Monday, October 11, 2010

The Difference Between GDP and Utility

In short, paving a road that doesn't need paving is a pissing away of the taxpayer's dollars. That money could more easily be useful if you just return it to the people. Why?

You'll get the same amount of production which will show up in the all-important GDP figures AND people will actually get a use out of it.

This is the biggest fallacy facing expert economist's today. They're concerned too much about hollow numbers and not about standards of living.

Now, a shinny new nickel to the person who can explain why this won't help the economy, but will improve numbers.

ht

11 comments:

J H P said...

It's the broken window fallacy all over.

Eric said...

It will boost numbers because people will be working, lowering unemployment rates. They'll be getting paid, so they'll spend some of that money, giving some companies business and affecting the associated stock prices. This gives the appearance of economic recovery.

It won't help the economy because no goods are actually being produced, nor is any service being provided to others that they would pay for. In fact, most government services are "free" (in that you don't pay anything when you consume them, but you "buy" whenever you get a paycheck and thus lose your money to taxes).

More government jobs means more government salaries have to be paid, meaning higher taxes. Since we tax income, that means people make less money per paycheck, forcing them to scale back their economic activity to reflect this reality. As a result, there is a less vibrant, less prone to growth economy, despite the numbers.

Paul E. Zimmerman said...

It won't help because it's all G and C and not enough I. All of that government hiring is just shuffling dollars back and forth (extracted from the private sector) without really producing much. Available goods and services decrease, making what's left more expensive, and standards of living go down.

Anonymous said...

Gross
Domestic
Product

Government PRODUCES nothing. *

In fact it inhibits production with the taxation/borrowing it must do to employ all those college educated geniouses.

Though, "government money" can lead to production, the net value to the economy is always negative.

GW South said...

Pretty simple. GDP= C+I+S+G+(X-I).

More government jobs means G goes up which means GDP goes up. If the jobs actually provide utility, then all is well and good. However, I suspect that these jobs that are being added are likely redundant and provide nowhere next to no actual utility.

So yeah, pretty numbers and GDP goes up, but doesn't mean the economy is any better since its artificial.

Rosalys said...

What are you talking about! Paving roads is one of the more productive electioneering techniques! It's a pattern I've noticed for years now. About 2 months prior to election time, there is a great flurry of activity by the city paving the local roads. The more the incumbent mayor is in trouble the bigger the flurry.

ch said...

This had a pretty good commentary on what government spending has led to in the past while, and the entitlement attitude seems to have sticked and entrenched itself in American thinking.

http://www.nationalaffairs.com/publications/detail/the-trouble-with-public-sector-unions

Unfortunately we're not doing much better in Canada. Things can't get better until they get much worse for people who refuse to deal with reality.

pathfinderlight said...

As Eric pointed out, people will be working. However, the stimulus is about creating products or services of dubious value for the money we pay for them. The money for an official project is all on the books and reported as GDP. In this case, the money is actually being wasted on a repair job that doesn't need to happen, essentially, we're paying for no increase in value on our infrastructure investment. Hence, GDP is produced, but nothing of value comes of it.

Otherwise, the money is spent in another way in the official economy, spent in the black market (unofficial economy), or saved for later spending. We have a good portion of that money is going to provide health for the economy by individuals who want to see something for their money. In the case of saving, this incentivizes people to work who are trying to save up for a specific purchase...even without that product necessarily having been produced yet. In the case of black market transactions, the true value of a good or service is almost never accurately recorded, and hence isn't included in GDP numbers.

Hot Sam said...

GDP is a crude substitute for social welfare and a headline number politicians love.

GDP will never correctly calculate the increase in social welfare when a female engineer quits her job, fires her nanny, and home school's her kids. GDP will show this as a large loss, but the woman's preference reveals it as preferred. There are losers in her personal decision, but those losses are negotiated through the market. There are winners too, such as the person who replaces her. Her employer might gain if they can replace her with someone just as competent at a lower wage.

DC Handgun Info said...

Why growth in government workforce is a positive BAD: (Amen to commenter Eric!) Government workers don't produce one darn iota of goods and services that people would choose to consume. AND they're eating taxes collected from those (who remain) in the private sector.

Ryan Fuller said...

"You'll get the same amount of production which will show up in the all-important GDP figures AND people will actually get a use out of it."

Ah, not so! People generally save some of their money or use it to pay down their debts (to other people who will likewise not spend every last cent), which doesn't show up in GDP. On the other hand, the government always blows the whole wad. Thus, government is a better steward of your money than you are.

Cripes, I hate Keynesians.