Economic recovery: don’t trust the GDP figures
There are at least three ways used to determine the success of an economy. We deal with something abstract called economic growth, we look at the most common measure we have for production which is Gross Domestic Product (GDP), or we tally up the number of jobs across the economy.
GDP is the favoured measure of wealth creation but it is an entirely artificial construct. Flaws abound in the construction of the national accounts, but let me focus on just one.
For the private sector, what is included is the money value of goods and services sold on the market adjusted for movements in the price level. But for most of the public sector, no such money value exists since what was produced was never actually put up for sale. Instead, the actual amount outlaid by governments for whatever they purchase is simply included “at cost”.
In the private sector, expenditure is only recorded after a business goes to all the effort of production and has then found someone to purchase what has been produced. In the public sector, whatever the government spends, on whatever it happens to buy, is put straight into the accounts without making any adjustment to determine whether there has actually been an increase in the community’s wealth.
A stimulus package will therefore create jobs, at least in the short term, and lead to a rise in the measured level of GDP. But whether the community is really better off economically is simply an unknown.