The Reasoned Review

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Gross Deceptive Product

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Dissident economist Joseph Stiglitz writes a fantastic op-ed in a recent issue of The Guardian about the number-twisting that goes into our GDP figures. The article is well worth reading, as it challenges many of our basic assumptions regarding such concepts as “economic health”, “vitality”, and “well-being”.

Stiglitz argues persuasively that “GDP maximization” is often at odds with what most would consider a basic standard of living. Clean air laws, water purity acts,  food safety guidelines and a host of other legislation technically reduce our GDP, but they also make our lives incomparably better. By taking GDP as a paramount indicator of economic health, Stiglitz contends, many economists neglect their citizens’ standard of living.

Stiglitz also mentions a lack of any measure of income inequality in GDP statistics – an important point, as our income disparity is now the greatest it has been since the gilded gilt of the 1920s.

And we cannot forget the massive role of government in our recent GDP figures. The value of government spending is inherently unmeasurable – we must simply take their word that the money they spent was on items of value (and not, say, financial executive compensation). As Stiglitz mentions:

In the last 60 years, the share of government output in GDP has increased from 21.4% to 38.6% in the US, from 27.6% to 52.7% in France, from 34.2% to 47.6% in the UK, and from 30.4% to 44.0% in Germany. So what was a relatively minor problem has now become a major one.

Stiglitz’s weakness, however, stems from his inability or unwillingness to mention some of the more unsavory methods of boosting reported GDP. The faults he recognizes, while nefarious, are generally well known. But our government engages in many, many other artifices in order to make our GDP numbers look better.  Here I refer specifically to the practice of “product substitution” and “income imputation”.

Harper’s ran a superior article about this phenomena in its May 2008 issue. In short, the doctrine of “product substitution” states that if flank steak becomes too expensive, consumers are expected to move down to ground beef – the same product is being consumed, but in less expensive a form. In this instance, for GDP calculators, the numbers for ground beef sales are adjusted upward to correspond to what flank steak would have cost (since the two products are made of the same cow). The GDP remains the same, but standard of living obviously goes down.

Also mentioned by Harper’s, but curiously neglected by Stiglitz, is the idea of “income imputation”. Put shortly, the Bureau of Economic Analysis, unbeknown to its subjects, will impute (or add) to household incomes at its discretion. From Harper’s:

The Bureau of Economic Analysis “imputes” to nationwide personal income data (known as phantom income boosters; for example, the imputed income from living in one’s own home, or the benefit one receives from a free checking account, or the value of employer-paid health- and life-insurance premiums). During 2007, believe it or not, imputed income accounted for some 15 percent of GDP.

I would strongly suggest reading the above Harper’s article in full – it gives a deep and terrifying account of the extent to which our government engages in daily statistical fraud. Joseph Stiglitz, valiant though his attempt may have been, unfortunately cannot give a full picture of our government’s manipulation.

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