Consumption is an always effect of what actually matters: production. It’s a reminder that while “supply siders” are increasingly ridiculous, “supply-side economics” is a statement of the obvious: the goal of all economic policy should be to remove any and all barriers to production. From there, consumption takes care of itself. Production is consumption. Always and everywhere.
All of which speaks to the impressive fatuity of economics, the profession. While there are Keynesian (majority) and supply-side (minority) economists, both religions pay lip service to Gross Domestic Product (GDP). Which is further evidence of just how ridiculous economics is.
To see why, consider Wall Street Journal economics columnist Greg Ip’s latest commentary for the paper. Parroting the economists he covers a bit too obediently, Ip laments the alleged unwillingness of Chinese producers to consume. In his words, “In other major economies, consumers contribute 50 to 75% of gross domestic product; in China, 40%.”
Ip is specific that the latter weighs on GDP, and it does, which very neatly reveals what a waste of space GDP is. It actually goes down if people consume less? Well yes, after which it’s worth adding that it similarly declines on a country-by-country basis if governments spend less. Let’s consider government spending first.
How do governments have money to spend? They do only insofar as there’s already productive activity in the actual economy, activity that governments can tax. In other words, governments can only consume after production has taken place. For GDP to then rise as a consequence of government spending amounts to double-counting in a way that would shame even the most crooked of crooked accountants.
What’s important is that non-governmental consumption is no different. It can’t add to growth simply because it’s what happens after production. To say consuming the fruits of production adds to economic growth similarly amounts to double counting. Yet in GDP terms, it’s additive. Which is yet more of a reminder of what a worthless number GDP is.
GDP is a measure of consumption, and the fact that it is shows what a waste of time the number is. Economists who embrace GDP (meaning, nearly all of them) loathe savings because they believe savings sap consumption, except that savings do no such thing. Repeat it over and over again, no act of saving ever subtracts from consumption. It merely shifts the power to consume into other hands. By extension, or parallel to the previous truth, no act of production ever occurs exclusive of consumption.
This is important mainly because Ip laments the propensity among the Chinese to save, but considering how recently immense poverty stalked the country, savings are logical. And again, they in no way subtract from consumption simply because production is once again consumption. It just signals a shift of it to other hands, including to American hands. Actual growth is actual growth. Not according to Ip.
The columnist claims the Chinese propensity to save “isn’t just a problem for China, it’s a problem for the whole world.” You see, the savings without which there’s no increase in productivity (meaning actual growth) reduce the GDP of the countries that attract the savings, since the export of shares in the world’s greatest companies (those are frequently American companies) aren’t counted as exports in GDP sense, but the export of t-shirts, socks, and shoes do count, and yes, add to GDP. What Chinese companies can’t sell to Chinese consumers, they export. The result: “an annual trade surplus in goods.”
According to Ip and GDP, savings are a global problem. For the countries in receipt of the savings. The inflow of capital quite literally brings down GDP. Yes, the more one looks at GDP the dumber it gets.
Republished from RealClear Markets