Friday, 10 June 2016

Gross Domestic Whopper

I've been rather fed up with many of the false assertions made by both sides in the EU Referendum debate. I ended up saying this:

"While the Leave campaigners have also been pretty sub-standard, the Remain gang have been absolutely pathetic with their silly scare stories, facile post-Brexit predictions, and their making of outrageous economic claims that treat the UK voters like children. As for Cameron and Osborne, well, they, like the atrocious Hillary Clinton, will say absolutely anything to anyone to keep people on side and try to win support for their agendas, and have spent the last few years slowly draining themselves of any credibility as thinkers and as having even the remotest consistency in what they claim!"

Asking what the biggest whopper has been is a tough one. If pressed though I'd have to say George Osborne and the Treasury's claim that "Families would be £4300 worse off if we left the EU" -


Even if we overlook the fact that it's impossible to know what the future economy will look like if we leave the EU, when pressed on how they came up with this figure, it turns out to have been a little sleight of hand trick based on projected post-Brexit GDP (the size of our economy) in 2030, and dividing it per head.

If you're paying attention, you should already be able to spot the anomaly - families are not the same as individuals. A quick Google search tells me that the average household size is 2.4 people, which means the figure of £4300 per household is down to £1791 per head. But then you'd have to reduce the number further still because there will be far more households in the UK in 2030, which would make the number even smaller.

Even aside from that, trying to measure our nation's future well-being (let alone present well-being) by our GDP is a bit like trying to count the number of ants in an ant colony - you're just never going to capture all the data, and you are bound to miss loads. The crux of the matter is that we are a lot better off than mere GDP numbers suggest, just as all the things in a happy marriage amount to more than the sum of the couple's joint bank account.

Because GDP only factors in monetised exchanges, it doesn't factor in all the consumer surplus, and nor does it by equal measure factor in the proportion of profligate government expenditure that robs the nation of value. GDP only factors in the cost of what the government provides (education, health, social services, roads, defence, wars in other countries, etc) not the efficacy or desirability of those provisions.

If there are no affordable competitive providers for most of the country on many of the things the public sector provides, it is fairly safe to assume that the costs of those provisions are more than we'd pay for them. In a free market we know how much people in the UK value fruit, paint, Nike trainers, and cars by the prices, which are set in accordance with prices of competitive suppliers.

Not only that but in the absence of free market benefits, the government is bound to provide things that we don't even want. Naturally a full cost-benefit analysis would be too time consuming, but there are a few indicators - and we can arrive at them by asking if we'd pay for these things - many high-level public sector wages, extra police officers, renewable energy quotas, and so on - out of our own pockets or go without.

If the government wastes £500 million on a failed highways project then there is an awful lot of value lost in opportunity costs. On the other hand If you buy a laptop for £250 you are signalling that you value it more than the £250, otherwise you'd buy something else, which means value is not being recorded.

Suppose you value the laptop at £350, then the £100 difference between what you would maximally pay and what it costs is what is known in economics as your consumer surplus. That's £100 of value that's not being recorded. GDP only measures the equilibrium price in the market (as illustrated by the chart below).



Nor does it measure things like all the value Google and Facebook brings to our lives, and the access to all the world's news and knowledge we have, which also keeps adding more onto our net consumer surpluses.

The other point to factor in is that if John's cleaner becomes his wife, and Rita's gardener becomes her husband, then cleaning and gardening in those respective households may no longer show up on the GDP statistics, but that doesn't mean the two households are worse off (quite the opposite).

One of the many problems with Communism is that it erodes away almost all value for services, skills, products and human ambition. To keep the matter simple, suppose there was an island nation that was entirely self-sufficient because the government had closed itself off from all outside trading. If the ruling powers set the prices of everything; apples, wood, clothes, cars, paint, and so on, the nation would be robbed of something vital (this did happen to some extent in the old Soviet Union, in Japan, in Zimbabwe and in Cuba, to name but four places) - there would be no consideration of preference for the citizens.

In a supply and demand free market, prices are dictated by consumer value - so that if apples are too overpriced people will buy oranges until the price of apples come down, and if Jaguars are too expensive people will but BMWs until they come down. This happens in wages too - if a hotel porter earns as much as a heart surgeon then either the incentive to be a heart surgeon diminishes, or the proper value placed on specialised skills is diluted.

Given the foregoing, just like above, it is clear that the GDP of the old Soviet Union or Zimbabwe or Cuba only tells a bit of the story of the plight- it is an unreliable statistic in measuring human qualities, well-being and standard of living because it fails to factor in the value of lots of the economic output. Even though the UK is not a Communist regime, it still has the same issue.

The final thing to mention is that even our free market spending on consumption isn't always a measure of a positive action; if I have to pay to have the wing mirror on my car replaced after a vandal broke it, or buy a burglar alarm, or paint to cover up some graffiti, then these are not examples of good voluntary spending on my part.

The upshot is, GDP is in itself an inadequate measure of value in our country, so projecting a cost per head by dividing a future GDP projection by the current household numbers is about as misleading as it gets.

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