A Quick Economic Lesson to a Good Friend

A short response to the newsletter by a well known expert in the trucking industry

Dear Good Friend,

Just my two cents’ worth:

GDP is a not a measure of economic health. (Zimbabwe had the highest GDP in the world a few years ago.) GDP is a measure of spending. If everything goes up in price, then the same or perhaps even lower economic activity can show an increase in GDP. Government loves GDP because it can manipulate the number by printing money and spending it. Economic columnists in the mainstream press like it, because they don’t have to work hard to really understand what is happening. And few of them understand economic theory. But the myth of a rising GDP is a lesson that few really understand or accept.

Secondly, an increase in inventories is not an indication of growth. No company wants to keep more inventory on hand than it really needs to meet sales in an orderly fashion. Inventories must be financed, which is a cost to the business, of course. Years ago, when the WSJ published real economic sense, it would report, correctly, that falling inventories were a sign of the end of a recession. Sales were picking up and that means that businesses would start calling back workers from furlough, etc. in order to increase production. By the way, production is key. But it must be production that consumers want. So an increase in inventories tells any business either that consumers do not want its product or the economy is going into recession.

Thirdly, economic theory is important, not government’s cherry-picked or misinterpreted numbers. The effect of tariffs cannot possibly be good for the American citizen. Oh, it may be good for steel workers, etc., but this comes at the cost of making the rest of us poorer, which is very hard to measure empirically. You will not find any statistics that show this to be correct or not. It is theory, based on logic. If the logic is correct, then the theory is correct, no matter what government statistics say.

Have a very Merry Christmas.

Pat