Letters by a modern St. Ferdinand III about cults

One of the hoariest and most prevalent of economic myths; and one pushed by the shiny teeth and hair on the small media box, is that the 'consumer is 70% of the economy.' This fallacy leads to a variety of bad policies- all of them to the benefit of increasing statist power. When a politician is able to convince you that the size 54 piece of underwear, which you purchased for $2 at Walmart and which is the size of a small tent, is magically transformed into '70% of the economy', you know that society has done a great job at dumbing down economic reality. No you are NOT 70% of the economy which of course offends over-developed narcissistic compulsions - and leads to deleterious policy choices.

Basic economics first. Gross Domestic Product which measures only the OUTPUT of all good and services in a national economy is a misleading and quite inaccurate picture of economic reality. In fact it was never meant to be used as an official and accurate portrayal of the economy. The Russian born US educated economist Kuznets, who in 1934 first developed the notion of GDP was quite well aware of its limitations. He created 'GDP' as a means to analyze policy and its impact on creating or contracting economic activity.

Kuznets came up with 2 simple methods to calculate GDP or what he and others loosely term 'economic size'. Neither is very accurate.

First Kuznets came up with the 'expenditures approach' where you add up total spending on all final goods and services or in eco-geek speak:  (Consumption goods and services (C) + Gross Investments (I) + Government Purchases (G) + (Exports (X) - Imports (M)) or [GDP = C + I + G + (X-M)].

A second more refined method is by adding in national incomes. In this approach GDP is calculated by adding up the incomes which  make up the factors of production in the society as well as gross expenditure given in the model above. These include such items as:  Employee compensation; Business profits; Entrepreneur's Income; Rental income on all assets; and Net Interest on all private loans. This calculation is typically larger in size than the first and more accurate - but it is rarely done. 

There are in any case, many objections to the above GDP calculations. Income factor calculation is much preferable to the expenditure GDP approach.  But sadly it is the expenditure model which is used by all nation states and economists to give us a picture of our 'total economy'.  But this is a false picture.

The most primary objection to using the expenditure model  is that the output bought in a nation state is not reflective of its true economy. As the Austrian-school economist Shostak stated a government for instance, can build pyramids across a country – a totally useless enterprise – but GDP would reflect a large growth. This would be a fallacious growth of course. Government spending replaces private capital and leads to debt and interest payments – neither of which are factored against public spending 'GDP' stimulus'.

A second obvious objection is that a retail good or service cannot possibly be 70% of economic activity. The size 54 piece of Walmart underwear might cost $2. But to infer that such a purchase is 70% of the 'underwear economy' is patentedly ridiculous. An entire supply chain from retail back through to distribution, manufacturing, design and marketing dwarfs the $2 retail price.

In reality if you want a true estimation of economic size you need to calculate the value added in the retail price and the value added prices in each step of that final transaction. This is very difficult to do but in essence you would end up with the reverse of 'common knowledge' or in other words you would have the reality that 70% of the economy is business and supply side value added transactions – not the consumer.

Kuznets, the originator of GDP knew of its great limitations stating in 1934 that: “...the welfare of a nation [can] scarcely be inferred from a measure of national income...” In 1962 Kuznets elaborated that: “Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what.” GDP according to Kuznets is an entirely artificial and rough estimation of what a consumer or state might produce and consume – but as a measurement of the true economy; income and wealth status; or of economic value added it is entirely misleading.

But GDP does serve the interests of government's and politicians. They can use the quackery of Kuznets and of the effeminate John Keynes to 'demand' demand side management and 'stimulus'. By appealing to pseudo-scientific economic theory, politicians can cloak massive statism in the guise of something benign and rational. But if the lie was exposed – that in reality it is business and economic value added which are 70% of the economy, than suddenly policies used to expand 'consumer buying' or to 'stimulate' demand would be found entirely unappealing and revealed as utterly useless.

To generate jobs, wealth, the means to pay for the welfare state and even measures of equality it is of course the supply-side which is 70% of the economy which needs to be stimulated. This means tax reductions, limited government spending and regulation, and incentives to create jobs and wealth producing opportunities. Instead of spending billions or trillions on useless spending projects, and having loose and reckless monetary policy, governments would be forced to do the opposite – cut taxes, reduce spending; and encourage business activity through proper monetary and fiscal measures.

Let's summarize. Our current methods of calculating GDP are NOT correct and lead only to the stimulation of government and union goons running our lives. The consumer is not 70% of the economy. Ergo demand or consumer 'stimulus' plans are bound to fail. What are needed are plans, policies and obsessions to stimulate supply, and the creation of capital and jobs. Want to help the so-called poor ? Besides weeping and moaning for more governmental transfers how about this ? Stimulate the supply of jobs and wages. That will do more to 'fix' the economy and help the 8% of people who are poor, than all the demand side plans of the 'Great Men' can possibly do.