We've commented on the absurd construction of GDP before. Paying one guy a thousand dollars to dig a hole and another guy a thousand dollars to fill it in adds two thousand dollars to GDP, though it doesn't add anything of value to the economy.
Policy makers focused on GDP by definition will want to increase government spending, because government spending, no matter how wasteful, corrupt, misguided, or worthless, increases GDP directly!
Rob Arnott comments on the false idol of GDP and the trap of debt-driven GDP spending here (pdf). Please read the whole thing.
GDP is consumer spending, plus government outlays, plus gross investments, plus exports minus imports. With the exception of exports, GDP measures spending.
The problem is GDP makes no distinction between debt-financed spending and spending that we can cover out of current income.
Consumption is not prosperity. The credit-addicted family measures its success by how much it is able to spend, applauding any new source of credit, regardless of the family income or ability to repay. The credit-addicted family enjoys a rising “family GDP”—consumption—as long as they can find new lenders, and suffers a family “recession” when they prudently cut up their credit cards.
In much the same way, the current definition of GDP causes us to ignore the fact that we are mortgaging our future to feed current consumption. Worse, like the credit-addicted family, we can consciously game our GDP and GDP growth rates—our consumption and consumption growth—at any levels our creditors will permit!
Consider a simple thought experiment. Let’s suppose the government wants to dazzle us with 5% growth next quarter (equivalent to 20% annualized growth!). If they borrow an additional 5% of GDP in new additional debt and spend it immediately, this magnificent GDP growth is achieved! We would all see it as phony growth, sabotaging our national balance sheet—right? Maybe not. We are already borrowing and spending 2% to 3% each quarter, equivalent to 10% to 12% of GDP, and yet few observers have decried this as artificial GDP growth because we’re not accustomed to looking at the underlying GDP before deficit spending!
UPDATE: Check out this video, which explains in layman's terms why Gross Domestic Income is a better goal than GDP.
I have attacked GDP as a false "accounting concept" for about 30 years. GDP does not take capital consumption into effect properly.
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