Haddon Libby
Last week I debunked the unemployment rate which is not the headline 7.7% touted in the news but 17%. Those in government over the decades have redefined the meaning of unemployment to exclude most of the unemployed.
To understand why many are so worried about government spending levels and the related debt burden, we have to understand the revenues of our country or its Gross Domestic Product (GDP). As I get into this, you will be surprised by just how ‘gross’ the number has become.
Until 1991, our country used Gross National Product or GNP. Why the change? GNP is everything created by Americans or Corporate Americans (companies are people too) whether domestically or overseas. GDP measures everything created within our borders without consideration as to the nationality of the person or company owning the revenues created.
When you look inside of our $15.85 trillion annual GDP, some surprising things are included. The closing of a business has ‘value’ to the country. This is not the cost of the moving van or wages paid to the repo man but the implied value that can be attributed to the end of a business. Closing businesses actually creates GDP!
The value of living in your own home creates $1.5 trillion of GDP every year. This is not the actual value of your home or apartment but the value of the concept of just living in it. I’m getting a fictitious rise in my personal net worth just thinking about it.
GDP also includes things like the value of a free checking account.
If you are one of the fortunately employed who gets healthcare, the value of buying the healthcare through your company at a price better than you could get on your own adds to GDP. This is not any corporate subsidy you may receive but the difference between the business rate and the individual rate.
One of my ‘favorites’ is that decreases in computer prices are added to GDP. Think about that for a minute. GDP went up because the price of something sold went down. I would personally think that this is not increased GDP or revenues but the lowering of operating costs. Only in government can you lower costs and include the savings as revenue.
Given this blatant disregard for basic accounting standards, I’m surprised that they have not factored in the illegal drug trade or prostitution. Wasn’t it Ronald Reagan who said, “Politics is supposed to be the second oldest profession. I have come to realize that it bears a very close resemblance to the first.”
Before the final official GDP number is cooked, a ‘deflator’ must be added in order to remove inflation. Stated differently, they need to eliminate the official inflation rate (2.1% which is not the real inflation rate that is closer to 10%) in order to get to a ‘true’ assessment of GDP.
After all of these numerical gymnastics, is GDP $15.8 trillion, a more accurate $12.5 trillion or some other number?
The answer to this question becomes of critical importance when we think about our ability to service our national debt which is nearly $17 trillion. For comparison, a well-run and healthy economy would have no more than $9.5 trillion of debt if revenues were $15.85 trillion. If revenues are closer to $12.5 trillion, debt should not exceed $7.5 trillion.
As you may know from your own personal finances, the burden of too much debt affects your choices in life. For a country, it means that it is more difficult to invest in its people, infrastructure and the future which translates into a lower standard of living over time.
