Have you ever wondered why things do not completely crash?
Certainly, we have recessions. However, for most of my adult life, we heard the conversation from various sectors talk about how "the system" is going to completely crash. This can be referenced by focusing upon the US dollar, economy, or civilization itself.
In spite of all the arguments for it, how come this never happens.
The latest is the debt level. After all, people believe the $35 trillion is completely unsustainable. Of course, this is misleading as we will cover in another article.
For now, we will cover gross domestic product (GDP) and how this is a flawed metric.
Things Do Not Completely Crash Because The Metrics Are Wrong
This is going to be a multi-article series so keep this in mind when reading through this. There will be other parts that tie all of this together.
A country's GDP is basically the economic output generated over the course of a year. This can be given as the total production such as the US GDP is around $27 trillion or as a percentage showing the year-over-year change.
However it is presented, there is a problem. It is here where most analysis goes awry.
Before getting into that, we have to acknowledge there is no better metric to utilize. This is what creates the quandary. To my face the fact there does not appear to be anything on the horizon that can replace GDP.
Unfortunately, it is utilized in so many capacities, such as with debt-to-GDP, that is provides a false narrative.
The Problem With GDP
So what is the problem with GDP?
You would think it a clear cut situation. GDP is basically an accumulation of the totals of all the economic output an area does. From this perspective, what could be simpler?
At this point, it all makes sense. Where things go awry is when we consider what use to be part of GDP yet no longer is.
What do I mean by this? Is this referring to a change in calculation?
No. It is even more basic. There were things that use to go into the GDP calculation yet no longer are there. The problem is that people still enjoy the benefits.
In other words, there is no accounting for free.
A prime example of this is long distance phone service. There was time when telecommunication companies such as AT&T or British Telecom had huge long distance divisions. It was not uncommon for businesses to rack up hundreds of dollars a month in bills.
Even on the personal level, people could run up significant phone bills. These were charged per minute as a fee to utilize the infrastructure.
When was the last time you received a long distance bill? If you are like most, it is well over a decade.
So what happened? Did people start to limit their conversations to only the local area. On the contrary, we actually expanded this.
Today, people have conversations with people all over the world for basically free. This is where things start to get fuzzy with GDP.
Billions Not Counted
Can you guess how much this was in the United States alone?
According to the FCC, in 1999, it was $108 billion. That is one year of billing. While the numbers are not available, it is likely it was far higher in 2010 right around the time smartphone penetration started.
Notice how we not only had a loss in revenues, there is also the fact that people are engaging in services that would have caused a 10x in this number.
Consider all the international discussions we have on Zoom, Spaces, or YouTube streams. People do not have to be located in the same country, yet can have an hour long conversation for free. How much would that have cost in 1985?
Yet it is nowhere in the GDP metrics.
We see this happen repeatedly.
What about music? Are you old enough to remember when a CD cost around $11? This provided one with roughly 10 songs. Here we can see it is roughly $1 per song.
From what I understand, this is about what a song costs when going to iTunes. However, this is not the only source. For about the same money, one can get access to 100 million songs on Spotify. Heck, if someone is willing to listen to ads, it is free.
Is it any wonder the sales totals for recorded music is way down? Yet, we still listen to music as much as those in the 1980s or 1990s.
Imagine what the GDP numbers would look like if each person had to pay $100 million to Spotify.
Take a look at this list:
- newspapers
- magazines
- road maps
- encyclopedias
- dictionaries
- classified ads
- photos
These were all items that were purchased. Even within some of those realms, such as newspapers, advertising from classified has dried up.
How much would this have cost in 1990 when people were paying for film and getting is developed?
Here we have another situation where the input to GDP drops to almost zero yet the amount generated skyrockets.
This is something we take for granted. As we will show in the next article, there is a major reason for this.
At this point we will simply close by stating the GDP metric is flawed since it under represents what is taking place. When something was once part of the calculation and no longer is, yet the benefits are still enjoyed by the participants, we can see the flaw.