‘Recession’ Is Every Bit as Foolish As the GDP Calculation That Informs It

A recent Wall Street Journal headline lamented a scenario in which “Europeans Don’t Spend, Auguring a Recession.” Are journalists the problem, or sub-editors writing the headlines, or might it be that “economics” itself gets dumber by the day?

It’s a question worth asking in consideration of the essential truth written by Adam Smith centuries ago that savers are society’s ultimate benefactors. Which, when you think about it, is a statement of the obvious. Without savings there’s no investment, and without investment there’s stasis. It’s a reminder that a much bigger threat to Europe’s economy or any economy is a lack of saving.

Figure that consumption is the easy part. It’s frequently joyous, and certainly never needs to be stimulated despite what economists tell us. As I state regularly in my new book The Money Confusion, life is about the getting. We get up and work each day because we need things, plus work is increasingly fulfilling, and it’s fulfilling due to savings that have created technology that has over time relieved us of the worst aspects of work. Translated, farming no longer defines our working existence as it once did. Savings led to tractors and fertilizers that freed much of the world from backbreaking work on the farm. Oh wow, how awful life would be if all we did was spend.

Yet economists fear a lack of consumption as the source of our ills. Some will blame education for their impoverished understanding of how the world work. Please don’t believe that. Let’s stop creating victims. If someone can’t see that savings are the ultimate source of economic advance, their problem isn’t the instruction they received. Some people just don’t get it, and won’t get it no matter how much instruction they have. Those who do get it don’t need the instruction. Neither the Beatles nor the Beach Boys had music teachers. Get it?

Still, there’s this question of recession in Europe. It will supposedly be authored by the very savings without which an economy logically can’t grow. About this, economists define recession as two straight quarters of shrinking Gross Domestic Product (GDP). Economists imagine an economy is a living breathing blob, as opposed to individuals.

From there, it’s worth pointing out that GDP actually increases with government spending. This rates a lot of attention given the rather simple truth that governments have no resources. The latter isn’t a slogan as much as it’s a statement of the obvious. As evidenced by governments arrogating to themselves an ability to tax us, it’s evident that their swagger or the “resources” at their disposal were produced by someone else. Put more plainly, governments attain spending power by taxing it away from those who produced it.

Please think about the above in consideration of GDP, and the reality that government spending increases the very GDP that economists follow to track economic growth. It’s a hint that economists don’t just lack common sense, they’re also guilty of double counting. How else to explain their embrace of an alleged measure of growth that is quite literally boosted created by growth. What economists miss is that government spending is a consequence of economic growth that can be taxed, not an instigator. Kind of basic.

After that, readers can hopefully see what economists plainly don’t, that government spending logically comes at the expense of savings. Governments can only spend what they’ve extracted from real production (that truth about resources yet again), which means their taxing power shrinks our power to save. Growth is a consequence of productivity advances, and savings are what enable those advances. A lack of spending is what powers growth, but governments tax away part of our surplus that might otherwise be saved, and when they tax it away they spend it. Put another way, government consumption comes at the expense of economy-enhancing savings.

Please keep all of this in mind with Europe top of mind. While a sub-editor perhaps wrote the headline about a lack of spending “auguring recession,” make no mistake about the origins of the headline. Economists in thrall to GDP believe recession is born of a lack of spending given their belief that spending, not savings, is the source of progress. Reporters just report, or they should just report.

Which means that if economists are right about the lack of spending in Europe, they’ll be wrong about the economic implications of same. It’s basic common sense relative to a GDP calculation and an adjective (recession) that vandalize it.