I’ve commented before on how the government has changed its methods over the years for calculating the economic stats, to make itself look better.
For example, consumer price inflation has been running about 8-9% per year under the 1980 method. I don’t claim the 1980 method is right; but the government claims only 1% CP inflation from its newer methods, and that number violates many people’s first-hand experience of rising prices and declining living standards.
Or with unemployment: by 1930s methods, it has been running 15-20%, which means we are already in the Great Depression 2.0. Again, I don’t view the older method as sacred; but that number fits many people’s experience better (as they have been forced into permanent unemployment, part-time work, etc.) than the government’s claim of 7.4% unemployment.
The people who change the statistical methods always have excellent-sounding reasons. There’s just one problem. Their changes always run in one direction, to make the government look better.
Somehow, they never adopt changes that could make things look worse. The latest example is GDP (Gross Domestic Product). Last week, the government published new data from new formulas for calculating GDP.
Guess what? The changes make the government look better. Suddenly, America’s GDP is supposed to be $550 billion higher. Which improves America’s debt-to-GDP ratio magically; that is, even though nothing has changed in reality.
But some of the changes they made are unreal, almost too silly to believe. The first ZH link above provides neutral-sounding descriptions from Bloomberg. Peter Schiff gave clearer and more colorful descriptions, in a preview back in April:
In the simplest terms, GDP is calculated by combining a nation’s private spending, government spending, and investments (while adding trade surplus or subtracting trade deficits). Business spending on R&D, a portion of which comes in the form of salaries, has traditionally been considered an expense that does not explicitly add to GDP. But now… the $400 billion spent annually by U.S. businesses on R&D will count towards GDP…[such as] the cost of producing television shows, movies, and music…Supporters of the change often hold up the blockbuster television comedy Seinfeld as an example. Given that the show’s billions in earnings far exceeded its initial costs, they argue that the production expenses should be considered “investments” (like R&D) and be added into GDP.
In other words: The money blown on developing artworks, such as movies – many of which earn nothing and are worth nothing – was traditionally not counted as GDP. And now, it is going to be counted as GDP. Schiff continues:
In essence, the new methodology is an exercise in double accounting. For instance, suppose a company employs an accountant who works in the sales department, who is then transferred to the R&D department at the same salary. He still counts beans but now his salary will be billed to the R&D budget rather than sales. In the old methodology, the accountant’s impact on GDP would come only from [his spending his salary]. Going forward, he will add to GDP in two ways: from his personal consumption and his salary’s addition to his company’s R&D budget. The same formula would apply to a trucker who switches from a freight company to a movie production company (for the same salary). If he moves refrigerators, he only adds to GDP through his personal spending [of his wages], but if he hauls movie lights, his contribution to GDP is doubled. It makes no difference if the movie bombs…
Another change that will artificially boost GDP concerns how government salaries will be counted…The new system magnifies the GDP impact of government pensions, which are a principal component of public sector compensation. Going forward, the pensions will be calculated not from actual contributions, but from what governments have promised. Under the old system, if a state had a $10,000 pension obligation but only contributed $1,000, only the $1,000 would be added to GDP. Under the new system the entire $10,000 would be counted. So now governments can magically grow the economy simply by making promises they can’t keep.
Emphasis added. Schiff’s article has a lot more; RTWT. Or if you prefer video rants, Schiff has a good one from last week, here.
The point is that many (if not all) of these GDP formula changes are baloney. But, baloney with a purpose: making the government look better. America’s GDP is magically larger, and its debt-to-GDP ratio is magically lower, even though nothing is any different than it was the day before.
That is what America is coming to.