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  • Writer's pictureAlan Stevens - AWAH - Libertarianism, Freedom.

Economic Statistics Mislead the West

Nobody imagined that national output could or should be measured before the 1930s.  Since then, Western states have clung to Keynes’s misconceived National Income statistics to measure ‘progress’ and relative military potential.


Keynes’s 1930s invention of National Income accounting created a house built, like the rest of Keynesianism, on intellectual sand.  In particular, Gross Domestic Product (GDP) as a measure of prosperity and progress is wholly unfit for purpose.  So unfit that it helps explain the disconnect between what legacy media assert is steady economic growth, versus the general decline in living standards perceived by most people in the West. 


Faulty GDP measures also feed the hubris of the Collective West in its dealings with the Global South, and in particular with Russia.  The thinking went – ‘How can NATO countries with a combined economic heft (annual ‘GDP’) of around $45 trillion, and $1.5 trillion of annual military spending, be thwarted by Russia which has an annual GDP of $2 trillion?’  


WHAT IS GROSS DOMESTIC PRODUCT (GDP) MEASURING?

GDP measures the sum of recorded money transactions in a society.  Such transactions need not represent the creation of real value, nor need growth in GDP indicate genuine economic progress.  


THE IMPOSSIBILITY OF MEASURING ECONOMIC PROGRESS

First things first.  Followers of the Austrian School of Economics consider all transactions in society, not just those in the ‘formal ‘economy.  They discuss how, in a free society – which nobody reading this post has experienced - people generally exchange their time, labour, money and other resources for mutual benefit on a wholly voluntary basis.  Austrian Economists also examine the ways in which our current ‘non-freedom’ works, or rather cannot work.  They show that coercive interference in people’s lives can only impoverish them.


The Austrian School asserts, as an a priori (i.e. true with needing supporting evidence) assumption, that people cooperate when they think that each exchange would maximise their ‘Psychic Income’ (or at least ‘lessen their sense of felt unease’), compared to alternative transactions they might have accepted.  Cooperation is based on each party’s purely subjective, unique, understanding of what might make them happier.  Or less unhappy.  Transactions include commercial employment and exchange, but they also include charitable and mutual provision, and running households and families.  In fact, everything.


On this view there are already two big problems with trying to measure ‘the economy’. 

Firstly, it is, in principle, impossible.  You can’t measure or compare what the sum of all individuals subjectively believed would be the outcomes of the transactions they engaged in in a year.  The only fall-back is to assume that money payments are a valid guide to value creation throughout society, even though much social cooperation involves few payments.


The second problem with measuring the ‘economy’ is that the results are misleading.  Still less do we need the state and its tiresome officials who rely on such statistics.  It’s all part of the fashionable but mistaken belief in Socialism.  Mises, the great Austrian School economist, demonstrated in 1920 that central planning cannot work ever.  Many millions of people suffered and died under communism to prove Mises correct.  The truth is this – the more people are free to make their own choices, the more opportunities they find to improve their lives.  Prosperity is the child of freedom. 

 

TRANSFER OF INFORMAL ACTIVITY INTO THE FORMAL TAXED ECONOMY

Much value is created outside the formal economy, especially in households.  If ‘informal’ activity is transferred to the commercial world, it swells recorded payments and therefore GDP and ‘growth’, as well as tax revenues.   Let us assume, for example, that the growth of salaried female employment and the concomitant growth in divorce lawyers, childcare, ready meals, home help etc. doubled recorded total payments and therefore GDP since the Second World War.  Much of this ‘economic growth’ would be illusory – a mere transfer of informal household production into GDP, and the tax net.


MONEY TRANSACTIONS NEED NOT REPRESENT VALUE OR PROGRESS

Keynes helped design National Income accounts in the 1930s.  Governments were then much smaller relative to overall activity, seizing 20-30% of people’s productive effort compared to the roughly 50% predation normal in the West nowadays.  Less than twenty years earlier most Western governments consumed about 10% of national income.


If the government sector is very small and meddles comparatively little in other people’s business, it can be assumed that most transactions in society are voluntary and represent genuine value creation. In these circumstances it does not do too much violence to reality to assume that the sum of recorded money payments has some meaning.


However, nowadays, we live in state dominated societies.  Half of recorded payments in the economy are directly to do with the state.  Production in the remaining ‘private sector’ is also regulated, ‘cartelised’, in order to benefit politically powerful big business at the expense of consumers and smaller businesses.  Naturally the result is less freedom and lower output.


CORRECTING GDP BY SUBTRACTING STATE ACTIVITY

People in the state sector may, or may not, act from the best of motives.  But they do not demonstrate the worth of what they do in a setting of free exchange.  Instead, they live on the proceeds of (‘legally’) plundering their countrymen.  The state sector is economically parasitical.  Its activities should not be included in a measure of societal wellbeing.  As a practical matter, state activities rarely generate wealth that could be used to pay for imports or service debt, which is a key aspect of national creditworthiness and resilience.


We should deduct state sector expenditure to arrive at ‘marketable’ or ‘market sector’ GDP estimates.  What happens when we do?  France is an extreme example.  She has a reported annual 2022 GDP of around $2.8 trillion, public spending of 58% of GDP and a debt to GDP ratio of at least 120% (Britain was better with a roughly $3 trillion GDP, 46% Public Sector spending and government debt to GDP north of 90%). 


In comparison, Russia’s reported 2022 GDP was just $2 trillion.  And it was spread over roughly 140 million people, compared to roughly 70 million each in Britain and France.  This small total - and the implied low economic production per head – played a key role in misleading the Collective West’s elites into expecting a speedy Russian collapse in 2022.  State sector spending accounts for around 37% of reported GDP and the Government debt to GDP ratio is under 20%. 


It is worth mentioning that Russia has a flat rate income tax of just 13%.  That indicates a surprising degree of economic freedom and helps explain its resilience.  Much of the Russian government’s revenues stem from its evidently well-managed involvement in hydrocarbon and nuclear power markets.  

        

If you deduct state spending from recorded GDP totals, a truer picture of private sector or marketable production appears for France, Britain and Russia.  Once state spending is excluded, France, Britain and Russia have modified ‘market sector’ GDPs of around $0.9 trillion, $1.6 trillion and $1.3 trillion, respectively. The government debt to ‘market GDP’ ratios are >250%, >150% and >30% respectively.  Russia has plenty of balance sheet capacity, for growth, or for war.  The West, especially France (and Italy), does not.  Default and crisis in France in particular would seem inevitable at some stage.   

Russia still looks like an also ran, especially next to the USA with its 330 million population.  The USA’s calculated ‘marketable GDP’ would be $17 trillion ($28tn GDP and Government spending at roughly 40%).  US federal debt - currently around $32 trillion and growing at a trillion dollars every hundred days – is around 180% of marketable GDP.


However, there is a lot further to go in criticising national income statistics, and reliance on them as an indicator of either national prosperity or military potential.


REGULATED MARKETS OVERSTATE GDP

Governments spend money on their own programs. They also regulate and meddle in allegedly private sector activities.  The health sector in the USA is supposedly a market sector, but it has been converted into an inefficient cartel by corporatist collusion between the state, privileged firms and professional bodies.  It consumes getting on for a fifth of GDP. 


All this expenditure ensures healthy payoffs for senators and congressmen – Big Pharma and the Military Industrial Complex are their two biggest donors.  Any system which makes elected representatives into multi-millionaires is not going to be reformed any time soon.  Costs and policies are not going to be reined in, regardless of the welfare or views of Americans.


The American healthcare system is associated with some of the worst healthcare outcomes in the developed world.  Singapore spends around a quarter as much as a proportion of GDP and gets much better outcomes.  Does that mean that the sum of payments in the American health system should be discounted by 75% to arrive at a fairer estimate of value?  Should we cut US GDP by 15% to allow for its poor health sector productivity?


Nobody has been living in a genuinely market economy in the West for many decades.  Most industrial sectors have intentionally been turned into cartels by the heavy costs of ‘free trade agreement’ market rigging and domestic state regulation, especially for smaller competitors.  Across the West, lobbyists write competition-suppressing regulation.  Their fat and happy, tame government officials pass it into law.  The result is uncompetitive markets, overpriced output and overblown payments to undynamic, poorly performing firms.  


The output of heavily cartelised industry sectors is accordingly going to be overstated in GDP estimates. Two glaring examples are the UK’s High Speed 2 (HS2) rail project, and the USA’s F35 stealth fighter programme.  Both are creatures of private sector cartels, UK construction firms and the US military industrial complex firms, combining with state interests and politicians to get the maximum number of snouts in the public trough.


If HS2 were ever built – I wonder if Britain any longer has the physical resources to do it – it could cost north of £200 billion.  It would create something of next-to-no market value.  The 600 F35s acquired by the US government could have cost $150 billion so far – the cost of the lifetime F35 program has been estimated at $1,100 billion.  I fear we may get to find out whether they work if the West gets the world war that it seems to long for – but most of them are not ‘mission capable’. 


However, the relevant point here is that the UK and USA statisticians will have happily added these eye-watering sums into their National Income/GDP accounts.  They may be pure waste but their costs will be counted as increasing reported living standards, and ‘growth’.    


MISLEADING EXCHANGE RATES FALSIFY GDP COMPARISONS

The next topic is currency exchange rates.  The US dollar and the linked currencies of America’s allies are typically overvalued.  Goods and services prices are generally too high in the West relative to the price of comparable goods and services elsewhere.

This partly reflects the massive state tax and regulatory costs incorporated in Western products and services.  Amongst the worst examples is housing costs which have been driven to unaffordability by planning regulations and state enabled bubble financing. 


EXCHANGE RATES FASIFIED BY WESTERN DOLLAR PRINTING

The overvaluation of Western exchange rates is strongly connected to the privileged position of the US dollar.  The dollar is the world’s reserve currency (and other Western currencies are more or less followers in the dollar system).  Originally, under the post war Bretton Woods international currency system, it was the only currency convertible (if only by other governments) into gold at a fixed rate of $35 to the ounce.   The US defaulted in 1971 on its obligation to back the dollar with gold.  Nevertheless, American influence has been sufficient until the Ukraine fiasco to ensure that everyone continued to use and to need US dollars.  Most trade and borrowing around the world is still carried out in dollars.


Western financial systems, especially in America and Britain, magically create US dollar credits or ‘money’ out of thin air.  Other countries need these dollars in order to engage in international trade.  They must sell real goods and services to the West to get the newly created dollars.  To make this happen, the value of Western currencies in foreign exchange markets has to be much higher than would normally be the case.  And Global South currencies must be lower than they should be.  Overvalued Western exchange rates enable the world to sell more goods for dollars, by making Global South exports super-competitive on price in Western markets.


The effect of rampant US Dollar creation has been big transfers of foreign resources (in the form of manufactured products) to the West, and the USA in particular.  This has enabled the US to pay for an exorbitant imperial military which is of no benefit to ‘ordinary’ Americans. 


But Western, especially US and UK, manufacturing has been hollowed out by years of artificially uncompetitive Western exchange rates.  All of a sudden, the West has now realised that its industrial base, and therefore military potential, is too small.


As far as this post is concerned, the main point is that unequal exchange rates produce very misleading GDP comparisons.  When Tucker Carlson travelled to Moscow for his recent, ground-breaking, interview with President Putin, his team also recorded an impromptu trip to a Moscow supermarket.  Each member tried to do his typical weekly shop.  The general view was that the bill in Moscow was a quarter of what the American total would have been. 


Can one quadruple the estimated value of Russia’s output based on that one extremely unscientific test?  If so, Russia would be easily Europe’s biggest economy.  If Russia’s ‘official’ GDP were quadrupled, the Russian standard of living per head would be about two thirds of America’s.  Could that be true?


Some prices are certainly way out of line.  For example, weapons.  The Russians reportedly produce 155mm artillery shells, still the principal battlefield killer, for $600 each.  The West is supposedly paying up to 10 times as much.  Combined Western production of shells is roughly an order of magnitude smaller than Russia’s.  Economies of scale, plus the exchange rate mismatch, mean that this reported cost discrepancy could be genuine. 


The West spends ten times as much on ‘defence’ as Russia.  How could it lose in the Ukraine?  Well, the answer is a lengthy one.  But overvalued exchange rates, industrial weakness, wantonly wasteful defense procurement, and choosing a fight so close to Russia and so far from the US, seem to have more than negated the West’s spending ‘advantage’.  (And no, the answer is not China, which has yet to put its weight into the balance.)


The whole area of currency comparisons is a minefield, if you will pardon the expression, made worse in Russia’s case by wild fluctuations in the Rouble’s exchange rate since 2022. 


PURCHASING POWER PARITY (PPP) GDP

However, the OECD does try to produce GDP estimates for various countries which allow for discrepancies caused by exchange rate distortions.  It estimated in 2022 that Russia’s ‘purchasing power parity’ (PPP) GDP is two or three times its official GDP.  On this basis, Russia vies with Germany as Europe’s biggest economy in PPP terms, well ahead of France and Britain. 


Looking at it in ‘market sector’ GDP terms, Russia’s $5.2 trillion OECD PPP GDP estimate becomes a ‘marketable’ GDP of $3.3 trillion when adjusted for its 37% state sector. 

Germany’s $5.7 trillion PPP GDP, adjusted downward by government spending at 50% of GDP, gives a market sector PPP GDP of $2.9 trillion.  These figures are a couple of years old.  Since then, Germany has lost access to Russia’s inexpensive energy and raw materials.  It is experiencing de-industrialisation.  But Russian industry is booming as a result not just of war production but also of import substitution of western goods taken off the market by sanctions.  Russia may now be much bigger than Germany in PPP GDP terms.


Meanwhile, on a PPP basis, Russia’s ally China is estimated to be, by some way, the largest economy on Earth - $35 trillion annually compared with America’s $28 trillion. 

    

INDUSTRIAL PRODUCTION AND GDP

The hypothesis of this post is that the use of Gross Domestic Product as an indicator of the size of national ‘economies’ and by extension national strength and wellbeing, is profoundly misguided.  Politicians use GDP statistics to assert that living standards are high and growing when they may well be doing the opposite. 


They also assume that GDP statistics genuinely cast light on the practicality of engaging in wars overseas.  For example, the Collective West’s combined official GDP is over twenty times Russia’s official $2 trillion GDP.  So therefore, the thinking would go, Russia should have no chance of defying the West.  But, quite evidently, that is not the case.


Governments also produce Industrial Production statistics.  I don’t propose to get into this in detail.  But suffice it to say that the story of steadily increasing prosperity in the West over recent decades is not well supported by industrial production measures.  I am aware that countries can in principle prosper by focussing on ‘services’.  Britain is said to have done this, especially in financial services.  I would ask: How likely is it that a successful society would have a flatlining manufacturing sector?  And what proportion of UK activity is simply an unsustainable money creation bubble?


I compare below steel production in some leading economies with the levels achieved in the late 1960s.  That was when our current leaders were forming world views that they seem not to have updated.  I am perfectly aware that steel production is an imperfect proxy for manufacturing prowess.  However, the ability to use energy and skill to turn metals and other resources into useful goods (and indeed weapons) seems to me to be a basic element of national prosperity and resilience.  It is certainly a crucial concern in war.

 

Here is annual steel production in millions of tonnes, with 1967 levels for comparison:

 

 

2022

1967

United States

81

115

Germany

35

41

Britain

6

24

Russia

88

97

China

1,019

14

               

 

The Chinese figure is not a typo.  It seems that China produces half of the world’s 1.9 billion tonnes of annual steel production.  The world total was just 497 million tonnes in 1967.  And this was dominated by the Collective West’s output.  Not anymore.


Britain’s de-industrialisation has been very marked.  It shows in the steel figures.  France is similar with 10 million tonnes (down from 20MT in 1967).  Germany and Italy have held up (Italy 21MT compared to 16MT).  China simply has the massive manufacturing potential that America used to have.  Russia could have industrial potential comparable to the 500 million strong EU, and a big edge in military technology and production.  Self-evidently, it has been more than enough to manage attritional warfare in Russia’s very near abroad.


Why did the globalist elites, who pull the strings of the West’s feckless, compromised politicians, expect Russia to be a military pushover?  And why would anyone imagine that a confrontation with China in its own near abroad would go the West’s way?  


Conspiracy theorists might suppose that the real plan was to wreck the US and Russia to enable European based DAVOS globalists to ‘build back better’ in a dystopian, rather less populated, world.  The idea is brilliantly explored in the film ‘The Sum of All Fears’ – complete with a ‘globalist’ false flag attack on the USA in Baltimore.  Sound familiar?


Alternatively, the problem may just be that Western elites have clung on to outdated world views, in part by relying on bad information in the form of GDP based National Accounts.


INFLATION, MONEY CREATION AND ECONOMIC GROWTH

National Income/GDP accounts are not just useless as measures of contemporary wellbeing.  They are also misused to support politicians’ assertions that things are getting better.  An increase in recorded payments in one year compared to the previous year is described as ‘economic growth’.   


As discussed, an increase in recorded GDP need not represent economic progress.  It could represent moving previously unrecorded informal household work into the formal, taxed, ‘economy’.  Or it could be measuring increases in health care, legal, ‘educational’, state or regulatory expenditures which may make little if any contribution to society’s wellbeing.


INFLATION

There is, however, yet another problem.  Let’s pretend that the sum of recorded payments making up GDP is reported to be 10% higher than it was in the previous year.  That would be reported as 10% ‘economic growth’.  But what if prices in general also increased by 10%?  That would mean that ‘real growth’- i.e. after adjusting for a general rise in living costs (‘inflation’) - would be zero.  


Small differences in inflation estimates make all the difference to whether or not any growth is occurring.  In the above example, if the general price index is deemed to have risen 8%, then real ‘economic growth would be deemed to be 2% (10% increase in national income deflated by 8% ‘inflation’). But if the officials find that the general price level increased by, 12% then ‘economic growth’ would be minus 2%. 


Government statisticians manfully create several price indices to measure inflation and adjust each year’s GDP statistics to arrive at real changes in GDP.   Politicians prefer lower estimates of inflation to higher ones.  Low estimates of price inflation reassure voters.  They reduce the amount by which transfer payments have to be increased to offset ‘inflation’.  Low estimates also result in estimating that Real GDP, the economy, is growing.  It takes very little change in the estimated rate of price increases to convert GDP growth into decline.


There is plenty of evidence that officially reported inflation is being more or less deliberately understated to paint a rosy growth picture.  For example, the very marked increase in housing costs in Britain and the USA are certainly not fully reflected in inflation indices.  In America dollar prices of new cars went up very roughly twofold in the first couple of decades of this century. But the car component of the US price remained largely unchanged.  This is due to so-called hedonic adjustments, meaning the cars are supposed to be ‘better’ now.


There are specialist private economics firms which compute inflation indices without recent changes in methodology.  They appear to find US inflation is being understated by several percentage points annually.  If US GDP estimates had been based on the old way of calculating inflation, US living standards would be reported to have declined markedly over recent decades.


There is reason to think that inflation has been consistently understated throughout the West, which means that growth as measured by GDP has been overstated.  In reality it is quite possible that the West could have been contracting recently, in economic terms, rather than growing.


CONCLUSION

National Accounts, GDP and its allied flotilla of proliferating statistics, are largely nonsense.  It’s turtles all the way down – each piece of misunderstanding, misrepresentation and delusional thinking is perched unsteadily on the one below it.  The whole exercise was always pointless since human beings do not need planning, supervision or officials in order to prosper.  Indeed, people positively need these things to go away before they deform society and undermine its creative capacity further.

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