Tuesday, September 23, 2014

GDP is Waste

By Charles Hugh Smith


Any system that has no way to measure, much less prioritize, opportunity costs and maximization of utility is not just flawed--it is terribly misguided and structurally destructive.
We're told the gross domestic product (GDP) measures growth, but what it really measures is waste: capital, labor and resources squandered in quixotic pursuit of waste masquerading as "growth." 


50 million autos and trucks stuck in traffic, burning millions of gallons of fuel while going nowhere? Growth! All that wasted fuel adds to GDP. Everyone who works from home detracts from "growth" since they didn't waste fuel sitting in traffic jams.

Repaving a little-used road: growth! Never mind the money could have been invested in repairing a heavily traveled road, or adding safe bikeways, etc.--in the current neo-Keynesian system, building bridges to nowhere is "growth."

GDP has no mechanism to measure mal-investment or the opportunity costs of squandering capital, labor and resources on investments with marginal or even negative returns
.
Buying a new refrigerator that could have been fixed by replacing a $10 sensor: growth! GDP has no mechanism for calculating the utility still remaining in roads, vehicles, buildings, etc. that are replaced--throwing away all the fixed-investment's remaining utility to buy a new replacement is strongly encouraged because it adds to "growth."

Building and maintaining extraordinarily costly weapons systems that are already obsolete: growth! The gargantuan future costs of interest paid by taxpayers on the debt borrowed to pay for the obsolete weapons is not calculated by GDP. The staggering costs of indebting future taxpayers is ignored by GDP--the only thing that counts in GDP is "growth."

Tearing out a functioning kitchen to install granite countertops and new appliances: growth! GDP has no mechanism to measure the decline of quality in new appliances, or the marginal utility of granite countertops over the existing surfaces.

Writing complex derivatives designed to defraud the buyers: growth! The immense profits booked by investment banks and the bloated salaries of the financiers who wrote and sold the guaranteed-to-default derivatives add greatly to GDP.

Creating another huge bureaucracy to oversee the financiers: growth! Squandering taxpayers' money on more layers of bureaucracy adds to "growth" and GDP--never mind that the labor is all wasted, since a 12-page law could have achieved the same results at near-zero cost.
GDP has no mechanism to measure the value of alternatives that use less capital, labor and resources to get the same results.

Tossing out an item of clothing that was worn once or twice in favor of the latest fashion: growth! GDP has no mechanism to measure what else could have been done with the oil burned to ship the new item of clothing across the Pacific and truck it to the retailer; if a consumer spends money on the new clothing, GDP registers that as "growth" (the only economic metric we measure and value) without calculating what else could have been done with the non-renewable resources squandered on frippery.

GDP is another outmoded part of the Keynesian Cargo Cult that worships "growth" and spending (a.k.a. aggregate demand) as the only goal. The Keynesian Cargo Cultists believe that paying people to dig holes and refill them is an excellent strategy for "growth:" ordering bureaucrats to bury wads of cash in abandoned mines and then turning the unemployed hordes loose to find the cash is Keynes' own example of worthy ways to generate "growth."

This narrow way of understanding the world completely ignores the non-renewable nature of fossil fuels and the critical concept of maximizing the utility of capital, labor and resources.
Any system that has no way to measure, much less prioritize opportunity costs (i.e. what else could have been done the capital, labor and resources) and maximization of utility is not just flawed--it is terribly misguided and structurally destructive.