Russian-American economist Kuznets fabricated the GDP algorithm in 1934, in order to 'prove' that Roosevelt's big government policies 'were effective'. As we all know, Rooseveltian statism failed. By 1939 the US real unemployment rate was over 20% [as it is today]; and the debt had mushroomed to historically high levels. There is no 'investment' made by government. It is strictly money spent to expand government. I have never liked GDP as a measurement. No for that matter the unemployment rate, the inflation rate, or the lack of transparency in government budgeting [does anyone know how much socialized health care really costs?]. Kuznets' quite crude algorithm has lived on and grown to be the defacto measure of our economy. But should it be so revered? Investment manager and popular newsletter writer John Maudlin reproduced economist Rob Arnott's presentation on why GDP is so flawed – and the consequences for our political and economic policy making. Notice the great difference between 'consumption' [most of it debt financed] and true prosperity:

[Rob Arnott, excerpted] GDP is consumer spending, plus government outlays, plus gross investments, plus exports minus imports. With the exception of exports, GDP measures spending. The problem is GDP makes no distinction between debt-financed spending and spending that we can cover out of current income.

Consumption is not prosperity. .....The credit-addicted family enjoys a rising “family GDP”—consumption—as long as they can find new lenders, and suffers a family “recession” when they prudently cut up their credit cards.

....Consider a simple thought experiment. Let’s suppose the government wants to dazzle us with 5% growth next quarter (equivalent to 20% annualized growth!). If they borrow an additional 5% of GDP in new additional debt and spend it immediately, this magnificent GDP growth is achieved! We would all see it as phony growth, sabotaging our national balance sheet—right? Maybe not. We are already borrowing and spending 2% to 3% each quarter, equivalent to 10% to 12% of GDP, and yet few observers have decried this as artificial GDP growth because we’re not accustomed to looking at the underlying GDP before deficit spending!

From this perspective, real GDP seems unreal, at best. GDP that stems from new debt—mainly deficit spending—is phony: it is debt-financed consumption, not prosperity. Isn’t GDP, after excluding net new debt obligations, a more relevant measure? ^....Our Structural GDP has grown nearly 100-fold in the last 70 years. Most of that growth is due to inflation and population growth; a truer measure of the prosperity of the average citizen must adjust for these effects. Accordingly, let’s compare real per capita GDP with real per capita Structural GDP.

......The real per capita Structural GDP, after subtracting the growth in public debt, remains 10% below the 2007 peak, and is down 5% in the past decade. Net of deficit spending, our prosperity is nearly unchanged from 1998, 13 years ago.

Figure 1. Real GDP, Structural GDP, and Private Sector GDP, Per Capita, 1944-2011

Source: Research Affiliates

As the private sector has crumbled, and Structural GDP has lost 13 years of growth, tax receipts have collapsed. ...

What does this mean for the citizens and investors in the world’s largest economy? If we continue to focus on GDP, while ignoring (and even facilitating) the decay of our Structural GDP and our Private Sector GDP, we’ll continue to borrow and spend, mortgaging our nation’s future.....

All of the above is commonsensical. But will it become mainstream? If governments mimicked the Pharaohs and built massive pyramids to their vanity and as outlets for the King's [Obama?] soul to find its way into the celestial heavens, is that economic growth or just debt-financed insanity? At some point the debt comes due. Inflation, higher taxes, 'temporary' fees [such as the temp health care 'investment' or payroll tax], or all of the above occurs. You can't have a socialized political-economy. It will simply fail at some point.

After World War II, the U.S. Government “downsized” from 43.6% of GDP to 11.6% in 1948 (under a Democrat!). Did this trigger a recession? Measured by GDP, you bet! From 1945 to 1950, the nation convulsed in two short sharp recessions as the private sector figured out what to do with all the talent released from government employment, and real per capita GDP flat-lined. But, underneath the pain of two recessions, a spectacular energizing of the private sector was underway. From the peak of government expenditure in 1944 until 1952, the per capita real Structural GDP, the GDP that was not merely debt-financed consumption, soared by 87%; the Private Sector GDP, in per capita real terms, jumped by more than 90%.

Was the recent 0.5% drop in GDP in the United Kingdom a sign of weakness, or was this drop merely the elimination of 0.5% of debt-financed GDP that never truly existed? Spending dropped by over 1% of GDP; Structural GDP was finally improving!

We must pay attention to the health—or lack of same—for our Structural GDP and our Private Sector GDP before they lose further ground.

Well said. I doubt that Arnott's views will become mainstream. Pity. He is right on. Debt is not growth. Drowning in credit problems is not prosperity.