What's in a Number?

While all eyes were on the R-Word, did we forget to examine GDP itself?

(Source: Getty Images)

Joel Bowman, musing today from Buenos Aires, Argentina...

It’s clearly a budget. It’s got a lot of numbers in it.

~ George W. Bush

And there you have it, dear reader. The experts have convened. A consensus was reached. The results, after much commotion, conjecture and confusion, are finally in. The economy either is, or is not, in a recession. There. We said it. 

Yes, yes... we know. You’re not supposed to use the “R-word.” This is 2022, after all. It’s considered impolite. Politically incorrect. Triggering to the emotionally ill-equipped. Racist (probably). A word of its time and all that... on par with “woman” and “fat” and “homeless.” (“Uh, you mean ‘body positive menstruator currently experiencing houselessness,’ thank you very much!”)

Indeed, so dangerous is the “business cycle contraction which shall not be named,” a recent New York Times columnist even suggested so much as thinking we were in a recession prolonged economic downturn could, in fact, lead us into one. From the Old Gray Lady/Senior, Silver-haired Newspaper Identifying as a Female (she/her):

What people expect can soon end up happening, and right now, with worsening data, many people’s expectations have come together to expect a recession. And those expectations could very well lead to one.

It’s the vibes, you see. Reality is merely a state of mind, dear reader, an inconvenient social construct. It’s our attitudes that manifest our destiny, mmm-kay. If only we could all just think prosperous, multi-millionaire thoughts, beaming our positive cosmic feelz into the great collective consciousness, we’d be fine. Or... not.

That the article in question was actually titled “The Vibes in the Economy Are … Weird. Really Weird.” just goes to show how utterly impeded obstructed hampered... oh fine, we’ll just go ahead and say it, retarded public discourse on the subject has become.

Linguistic Contortionism

Of course, adults living in the real world know a recession when they see one, regardless of what their self-serving, fact-“checking”, language-mutilating, insider-trading, money-printing overlords choose to call it. And they know exactly what it feels like, too. It’s pain at the pump. It’s hard decisions at the grocery store and overdue bills in the mailbox. It’s family vacations to Paris... Texas, Athens... Georgia, and Geneva... Illinois. It’s that stomach-churning moment when choosing between wants and needs transitions to choosing between needs and going without.

For the past seven-plus decades, going all the way back to the year Perry Como sang “Some Enchanted Everything” (1949), a recession meant two consecutive quarters of negative GDP growth. At least, that’s according to the wonks at the National Bureau of Economic Research, who used their official R-Word stamp every single time – all ten of them – the economy logged two consecutive negative quarters... that is, right up until this unique and altogether special year.

We first addressed this a couple of weeks back, in a column titled: What’s in a Word? (Trigger warning: The R-word is used, and liberally.) 

And so today, we sidestep the semantic sphere for a spell and examine instead the even darker, murkier realm of numbers. As if linguistic contortionism was not enough for poor Homo Credulus to contend with, he must also anticipate a barrage of lies, damned lies and governmental statistics emanating from the numerical domain, too! 

Which brings us to that oft-used but seldom examined academic concoction known as gross domestic product (GDP)...

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What’s in a Number?

By Joel Bowman

According to our trusty Encyclopedia Britannica, gross domestic product (GDP) is defined as the “total market value of the goods and services produced by a country’s economy during a specified period of time.”

Ordinarily, we hear GDP expressed as a percentage, that is, a rate of growth, either positive or negative. Ask any man on the street and he will quote the latest figure to back up his bullish or bearish sentiment (see “vibes,” above), to help him decide whether to buy or sell, to take a holiday or look for a second job. 

The feds, meanwhile, cite the very same figure to help justify their own course of action; whether the economy needs to be “stimulated” or “cooled;” whether to slash or hike rates; to “inflate or die.” 

A lot rides on this magic number, in other words, even as it’s predicted, prognosticated, conjectured, aggregated, tortured, averaged, announced, revised and re-revised ad nauseum each and every quarter. Even so, most people tend to think of GDP as some kind of definitive reading, spat out of a complex, high-powered machine, which testifies reliably, irrefutable, quantitatively as to the overall health and vitality of something called “the economy.” 

But what, exactly, is this thing we are measuring, this “economy”? 

As Frank Shostak, adjunct scholar at the Mises Institute, put it, “The GDP framework gives the impression that it is not the activities of individuals that produce goods and services, but something else outside these activities called the ‘economy.’ However, at no stage does the so-called ‘economy’ have a life of its own independent of individuals. The so-called economy is a metaphor—it doesn't exist.”

We’ll come back to the metaphor... ahem, the “economy”... in just a second. First, let us consider briefly the computation of the GDP measurement itself. There are three primary methodologies used to calculate GDP:

1)        The expenditure method
2)        The income method and
3)        The value added method

The Cost of Government

Theoretically, all three methods should produce the same result although, in practice, this almost never happens. For instance, when there is a large surge in public spending, such as the never-ending Niagara of pandemic relief packages, stimmie programs, loan and grant hustles, payment protection schemes, climate boondoggles, equity subsidies and assorted other free-for-all lolly scrambles, one would expect significant GDP “growth” to register in the expenditure method. 

Roughly speaking, this method calculates the “size” of an economy by totaling its expenditures, minus imports. The equation looks like this:

GDP = private consumption + gross investment + government spending + (exports − imports). Or, GDP = C + I + G + (X − M).

The adroit reader will notice immediately the legerdemain afoot, that “government spending” is counted as a net positive, a “+.” Here’s how the Commerce Dept.’s Bureau of Economic Analysis explains it...

Gross domestic product (GDP), or value added, is the value of the goods and services produced by the nation’s economy less the value of the goods and services used up in production. 

So far, so good...

GDP is also equal to the sum of personal consumption expenditures, gross private domestic investment, net exports of goods and services, and government consumption expenditures and gross investment. 

[Emphasis ours. SOURCE]

Hence the very careful wording of, to take the most recent example, the Inflation Reduction Act. Here’s how the The New York Times celebrated its passage last week:

The bill, signed into law by President Biden on Tuesday, makes $369 billion in climate and energy investments — by far the largest such investment in American history. 

Not a $369 billion gamble, dear reader, a greasy-palmed giveaway, a great solar and wind piñata... rather, an investment in our future and (need we add, tearily) our children’s future. Surely you’re not one of those anti-future children haters, are you? And yet, as Bill Bonner pointed out during the week, “If it were such a good ‘investment,’ why do the feds have to force people to make it?”

Of course, the IRA is but a drop in the ocean when it comes to total government expenditure. Between federal, state and local governments, total government spending for fiscal year 2022 is projected to be north of $9.3 trillion dollars, give or take a few hundred billion. [SOURCE] What of all those “investments”? 

Not only are the vast majority of these programs unsustainable, mendacious and distortive scams, measuring them as a “+” under the expenditure GDP calculation separates further the reality individuals experience in their workaday lives from the GDP fantasy their governments serve up to them.

For one thing, this methodology ignores the fact that government spending is not true production at all because it is debt financed. (Imagine maxing out your credit cards to load up on meme stocks and counting your “investment” as a net positive in your Gross Household Product (GHP)). Government spending, therefore, should really only be government spending, LESS government borrowing.

Austrian Alternatives

Murray Rothbard, a key figure in the Austrian School of Economics, sought to address this “oversight” when he proposed his twin alternative measures: Gross Private Product (GPP) and Private Product Remaining (PPR).

Rothbard defined the former as “gross national product less income originating in government and government enterprises.” PPR is GPP less the higher of government expenditures and tax revenues plus interest received. Rothbard argued that because government output is “financed coercively” (i.e., by taxation), it is therefore unclear what - if any - market value may be ascribed to the end product. Simply put, both Rothbard’s measures place government “production” where it belongs: in the “opportunity cost” pile.

If free market participants did not deem it worth their while to buy something in the first place, why should it be considered a net positive when the government confiscates their money (and/or that of their unborn children) to purchase it on their behalf? The case may be brought against practically every government expenditure which, even if it was allocated to something everyone agreed they wanted (decent roads, for example), nevertheless crowds out competition from private enterprises to provide that very same good or service. 

In the end, GDP as a measurement can no more calculate the health of an economy than it can tell you the time or give you a back massage. However it is measured, true economic progress is forged not in the crucibles of debt or coercion, but from the honest toil of individuals seeking to better their own lot, unhindered by the government’s long, strangulating reach. And if a positive GDP figure factors in a massive expansion in government expenditure, the only thing ultimately being measured is the rate at which the country is going to rack and ruin. 

But hey, at least then we won’t have to worry about the feds clandestinely redefining the word “recession.” They’ll surely have moved on to “depression” by then, if they haven’t already.

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And now for some more Fatal Conceits…

Did you catch our latest (and long-overdue) Fatal Conceits podcast with Bonner Private Research’s macro analyst, Dan Denning? No? Fear not! Here’s the link again, so you can catch up in your own sweet time…

Dan Denning on Where to From Here?

We’ll add the transcript later today/first thing tomorrow (just wanted to get this Sunday Session to you before we head out for lunch). Speaking of which, we’re off to enjoy one of Argentina’s great gifts to mankind… the carnivorous extravaganza known simply as the asado.

That means giant steaks, slow cooked over wood and coal. Bife de lomo… ojo de bife… bife de chorizo… morcilla… choripan… mollejas… and not a blasted bug- or plant based-burger in sight. All washed down with a glass or three of rich Bonarda, first planted by the Etruscans some 3,000 years ago and now a feature of the Argentine carta de vinos.

Bill will be back with his usual missives tomorrow. In the meantime, enjoy what’s left of your own weekend.

Until next time…

Cheers,

Joel Bowman