Thanks to the Center for Freedom and Prosperity for releasing a new video on why economists, the government and the media incorrectly focus on Gross Domestic Product (GDP) as a measure of our nation's economic health. If more focus was on Gross Domestic Income (GDI), Americans would be better off.
First, let's give a little primer on what makes up gross domestic product and gross domestic income.
Gross Domestic Product, or GDP is amount of goods and services produced in a year, in a country. In economic terms, GDP can be calculated by:
GDP = private consumption + gross investment + government spending + (exports − imports)
Gross Domestic Income, or GDI is comprised of national income plus "capital consumption". In algebraic terms, net national income (NNI) (for educational purposes for this dialogue) is calculated by:
NNI = C + I + G + (NX) + net foreign factor income - indirect taxes - depreciation
* C = Consumption (final purchase of goods and services by individuals constitutes consumption
* I = Investments (everything that remains of total expenditure after consumption, government spending, and net exports are subtracted (i.e. I = GDP - C - G - NX))
* G = Government spending
* NX = net exports (exports minus imports)
Government spending or government expenditure is classified by economists into three main types. Government acquisition of goods and services for current use to directly satisfy individual or collective needs of the members of the community is classed as government final consumption expenditure. Government acquisition of goods and services intended to create future benefits, such as infrastructure investment or research spending, is classed as government investment (gross fixed capital formation), which usually is the largest part of the government gross capital formation. Acquisition of goods and services is made through own production by the government (using the government's labour force, fixed assets and purchased goods and services for intermediate consumption) or through purchases of goods and services from market producers. Government expenditures that are not acquisition of goods and services, and instead just represent transfers of money, such as social security payments, are called transfer payments. Government spending can be financed by seigniorage, taxes, or government borrowing. (Source: Wikipedia)
With Economics 101 behind us, let's watch the video, and the we'll discuss more on why this is important.
More on Why Keynesian Policies Fail
As the video mentions, politicians and economists incorrectly focus on consumer spending rather than focusing on pro-growth policies to spurn economic growth. What politicians fail to understand is that Keynesian policies that throw government money to grow the economy is short-term, while pro-growth that increase income is long-term.
What this means is that short-term band-aids such as the American Recovery and Reinvestment Act of 2009 (or Stimulus Bill) only aid (if that) the economy in the short-term, rather than encourage or foster long-term real economic growth. The premise by the Stimulus Bill was to create shovel ready jobs, but in reality when those pet projects are done, they economy will contract again.
Followers of Keynesian economics fail to understand that real economic growth is done in the private sector. In order for their to be meaningful long-term economic growth, politicians need to focus on pro-growth policies such as: lower tax rates, deregulation, good monetary policy, liberal trade policy and reduced burden of government spending (see 3:13 of video).
Until politicians abandon Keynesian economics (in favor of Hayek's more business friendly) policies) the American economy will continue to be sluggish.