Monday, July 4, 2011

Why the GDP is intrinsically innaccurate in mixed and command economies

As I found myself contemplating the implications of the the historical decline of the real wage rate, it struck me that it could be used a more reliable metric in measuring the health of the economy, accounting for changes of the employment to population ratio of course, than the GDP.

In fact, because GDP is merely the cumulative price value of all goods and services in the economy, artificial prices that distort the value of a good or service renders the calculation flawed because it creates a value mismatch. In a purely free-market economy, this would be less of an issue because prices are determined by their actual value; if I built a useless product or provided an unneeded service, the nonexistence of demand will suppress my product or services' value because nobody wants or needs it, thus it will not contribute to the GDP.

However, in a mixed or socialized economy, where a product's value is not necessarily determined by supply and demand - which is the measure of the collective population's assessment of its value - but by Government fiat, my service may not benefit anyone or increase the overall welfare of the population, but if it is arbitrarily mandated by the Government its price will be artificially inflated and thus contribute to the GDP, even though no wealth was created.

The biggest example of value mismatch is Government and private Government-mandated bureaucracy. Jobs that promote little to no increase in prosperity and are yet a big contributor to the GDP. In fact, they may even be a hindrance. What is also at issue but is rarely acknowledge is the immense opportunity cost involved of having millions of people doing one thing and not another. Actually, given the opportunity cost, it wouldn't be the GDP increasing and prosperity stagnant, but the GDP being static and overall prosperity declining. The TSA is a textbook example. Unionization and featherbedding have also served to distort the price configurations. Bubbles also have huge effects on value distortions. A house increasing 2 x in five years because of unsustainable credit expansion is no indication of growing prosperity - the house is the same as it was before - but it does add to the GDP.

This is why the real wage rate, the average purchasing power of a worker in terms of goods that he really needs, like food, is a far more accurate measure of the actual health of the economy than the GDP that counts everything, useful or nonuseful. Because the wage rate is simply a measure of efficiency, jobs that contribute little will only suppress it.

However, efficiency is only one aspect of the overall size of the economy; you have to combine it with the amount of workers involved, either the employment to population ratio or the size of the labor force. The former would produce the size of the economy relative to the population, the latter would produce the size without regards to the population. Put differently, the former is equivalent to GDP per capita, the latter GDP.

With this in perspective, it is interesting to note that the real wage rate has declined since 1973 while the population to employment ratio is back where it was before women entered en masse in the workforce! So, there has literally been no economic growth for almost 40 years. For all the iphones and sophisticated technology that has been developed to increase our efficiency, there has been a huge parasitical sector dragging it down. One may object by pointing out that we are in a recession , so using current numbers is not indicative of a historical trend. But not only this recession is not even close to reaching its trough (this is a point already demonstrated in conclusive manner, only an idiot can believe otherwise), but it is simply a return to an illusory-free status. The only reason the economy appeared to be growing for the past 30 years is because of increases in debt. In all fairness, price distortions work both ways. You can buy a computer with an advanced duel core processor today for the same price as a windows 95 Dell 15 years ago.

What it all comes down to is that the true state of the economy is hidden within the intricate mirage of Government and FED distortions.

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