State spending leads to growth in Grossly meaningless Domestic Product

Jamie Whyte
TWO years ago, the Bank of England (BoE) predicted that GDP would today be growing at a rate of 2.5 per cent a year. It is in fact growing at 0.0 per cent or thereabouts. An economic forecaster overestimating GDP growth by 2.5 percentage points is like a weather forecaster predicting that the temperature will be 20 degrees warmer than it turns out to be. If the forecasters at the BoE were paid by voluntary subscribers rather than taxpayers, they would be out of business.

But the problem is worse than poor GDP forecasting. The supposedly observable facts of GDP – for example, the fact that it is now growing at a rate of about 0.0 – are themselves suspect. This is because we do not know what roughly a third of the measured economic output is really worth.

To see the problem, start with the old Soviet Union. Plenty was produced by its factories and farms: Ladas, beetroots, brown polyester suits, and so on and on. But what was all that stuff worth? It was impossible to tell because, even when the goods were priced, these prices carried no information about consumer preferences nor, therefore, about what the goods were worth. Prices were set not by supply and demand but by government officials. And citizens had almost no choice in what they consumed. Soviet GDP figures were close to meaningless.

The same problem arises in the UK. State education, healthcare, foreign invasions and other government-supplied goods are not priced. Consumers pay nothing for them. So what are they worth?

For the purpose of measuring GDP, goods and services supplied or procured by the government are valued at cost. If your child’s unpriced state education costs £7,000 a year to supply, that is what it is supposedly worth. But since no one willingly paid £7,000 for it, this is an unsafe supposition.

In fact, given that government suppliers are subject to no serious competition, the safe assumption is that what they produce costs more than people would be willing to pay for it in a free market. I, for one, would not pay £7,000 for the education my daughter receives at that cost.

Worse: the government provides things to people who do not value them at all. For example, when you are robbed a policeman will come to your home to comfort you. This must cost a few hundred pounds. How much would you pay for it? Personally, nothing. Yet that won’t stop the comforting from happening. Nor stop it from being counted as a contribution to GDP.

Even worse: GDP includes “services” that people would pay to stop. The salaries of all those bureaucrats who devote themselves to placing regulatory burdens on productive businesses are counted as a contribution to GDP.

Never mind the unreliability of forecasts for next year’s GDP. The figures for current GDP are themselves an elaborate governmental fiction.

Jamie Whyte is a senior fellow of the Cobden Centre.