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Thursday, 16 April 2009

Curing the GDP fetish

Last week the Telegraph ran a story quoting a senior cabinet minister, possibly Stephen Timms but the paper wasn't clear, as saying:

"Previously, a country would only go if they were in a very bad state. It was a bit like going to accident and emergency to get urgent help. This new facility will not be like that. It is a bit more like getting wellbeing care or even like going to a spa to recuperate."

The recuperation this country needs is a wheening from the idea that headline GDP numbers are a measure of economic health. We can expect government spending to be up again this year when overall economic activity is in slight decline, which means that non-government spending is falling off rapidly. But we can't cut spending now say the neo-Keynesians because that will reduce activity further with a downward spiral. But that ignores reality, a bit like an aircraft on the point whose pilot insists that the nose must be kept pointing upwards because they can't afford to point down.

The truth is that the aircraft like the economy must be allowed to fall. Government spending cannot continue to be funded by borrowing and higher taxation will simply drive investment away. The government will have to live within its means and if tht means the current administration can't fulfill their manifesto commitments, well, no surprises there. Perhaps the current electorate will learn the same lesson that was learned in the 1970's. If a government clings to power by promising goodies in excess of the economies capacity to pay for them, if it mismanages the resources then eventually it will be pushed out of power.

The real story is that if the size of the economy is dropping 3% this year, government activity which is now 48% of all activity is growing at 6% a year for the next to years in an effort to boost GDP, what doies that tell you about the other 52% (proabably less) of the economy. A little basic maths tells us that it must be falling at around 11% or so. That is the real issue, and has been for years. Higher government spending may be a boost in the short term as it keeps shops open and optimism up, but in the long term, wasteful spending to feed the GDP fetish is just a burden on the economy, discouraging inbound investment and eventally leading to higher unemployment bankruptcy and ruining lives. That is what we are seeing coming through now.

The current fiscal deficit has been like watching a cartoon character running over the edge of a cliff. For the past five years the government has been doing the running on thin air trick, but now they are is loooking down into the canyon.


Demetrius said...

Increase GDP? Dead easy, get in your car, drive around the M25 a couple of times, then head for the nearest shopping mall, and spend, spend, spend. Yvette Cooper must be familiar in detail with the Vivian Nicholson Theory of Economic Growth from 1961, it is the basis for government policy.

Alex said...

Well its easier than that. Put up taxes and pay people on the public sector payroll more. In fact ceate a lot of non-jobs and tax those on the payroll and everything they spend. Send the money spinning faster and faster in a circle. GDP goes up but nothing extra is actually produced

GDP is a measure of money passing not a measure of economic value.