Fighting against statism in Washington is a lot like trying to swim upstream. It seems that everything (how to measure spending cuts, how to estimate tax revenue, etc) is rigged to make your job harder.
A timely example is the way the way government puts together data on economic output and the way the media reports these numbers.
Just yesterday, for instance, the government released preliminary numbers for 4th quarter gross domestic product (GDP). The numbers were rather dismal, but that’s not the point.
I’m more concerned with the supposed reason why the numbers were bad. According to Politico, “the fall was largely due to a drop in government spending.” Bloomberg specifically cited a “plunge in defense spending” and the Associated Press warned that “sharp government spending cuts” are the economy’s biggest threat in 2013.
To the uninitiated, I imagine that they read these articles and decide that Paul Krugman is right and that we should have more government spending to boost the economy.
But here’s the problem. GDP numbers only measure how we spend or allocate our national income. It’s a very convoluted indirect way of measuring economic health. Sort of like assessing the status of your household finances by adding together how much you spend on everything from mortgage and groceries to your cable bill and your tab at the local pub.
Wouldn’t it make much more sense to directly measure income? Isn’t the amount of money going into our bank accounts the key variable?
The same principle is true – or should be true – for a country.
That’s why the better variable is gross domestic income (GDI). It measures things such as employee compensation, corporate profits, and small business income.
These numbers are much better gauges of national prosperity, as explained in this Economics 101 video from the Center for Freedom and Prosperity.
The video is more than two years old and it focuses mostly on the misguided notion that consumer spending drives growth, but you’ll see that the analysis also debunks the Keynesian notion that government spending boosts an economy (and if you want more information on Keynesianism, here’s another video you may enjoy).
The main thing to understand is that GDP numbers and the press coverage of that data is silly and misleading. We should be focusing on how to increase national income, not what share of it is being redistributed by politicians.
But that logical approach is not easy when the Congressional Budget Office also is fixated on the Keynesian approach.
Just another example of how the game in Washington is designed to rationalize and enable a bigger burden of government spending.
Addendum: I’m getting ripped by critics for implying that GDP is Keynesian. I think part of the problem is that I originally entitled this post “Making Sense of Keynesian-Laced GDP Reports.” Since GDP data is simply a measure of how national output is allocated, the numbers obviously aren’t “laced” one way of the other. So the new title isn’t as pithy, but it’s more accurate and I hope it will help focus attention on my real point about the importance of figuring out the policies that will lead to more output.
[…] actually think part of the problem is that folks on the left focus on how income is spent rather than how it’s earned, so I sometimes try to get them to understand that economic growth occurs when we produce more […]
[…] argued, for instance, that we should focus on how national prosperity is generated (gross domestic income) rather than how it is allocated (gross domestic product). If we changed the […]
[…] argued, for instance, that we should focus on how national prosperity is generated (gross domestic income) rather than how it is allocated (gross domestic product). If we changed the […]
[…] real drivers of economic strength are private investment and private […]
[…] real drivers of economic strength are private investment and private […]
[…] stated high levels of consumption don’t cause a strong economy. It’s the other way around. A strong economy enables high levels of […]
[…] explained in the video, and as I wrote back in 2013, people without much knowledge about economics draw inaccurate conclusions when using data on GDP […]
[…] a transitory boost in consumption, but there’s no increase in production. At the risk of stating the obvious, a nation’s gross domestic income does not increase when the government borrows money from […]
[…] Moreover, I don’t think consumer spending is an important variable, at least not in the sense of driving the economy. […]
[…] problema con el artículo es que ella también cae en la falacia de las estadísticas del […]
[…] problem with the article is that she also falls for the fallacy of GDP […]
[…] this interview, I tried to make a more nuanced point, explaining that we should focus more on gross domestic income (GDI), which measures how we earn our national income, rather than gross […]
[…] this interview, I tried to make a more nuanced point, explaining that we should focus more on gross domestic income (GDI), which measures how we earn our national income, rather than gross […]
[…] this interview, I tried to make a more nuanced point, explaining that we should focus more on gross domestic income (GDI), which measures how we earn our national income, rather than gross […]
[…] I hasten to add that this is probably not be a wise course of action since the money may be squandered and you simply wind up further in debt, but I admit that the short-run consumption data will be better. […]
[…] interview, I pointed out that investment and production are the real keys to growth, which is why I prefer GDI over GDP). Increased consumption, I explained, is a result of growth, not the cause of […]
[…] interview, I pointed out that investment and production are the real keys to growth (which is why I prefer GDI over GDP). Increased consumption, I explained, is a result of growth, not the cause of […]
[…] income is a better measure than gross domestic product if we want insights on growth, so I’m not a big fan of GDP […]
[…] it turns out that increases in national income (usually measured by gross domestic product, though I prefer gross domestic income) are driven by two […]
[…] it turns out that increases in national income (usually measured by gross domestic product, though I prefer gross domestic income) are driven by two […]
[…] some of what I wrote on the topic back in […]
[…] is one of the reasons I wish people focused more on “gross domestic income,” which is a measure of how we earn our national income […]
[…] is one of the reasons I wish people focused more on “gross domestic income,” which is a measure of how we earn our national income […]
[…] is one of the reasons I wish people focused more on “gross domestic income,” which is a measure of how we earn our national income (i.e., wages, […]
[…] is one of the reasons I wish people focused more on “gross domestic income,” which is a measure of how we earn our national income […]
[…] is one of the reasons I wish people focused more on “gross domestic income,” which is a measure of how we earn our national income […]
[…] is one of the reasons I wish people focused more on “gross domestic income,” which is a measure of how we earn our national income […]
[…] is one of the reasons I wish people focused more on “gross domestic income,” which is a measure of how we earn our national income (i.e., wages, […]
[…] is one of the reasons I wish people focused more on “gross domestic income,” which is a measure of how we earn our national income […]
[…] an improving economy rather than causes of an improving economy. The focus of policy should be on how to produce higher incomes, not on how existing income is […]
[…] markets). And since they believe the economy is driven by people spending money (rather than people earning money) and having it trickle to other people, maybe they assume that advocates of tax cuts believe the […]
[…] argued, for instance, that we should focus on how national prosperity is generated (gross domestic income) rather than how it is allocated (gross domestic product). If we changed the […]
[…] argued, for instance, that we should focus on how national prosperity is generated (gross domestic income) rather than how it is allocated (gross domestic product). If we changed the […]
[…] argued, for instance, that we should focus on how national prosperity is generated (gross domestic income) rather than how it is allocated (gross domestic product). If we changed the […]
[…] half of the video are the ones that make sense, of course, and I particularly like the point that consumer spending is a reflection of growth, not a driver of […]
[…] half of the video are the ones that make sense, of course, and I particularly like the point that consumer spending is a reflection of growth, not a driver of […]
[…] assumptions about government spending contributing to growth. That’s why I prefer looking at how national income is earned (GDI data) rather than how national income is allocated (GDP […]
[…] actually think part of the problem is that folks on the left focus on how income is spent rather than how it’s earned, so I sometimes try to get them to understand that economic growth occurs when we produce more […]
[…] And if you want to dig further into the issue, you can click here for a video that explains why we might get better decisions if policy makers focused on how we earn income rather than how we allocate income. […]
[…] actually think part of the problem is that folks on the left focus on how income is spent rather than how it’s earned, so I sometimes try to get them to understand that economic growth occurs when we produce more […]
[…] actually think part of the problem is that folks on the left focus on how income is spent rather than how it’s earned, so I sometimes try to get them to understand that economic growth occurs when we produce more […]
[…] actually think part of the problem is that folks on the left focus on how income is spent rather than how it’s earned, so I sometimes try to get them to understand that economic growth occurs when we produce more […]
If you want to avoid withdrawal, you have to keep drinking.
Same reason that Jefferson said that the federal government is not the only arbiter of what is Constitutional.
[…] Mitchell at Cato Institute explains that the GDP only measures how we spend our income. “Sort of like assessing the status of […]
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