GDP Hides The Damage From The Covid-19 Lockdowns

dollar hole

Do not believe government pronouncements that the economy is rebounding from very minimal damage caused by unprecedented covid-19-inspired closures of businesses. The government will use its favorite statistic of the health of the economy to justify its actions—gross domestic product (GDP).

GDP is supposed to represent the total of spending on final goods and services in the economy. It is a Keynesian term that elevates a concept called "aggregate demand" as most important. Not production and especially not savings. In fact Keynesians fear savings most of all. Now, you and I know that we can become wealthier only by saving some of our income and investing it wisely for the future. But Keynesians invented a concept called "the paradox of thrift," whereby they claim that the economy enters a death spiral from reductions in spending caused by an increase in savings. Individually, savers may be better off, they say, but collectively the economy suffers. For example, the new auto that we savers do not buy, rather keeping our old one in good repair for a few more years, denies the automakers and all who work for them the money they need to continue production. Layoffs and plant closings ensue. The reduction in aggregate demand ripples outward, bankrupting more and more support businesses and their employees. This is the simplistic Keynesian view of savings.

But what happens to the money that we do not spend on as many new cars? Is it thrown down a rathole? No, of course not. It is invested in longer-term production processes that will yield even more wealth than if we had continued our former practice of buying new cars more often. Austrians call this phenomenon a change in the "structure of production." We may produce few automobiles now, but later we'll have access to products and services that would not have existed without our previous investment. We see this in our personal financial profiles. Our savings accounts increase at a compounding rate, allowing us to live a more comfortable existence later in life. This is the truth that used to be drilled into all of us before governments' in-house economists propagandized that by being frugal we were denying our fellow citizens what was rightfully theirs: i.e., our money and our future. It's nonsense.

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