AUSTRIAN ECONOMICS ADDICT

Real GDP Contracts Most in 27 Years (Photo credit: inspecie.co.uk)

QUANTITATIVE VS. QUALITATIVE ANALYSIS

We keep hearing  from the administration, and the media, that the economy is slowly improving. They cite unemployment data and GDP data to back this assertion, hoping we won’t dig below the surface in search of the truth hidden in the numbers. How you arrive at the specific numbers, is more important than the numbers themselves. Here’s an example. The environmentalists try to prove global warming by using a vaguely defined  point in the past, and comparing it to this years, or this decades, temperature. If you let me pick the year to be used in the comparison, I could prove global cooling. All I’d have to do is pick a year that was hotter than this year. If you can pick the starting point in a  comparison, you can make the data say whatever you want it to say. This is just one sleight of hand trick that politicians, the elites, and the media use in an attempt to shape our opinion, and move it toward their desired outcome. You have to have a definable standard for a comparison to be made. If the standard can be manipulated, comparisons are meaningless. When they say the economy is improving, we have to ask, “compared to what”. Normally the economy is judged to be improving if there is growth. We’re told that the GDP (gross domestic product) is the data used to show growth. The GDP is basically the sum in dollars of goods and services sold to final users. It is more complicated than that (read here), but the number is based on what is consumed in a given period of time (quarter or year). But as we have discussed many times, you can’t consume something that has not been produced. So, if production comes before consumption, doesn’t production have to be an indicator of economic growth? Producing grows an economy, it creates wealth. Consuming is the destruction of wealth (production). The mainstream economists, politicians, bureaucrats, and the media, worship at the altar of  “macro data”, but if their prayers aren’t answered by this data, they pick, choose, and manipulate it, in order to fit this macro god to their vision of economics. Do they understand that specific macro data isn’t even necessary to tell us if an economy is growing or not growing? You don’t need to quantify (measure) a specific thing to know what direction it is traveling, or if it is moving at all. The speed , in MPH, isn’t necessary data for you to tell if a car is moving. A compass isn’t necessary to know that the car is traveling north and not south. Even if it is traveling northwest, you definitely know it’s not traveling south. Quantitative analysis isn’t necessary to show qualitative direction. Lets take what we’ve just discussed, and look at the economy, first from the standpoint of production, and then from the standpoint of consumption.

PRODUCTION IS AN INDICATOR OF GROWTH

Let’s look at production as an indicator of growth, from the stand point of employment. We’ve had between 7-9% unemployment for five and a half years, compared to the 4-5% unemployment in 07 (Graph here). Because of the way individuals who are looking for work are counted, these unemployment numbers are lower than reality, but these real number don’t matter for our analysis. The fact that more people are unemployed now, than there were five and a half years ago, is all we need to know. The difference between these unemployment numbers is about 4%, which means that 4% of the work force hasn’t produced anything for five and a half years (Graph here). They have been consuming without producing. Many of the new jobs that have been created in the last five and a half years are part-time jobs (Graph here), and this is significant as we look at production. The standard full-time job is counted as 40 hours per week. These new  part-time jobs are counted as equal to the full-time jobs they replaced, even though these part-time jobs aren’t 40 hour a week jobs. These part-time jobs are not producing as much as the full-time jobs, if you just compare the hours worked. As you can see, we are not producing as much as we were five and a half years ago. We know the direction the economy, even though we can’t quantify it.

CONSUMPTION DESTROYS WEALTH IT DOESN’T CREATE WEALTH

An economy doesn’t grow because we consume more, we consume more because the economy grows. GDP is a measure of consumption, and from that standpoint,  the economy is growing. But how could this be if more people aren’t working. Because production puts money,  (certificates of purchase), in the pockets of  workers allowing them to consume, isn’t production really consumption. If you don’t work or produce, you have nothing to use in exchange for what you want to consume. Lets look at a few ways we are consuming without corresponding production.

1)The unemployed are receiving unemployment benefits (money or certificates of purchase), to be used for consumption, without corresponding production.

2)Many more people are going on disability (the new extension of unemployment benefits), which means they are consuming without corresponding production.

3)Many people are taking money out of their retirement accounts and emergency funds, or selling assets, in order to pay for present consumption, with money that was originally saved, for future consumption.

4)All Government spending, above what they take in taxes, is consumption spending without corresponding production. At least the confiscated tax dollars were from someones real production, even though these dollars would be used in a more productive way if the producer was allowed to make the decision on how they were spent. The Government has to  borrow $1 trillion, or more, a year to finance the difference between the $2.4 trillion they confiscate in taxes from the producers, and the $3.4 to $3.7 trillion they actually spend. They sell T-Bills (bonds), to finance the debt, some of which are purchased by the private sector. Private sector purchases of Government debt takes capital out of capital markets (production), and places it in the bond market, which is consumption spending. These T-Bills are also being purchased by the Fed, which exchanges electronically printed counterfeit dollars for the bonds. These counterfeit dollars do not represent any corresponding production. These counterfeit dollars allow the holder to steal goods and services from the people who produced the goods and services.

5)Inflation increases the GDP. Inflation calculation numbers are based on the Consumer Price Index (CPI), and are fake, because they don’t count food and gas in these numbers. Gas and food prices have been going up, which means we are paying more in dollars for these goods. If the GDP is calculated as the sum in dollars of goods and services sold to final users, and inflation increases this dollar amount, than inflation adds to the GDP number. It is not real growth, it is purchasing less goods and services with more dollars. All of this taken together shows that we are consuming without corresponding production.

Unemployed workers, disability insurance, spending money on consumption that was set aside for production, Government spending, Government borrowing, The Fed’s counterfeiting, and inflation, are all consumption without production. There is no need to quantify any of these statistically, the fact they are growing tells us the direction we are traveling.

CONCLUSION

If we don’t get caught up in the numbers, and just look at the direction production and consumption are going, we won’t get fooled by politicians and the media when they try to sell us a load of BS about an improving economy. If we continue down this central planning road, we will not produce enough to meet the consumption demands of both the private sector and the public sector. Everything we listed on the consumption side is growing, and what we listed on the production side shows contraction. The directions that consumption and production are moving, can’t be sustained. We will continue down this road unless Government intervention in the economy, through taxes and regulation, and the Fed’s intervention through counterfeiting and interest rate manipulation, gets rolled back or stopped. The Government is strangling the private sector, the very sector that produces what politicians love to redistribute.

Here is a great article about GDP,  What Is Up With The GDP?, by Frank Shostak, at mises.org.

Related Article – Consumption Depletes What Has Been Produced And Saved, at austrianaddict.com.

Related Article – A Tornado vs The Fed, Which Is More Destructive? at austrianaddict.com.

Related Article – A Housing Recovery, Or Just Another Bubble, at austrianaddict.com.

This entry was posted on August 20, 2013 at 1:19 am and is filed under Econ. 201. You can subscribe via RSS 2.0 feed to this post's comments.

Tags: Consumer Price Index, Economic growth, Electronically Printing Counterfeit Money, GDP, Government debt, Government spending, Gross domestic product, Inflation, Production and Consumption, Unemployment