"as bogus as a three-dollar bill"

That's not the expression, you know.


I check my blogger stats often. The main thing is always more pageviews. Can't help it. But sometimes I look at what posts people have been reading. Sometimes I re-read one of those. That's how I came back to Indirection, from three years ago. Short post, but some good comments. And a link or two to Why the U.S. GDP number may be as bogus as a three-dollar bill at The Globe and Mail:

In 10 days, Washington will release its revised estimate of first-quarter economic growth...

Economists will issue a variety of learned opinions about what it all means...

What most of them will not be saying is that the GDP figure is essentially meaningless.

I have to go just briefly off topic. Where does this stupid fetish for the wrongness of GDP come from? Yes, yes, the economy is all screwed up. No, no, GDP doesn't count the hours your mama spent hanging the wash out to dry. Maybe, maybe such things should be counted in some alternate-universe replacement for GDP. But for now let's stop with the drivel and focus on the problems in our economy. It wasn't the failure to count your mama's laundry that made the economy go bad.

Okay. So Brian Milner, the author of the Globe and Mail article, writes:

Many of us instinctively distrust some (okay, a lot) of what governments tell us... But tell us GDP is growing at a faster clip than forecast, and we erupt into loud cheers.

But what if the number turns out be fake? That's the provocative question posed by renowned U.S. money manager Rob Arnott, who makes a convincing argument that what passes for growth in the U.S. and a bunch of other deficit-ridden economies is less than it seems.

Fake? Not real? What?

"It may be for real or it may be phony, based on increases in deficit spending," Mr. Arnott says of the latest European numbers. But while he's unsure of euro-zone growth in a new age of austerity, the chairman of California-based Research Affiliates is absolutely certain that next week's revised U.S. GDP number will be as bogus as a three-dollar bill. That's because it will not take into account how much of the American expansion stems from the government's deficit-spending binge.

Oh. Mr. Arnott says the increase in GDP is fake because the government upped its spending in response to the Great Recession. Eh... His focus is wrong. You're supposed to realize that increased Federal spending is a policy response to recession, an offsetting increase in spending intended to stimulate the economy. (Whether that policy actually works is a separate topic.)

There is a lot of related but irrelevant stuff in things people say. That's what the word focus means -- to prune away the irrelevant.

"Gross domestic product is used to measure a country's economic growth and standard of living. It measures neither," Mr. Arnott says flatly. "GDP measures spending..."

GDP measures "final" spending, not "spending". It excludes all of the preliminary spending that goes into a final product in order to avoid double-counting, because the preliminary spending is costs are already included in the price the consumer pays, the "final" price. Not a big deal. But if you're going to be critical, like Mr. Arnott and Mr. Milner, you may as well be accurate.

GDP counts "final" spending in order to measure the size of the economy. But the size of the economy can be measured as income instead of output: GDP is a measure of income. When the Federal government engages in deficit spending, its purpose is not to fake the size of the economy. Its purpose is to increase income.

You might think people would be happy about that.


Mr. Milner's article continues:

The problem, [Arnott] argues, is that the GDP figure fed to the public does not distinguish between consumption that is covered by current income and that which is financed by deficit spending. He likens it to a family with too many credit cards. The more credit they use, the higher the "family GDP" climbs. But that expansion is unsustainable. Once they are forced to slice up their cards, their GDP must plunge.

I want you to see two things in that paragraph. First, I want you to see that in Arnott and Milner's view, it's the part of GDP "which is financed by deficit spending" that is the "fake" part.

The second thing I want you to see -- perhaps a little more difficult to see -- is Arnott and Milner's assumption that the use of credit is a personal decision, and that the the excessive growth of debt in our time is the result of excessively bad personal decisions. Maybe that's a microfoundations-based concept, I don't know. I do know it's a crock.

The excessive growth of debt in our time -- since the end of World War Two, I mean -- is the result of flawed thinking, and of policies based on that thinking. We think printing money causes inflation and using credit doesn't. So we restrict the printing of money and encourage the use of credit. So debt increases. On top of that, we fail to encourage the repayment of debt. So of course our borrowing increases and of course our debt grows and of course it becomes a problem.

But when the costs of accumulated debt become a burden that hinders economic growth, we don't see the burden of debt. We only see that growth is slow. So we fix our policies, to make them do more to encourage the use of credit, because using credit is good for growth.

Well, yeah, using credit is good for growth. But it also adds to the accumulation of debt, and that's not good for growth.

I don't know if you can see all of that in the paragraph about the family with too many credit cards. But think about it, and keep an open mind.