Tuesday, September 30, 2008

Who Could Have Possibly Predicted A Collapse?

Murray Rothbard, that's who.

In the 1991 preface to his Case for a 100 Percent Gold Dollar, Rothbard predicted the collapse of the United States banking system, and foretold with incredible accuracy the situation the American government currently finds itself in:

"The United States authorities would then be faced with two stark choices. One would be to allow the entire banking system to collapse, along with virtually all the deposits and depositors in that system. Since, given the mind-set of American politicians, and their evident philosophy of “too big to fail,” it is certain that they would be forced to embrace the second alternative: massive, hyper-inflationary printing of enough cash to pay off all the bank liabilities. The redeposit of such cash in the banking system would bring about an immediate runaway inflation and a massive flight from the dollar."

The world is full of ironies. It appears that by rejecting the ironically-named Emergency Economic Stabilisation Act, the US Congress has prevented a catastrophe of epic proportions. At least for now.

Perhaps it's America that's doomed?

Friday, September 19, 2008

GDP: A Load of Rubbish (Part 1.1)

Bobby Kennedy said it better than I ever could:

Monday, September 1, 2008

GDP: A Load Of Rubbish (Part 1)

Look inside any economics textbook and it will present you with a formula. It may look something like this:

GDP = Y = C + I + G + X - M

Gross Domestic Output = Consumption + Investment + Government Spending + Exports - Imports

However this metric, when used as an indicator of a country's 'well-being' is essentially flawed. Let's see why:


C (Consumption)

This is the aggeregate of all private spending in the economy. Everything from food to clothes to pianos to computers. However the figure soesn't include the various supply-constraining measures that the government imposes it. The Common Agricultural Policy for example has the effect of raising food prices for everybody. This will show up as an increase in consumption spending, when in fact the poorest people suffer the most from it. Any government licensing fees also limit supply, and hence artificially push up consumption.

Also calculated within 'consumption' is the money spent on combatting government violence. Lawyers and accountants are two professions that come to mind. Governments always make the legal system and the tax code more complicated, thereby increasing demand for the services of lawyers and accounants. This expenditure does not add any wealth to a nation, it merely keeps the money flowing from person to person.

That's what consumption calculates. But what doesn't it calculate? Well, all services rendered for free or as barter transactions do not show up in GDP. If I paint your fence and you mow my lawn, we both receive a benefit but it does not add to GDP.

Finally Black Market activities are not included in consumption data. Money traded for illicit goods like guns and drugs, and illicit services like prostitution and gypsy cab rides, does not add to the GDP figure.





I (Investment)

This is a fairly good indicator in GDP. However in the GDP formula, 'investment' refers to 'gross investment', rather than 'net investment'. It does not calculate the effects of depreciation of the capital stock. In reality we should be using 'net investment' as our indicator and hence 'net domestic product' (NDP) as the gauge of a nation's prosperity.

G (Government Spending)

Government spending is the aggregate sum of all spending on goods and services by the government. It does not include transfer payments, which are just transactions where money is taken from one individual and given to another.

The assumption that all government expenditure is good for the economy is ludicrous. Many occupations funded by the government would not survive in the free market. Governments are ripe targets for rent seeking activity, whereby powerful interest groups lobby the government for more money without increasing their productivity in return. Government jobs are seen as cushy, insulated and uncompetitive.

Lastly, as governments collect their money involuntarily, there are always problems when it comes to the greater economy. If the government gets its money from taxes, it disincentivises work and investment. If it gets its money from the printing press, it causes inflation. If it raises its money from creating debt, it distorts the interest rate.

(X - M) (Exports minus Imports)

This is also known as the 'trade balance'. The best critique of this measure is, for me, Milton Friedman's. In Free to Choose, Friedman wrote:

"Another fallacy seldom contradicted is that exports are good, imports bad. The truth is very different. We cannot eat, wear, or enjoy the goods we send abroad. We eat bananas from Central America, wear Italian shoes, drive German automobiles, and enjoy programs we see on our Japanese TV sets. Our gain from foreign trade is what we import. Exports are the price we pay to get imports. As Adam Smith saw so clearly, the citizens of a nation benefit from getting as large a volume of imports as possible in return for its exports or, equivalently, from exporting as little as possible to pay for its imports...

...In your private household, you would surely prefer to pay less for more rather than the other way around, yet that would be termed an "unfavorable balance of payments" in foreign trade." (Source)

Beautiful.

Conclusion

GDP is a broken measure. The only reason it stays in use as an indicator is because every nation on earth uses the same broken indicator.

In Part II, I shall examine how GDP is susceptible to the Broken Window Fallacy , paying close attention to the Great Depression. In Part III, I will discuss some alternative measures of national well being.

Who Really Owns Their TV?

Many European countries have TV licencing laws.

Here in Ireland, the price of owning a colour television set is €160 per annum. This money is then used by the government to fund the great television programmes that probably would not survive without the warm woolen blanket of government.

But that's not the point I'm trying to make here. My point is about ownership.

In econospeak, ownership is defined as full control of the resource in question. Ownership means not having to pay anybody for the privilige of using a resource. This is contrasted with renting, where a fee is charged periodically for the use of the resource. Failure to pay rent may result in fines or imprisonment.

By this metric, economically speaking, nobody in Ireland, Britain, France and
many other European countries owns a television. We perpetually rent them from our governments.