How can it be? (Walter E. Williams)

townhall.com ^ | January 14, 2004 | Walter E. Williams

[Axenolith]

No, an annual inflation rate of 3.5% would have carried it to ~47,000...

[Tribune7]

OK, thanks. That's good news.

[Axenolith]

no, it means your down 10K. Williams is right though, to the extent that someone somewhere is willing to continue to shell out for our debt a ridiculously low returns at the same time we're printing the heck out of the currency.

Also, even if it is all fiat BS, those who work and have smarts can keep one step ahead...

[k2blader]

Bump for my favorite economist!

[Tribune7]

OK, I get you, now.

OTOH, has inflation already been factored? Is the income cited in constant dollars. Someone earlier had posted they were.

[xzins]

I will defer to your greater knowledge of the GNP.

My contention has always been simple calculation of future value does not APPEAR to indicate that there has been advancement in standard of living.

[The Old Hoosier]

My contention has always been simple calculation of future value does not APPEAR to indicate that there has been advancement in standard of living.

OK, right. I want to explain why that's not the case. Bear in mind that GDP is supposed to measure the amount of goods and services produced in a given year--not "value." GDP does not include, for example, national savings or long-term investments unless they are bought, sold, or spent on something in that particular year. It's an annual figure that starts all over again each year.

First of all, the dollars they are measuring it in are the SAME dollars for 1980 and 2002. In other words, inflation has already been accounted for in these numbers. It would be a mistake to go in and factor in inflation again, like you were doing, because it's already in there. If we had the 1980 number in 1980 dollars, the number would be smaller than 21000 or whatever it was. Because inflation is accounted for already, Williams is right to say that the increase is real.

Second, the GDP has actually grown more than the percentage he gives, but since we get per capita GDP by dividing GDP by the total population (including every man woman and child, whether they work or not), the increasing population drags the number down.

On the other hand, and third, an increase in GDP does not necessarily indicate an increase in standard of living (although it usually does). What Williams should say is that we had a whatever % increase in the amount of wealth that changed hands in the U.S. since 1980. It's a good sign for growth, but it certainly isn't the final word.

The problem with GDP as a measure of growth is that it makes a hero out of the cancer patient undergoing a costly divorce. This guy is spending tons of money on doctors and lawyers, but none of that helps the economy grow. If we could come up with a measure that excludes certain kinds of business transactions from the mix, and use it consistently, we'd have a better idea of growth generally.