see no better illustration of the fallacious thinking of those who worry about GDP slipping when governments cut back on borrow and spend. Borrowing to create activity in an economy, as I have argued previously is seen as a perpetual growth machine which is 'lossless'. In this case, the loss and replacement of perfectly good assets apparently creates economic growth.
No doubt some commentators will claim that government 'investment' is different; it creates long term growth. For example, many such people will propose project 'x' or 'y' as an investment. What they do not discuss is that these projects will come on top of borrowing for consumption. Also, as I discussed in a recent post, in one case I found a proposal to 'invest' in new rail infrastructure for the UK, even though rail is heavily subsidised such that this is not an investment with a positive return, but an investment to increase expenditure into the future (not withstanding that it might have quality of life benefits). 'Yes', there are some genuine investments that might be made, but these should not be made on top of borrowing for consumption. However, the term 'investment', as used by government, is often highly malleable, and is often nothing to do with investment but is rather concerned with expenditure for consumption.
The case of the US is interesting, as I have seen arguments made that the US has under-invested in infrastructure, and then present the idea that investment now is the solution. Again, why was the US government borrowing during the 'good times' and not investing in these apparently neglected projects? Why were they borrowing for consumption rather than for investment? Why is it that these economists were not railing against the government borrowing and consuming in the good times, when they could have been borrowing to invest in these projects? The answer is simple; they do not want to make the hard choices. Every element of government spending can be found to have a justification, but that justification does not include confronting the hard choices of either raising taxes or choosing between priorities within the constraints of the actual tax revenue available.
It is much easier to just borrow the money and leave the problem of paying until later. As I have long argued, at least in developed economies, there is no real reason why governments should be borrowing at all, barring major natural disaster or events like World War II. They have a strong base of income to draw upon, and can pay for both expenditure and investment from that income. Even if taking a Keynesian position, governments are not supposed to be borrowing and spending for consumption during the good times, but are supposed to only do this during the bad times.
I reiterate the point; those who support government borrowing and spending have never wanted to make the hard choices - either persuade the taxpayers that they really need to pay more taxes, or confront the difficult problem of priorities for expenditure. Instead, they propose borrowing and spending, during both the good and bad times. As they do so, they hide behind fig leaves such as GDP, which hides the long term damage that they are inflicting upon the economy; they persuade people that the economy is 'growing', even whilst the debts mount, and the activities which are developed through borrow and spend boost GDP. The real problem is cowardice; they cannot persuade people to pay for the expenditure of the government, so they pass on the problem of paying to the future. They believe that all of those government expenditures are 'good', but do not have the guts to make their case honestly and openly and subject the real cost to the scrutiny of voters. It is a tragedy, and I can only wish that voters would start to punish this cowardice.