What do I mean by ‘fake GDP’? I mean that portion of GDP which is debt-fueled spending. The spending shows up in GDP figures, but the debt incurred is not deducted, resulting in ‘fake GDP’. I have two specifics in mind:
-Lending and consumption through the housing bubble. Property and construction were soaring (making GDP appear more robust), but it was on the back of loans should not have been granted and that will never be repaid. So, the purchasing power was never there in the first place. And this is papered over by the bailout- another trillion or so on the national debt tab, though at the time the economy (falsely) appeared to be chugging along.
-Stimulus spending. Again the GDP appears more robust as the debt is not accounted for.
ISTM that, considering the above, there has been a fair amount of ‘fluff’ in the GDP for the past several years. While the recession is a bad one, the economy is actually even worse than it appears because of the ‘fake GDP’- debt fueled spending whose costs are put off. The concern is that it will take another bailout or another stimulus to keep the numbers looking pretty, driving us ever closer to a Greece-like debt situation, or else there won’t be another bailout or stimulus, the borrowing will stop, the ‘fake GDP’ will evaporate and we’ll see a big downward correction with nasty consequences.
It seems like a general question to me, even though it comes down to a judgment about validity. Is there something I am missing? I am not an economist and wonder if there is something I don’t understand about this whole affair which is causing me undue concern.
I’m not an economist either, but frankly I don’t think you’re missing anything. The government has been cooking the books on the economy for decades. Take the unemployment numbers: they exclude “discouraged workers” and other categories of jobless people, specifically in order to make the number lower. That’s why some economists calculate the “real unemplyoment number,” which is currently somewhere around 15%
GDP only measures the total amount spent on goods and services. It doesn’t matter where that money comes from. (At least in terms of loan vs income. GDP differs from GNP, for example, based on what is included.)
GDP fails to measure many things that it wasn’t designed to measure. The unemployment rate is the same way - it was never intended to measure the things that many people think it should. The key is to understand what GDP (or unemployment) means and use it only in that way.
You need to analyze many numbers to fully understand the economy. To address the issue of whether spending is a result of debt financing or revenue financing, there are other statistics you can look at, like per capita debt or per capita income. If GDP goes up along with a large increase in per capita debt, then we know where some of the money came from.
So that everybody’s on the same page, here’s an explanation of what goes into GDP. It also goes into what the GDP doesn’t measure.
Here’s a graph of GDP since 1960. Note how smooth the graph is.
None of what the OP mentions is more than a blip in the total GDP. And it’s not exactly as if there were no bad loans or government deficit spending in previous years.
GDP is merely a large, gross, first-approximation number. It’s like obsessing with the Dow Jones Index. Professional economists may check the number but then go on to their real business.