Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: WEDNESDAY, February 10, 1993 TAG: 9302100363
SECTION: EDITORIAL PAGE: A7 EDITION: METRO
SOURCE: LAWRENCE M. PARKS
DATELINE: LENGTH: Medium
A BIG LIE
AT AN IBM conference two years ago in Palm Springs, Calif., IBM Chief Scientist John Armstrong spoke about IBM research and development with a 30-year time horizon. Were IBM to shut down that R&D and "early retire" the scientists and engineers employed on it, there would be no effect as far as the gross national product (a.k.a. "the economy") is concerned, because GNP does not include R&D.Already, one should discern that there is something wrong with the concept of using GNP to measure "the economy."
Even more troublesome, while the real economy certainly decreases when scientists and engineers are fired, if they get jobs as taxi drivers or hamburger flippers, there is an increase in GNP. In other words, the way the GNP is calculated, the real economy can be decreasing while the GNP is increasing!
And as far as the Bureau of Labor Statistics is concerned, there would be no change in employment: Employing scientists as taxi drivers makes no difference!
The lie is to say that the economy is improving as GNP grows. This is because GNP does not measure economic activity. Instead, GNP counts the value of products and services that come to market during a given year. It omits the value of many intermediate outputs that are part of the real economy and incorporated in products or services that may come to market in future years. GNP measures only some of the results of economic activities.
Economic activities are those that add value and are performed in the expectation of a return on investment, including an investment of one's time and effort. Economic activities that span a long time-horizon decrease as interest rates and taxes increase.
The higher are interest rates and taxes, which increase as government spending increases, the lower is the return on investment from economic activities, including investment in acquiring "know-how" - that is, education. Economic activities (including education) are curtailed or transferred to countries where relative government spending and concomitant interest rates and taxes are lower. None of the decrease in long time-horizon economic activities is reflected in GNP.
Most importantly, GNP includes government spending for goods and services that is not economic activity at all. Government spending is really consumption and should not be included in any measure of the economy.
As government spends more, taxes and interest rates increase, return on investment from economic activities decreases, and the real economy shrinks while the GNP expands. In fact, we know from the experience of Soviet Russia that if the government spends enough, it will destroy the real economy altogether.
That's why, with almost 10 million Americans unemployed and an additional 6 million underemployed, many insist that "the economy" (i.e., the GNP) has been growing, albeit at a very small pace, when in fact real economic activity across the nation has been decreasing markedly.
For these reasons, it is a lie to say that the economy is improving as GNP increases. The truth is that GNP as a measure of the economy is without merit and bears little relation to what is happening in reality.
It follows that government fiscal and monetary policies directed at improving the "the economy" (i.e., the GNP) are based on a false assumption. If the measuring rod is irrelevant, then how can the result be what one expects?