GDP and What We See

The United States is now said to be out of recession and to have been out of recession for a good while because the government’s reported gross domestic product has been increasing. Yet polls show that a large percentage of the population believes the country in still in a recession. An unusually high levels of unemployment and underemployment, a lower average net worth of households, a depressed market for residential real estate,  and other factors support that opinion and indicate that the economy is still doing poorly.

Various writers have pointed out the shortcomings of GDP statistics as an indicator of the health of the economy. There are significant problems with both the collection of the data and the methods of analysis. Additionally activity in the so-called underground economy of both illicit activities and otherwise legal but unreported cash transactions is not measured. Neither is activity in the fully legal and  probably much larger second underground economy of goods and services produced by people for themselves with no money changing hands – everything from home gardening and canning to do it yourself-ers painting their houses to friends helping each other with car repairs and  household wiring.  Also GDP calculations treat all types of measured economic activity as  equivalent. A given amount of money spent on a Solyndra or a Cool Hand Luke stimulus project of activity no more productive than digging holes and filling them back up counts exactly as much as the same amount spent on developing the next iPhone.

In ordinary times these and other difficulties do not prevent the GDP statistics from being useful in estimating the health of the economy. People can assume that the omissions, problems of method, and systematic errors will have about the same effect as a percentage of the whole at one time as another and use the trends in the GDP as indicators of a growing, stagnant, or declining economy. However that is acceptable only so long as the assumption is valid.  If the percentage of economic activity that is either unreported or unproductive changes significantly, the GDP statistics will give a false reading on the health of the economy.  This happened immediately after World War II when the official GDP registered a serious decline because of a decrease in government spending on the war, but the real economy saw neither a depression nor serious unemployment but rather an improvement in the average standard of living.   The earlier war time GDP was artificially high relative to the actual health of the domestic economy because so much of that GDP was spending on the war – spending which, while necessary, did not produce as much as the numbers alone would have indicated in the way of goods and services for the domestic economy. We have had something similar in reverse order in the last few years. The post-2008 GDP statistics are artificially high relative to the actual health of the domestic economy because an abnormally high percentage of the GDP has been unproductive and/or inefficient government spending which has produced comparatively less in the way of useful and desirable goods and services in the real economy. The country is thus doing worse than the GDP numbers indicate, and citizens may indeed believe their lying eyes rather than what the politicians are telling them.