The Crash Course - Chris Martenson [60]
Here is an example of just how far from reality GDP has strayed: The reported GDP amount for 2003 was $11 trillion, implying that $11 trillion of money-based, value-added economic transactions occurred. But that did not actually happen. To begin with, that $11 trillion included $1.6 trillion of so-called imputation adjustments, where economic value was assumed (“imputed”) to have been created, but where no cash transactions had actually taken place. Despite the fact that there was no trade and nothing changed hands, a value was still assigned to these assumptions and reported as part of the GDP.
The largest imputation represents something called “owner’s equivalent rent,” which assigns a value to the benefit that homeowners receive by not having to pay themselves rent. If you own your house free and clear, the government calculates “the amount of money owner occupants would have spent had they been renting.”9 It’s not a trivial amount; it totaled $1.225 trillion in 2009.10
Another is the benefit that you receive from the “free checking” provided by your bank, which is imputed to have a value because if it wasn’t free, then, as the logic goes, you’d have to pay for it. So a value is assigned to all the free checking in the land, and that, too, is added to the tally. Together, all of the imputations added up to $2.27 trillion dollars in 2009, out of a total reported national income of $13.94 trillion dollars, or 16 percent of the total.11
Next, like the CPI, the GDP also has many elements that are hedonically adjusted. For instance, computers are hedonically adjusted to account for the prospect that faster and more feature-rich computers must be worth more to our economic output than prior models.
So if a computer costing $1,000 was sold, it would be recorded as contributing more than a thousand dollars to the GDP to account for the fact that it’s faster and more technologically advanced than the thousand-dollar model that was sold last year. Of course, that extra money is fictitious; it never traded hands and doesn’t actually exist. This is similar to a toilet paper manufacturer reporting higher revenues because its product was softer and fluffier this year, even though the same number of units was sold last year at the same price.
Admittedly, there are perfectly valid justifications for trying to adjust for the role of quality when measuring price changes. For example, if we were to compare a 1972 Ford Pinto, with its thin-walled gasoline tank and 8-track player, to a 2010 Camry with anti-lock brakes, CD sound system, driver and passenger airbags, and vastly improved drive train, and we were to find that the Camry had a higher market value than the Pinto, it would be unfair to attribute that price difference solely to inflation.12 I feel it’s quite a stretch to then claim that an improvement in quality is the same thing as having sold more of that item, which is what the GDP purports to measure.
Interestingly, for the purposes of inflation measurements, hedonic adjustments are used to reduce the apparent price of computers, but for GDP calculations, hedonic adjustments are used to boost their apparent cash contribution to the nation’s economy. Using the magic of hedonics, government statisticians are able to simultaneously claim that computers cost less but are worth more—depending on whether the measurement is being applied to the CPI or the GDP, respectively.
So what were the total hedonic adjustments in 2003? An additional $2.3 trillion dollars.13 Taken together, these mean that $3.9 trillion or fully 35 percent of 2003’s reported GDP wasn’t based on transactions that you could witness, record, or touch. They were guessed at, modeled, and/or imputed, but they did not show up in any bank accounts because no cash ever changed hands and no product was produced. These adjustments have served to vastly inflate the GDP and overstate the true economic health of the United States.
As an aside, when you read about how the United States’ “debt-to-GDP ratio is still quite low” or “income taxes as a percentage