How Measuring GDP Encourages Government Meddling

Mises Daily: Tuesday, March 18, 2014 by John P. Cochran

In a review of Diane Coyle’s GDP: A Brief but Affectionate History, aptly titled “Measuring the Unmeasurable,”James Grant highlights many of the difficulties involved in aggregate statistical attempts to measure economic activity. Grant summarizes critical problems in one succinct sentence, “Imagine deciding which nation produces what in a global supply chain. Or correcting price for quality improvements. The mind boggles.”

And well the mind should boggle. Even worse than the measurement problems associated with GDP is the potential for misuse as in the most recent, but not the only, failed attempts to manage the economy with stimulus and other wrong-headed monetary and fiscal policies. An early opponent of statistical measurements of economic performance, as noted by Grant, was Sir John Cowperthwaite, Britain’s longtime financial secretary of Hong Kong whose introduction of free market economic policies are widely credited with turning postwar Hong Kong into a thriving global financial center. Grant points out that Cowperthwaite:

batted away attempts to compile the Crown colony’s gross output on the grounds that the resulting figures would be untrustworthy and that their very existence would constitute a standing temptation for the government to “manage” an economy that seemed to be doing quite well on its own.......

........In addition to the distortion-caused under emphasis of savings and investment and the overemphasis of consumption and all the follies this encompasses, Robert Higgs highlights distortions introduced by inclusion of government expenditure including but not limited to the bias toward positive Keynesian fiscal multipliers. He summarizes:

 

Until World War II and the postwar years, when the federal bureaucracy institutionalized the government’s preferred method for calculating national income, economists offered sound arguments for excluding government spending from estimates of gross domestic product. Using their general approach reveals that the private economy’s performance for the past thirteen years has been only somewhat better than complete stagnation......To Read More....