Kudlow Needs a Refresher Course
in Econ 101
Peter Schiff
April 29, 2005
I hate to be so critical of
CNBC, especially since they were gracious enough to have me on
as a guest on Monday, but when they present such an easy target,
I just can't resist. Such was the case yesterday, when Larry
Kudlow, host of "Kudlow & Co.," and one of that
network's more colorful "economic" commentators, demonstrated
his needs to return to Princeton for a refresher course in basic
economics. I write this because, yesterday, when commenting on
the release of disappointing first quarter GDP numbers, his ridiculous
argument in favor of changing the way GDP is calculated, revealed
a lack of understanding of what this basic economic statistic
is attempting to measure.
Besides further supporting my stagflation warning (the deflator
rose at an annual rate of 3.2%,) yesterday's report revealed
that first quarter GDP grew at a less than stellar 3.1% rate;
its slowest pace in two years, and well below Kudlow's typically
far more optimistic forecast. But rather than admitting to being
wrong, Kudlow, much like a golfer blaming a poor shot on a defective
club, instead attributed the weaker performance to what he perceived
to be a flaw in the methodology used to calculate the index.
Since imports subtracted 2.19% from GDP, Kudlow proposed adding
that value back in. In his words, "imports are not a bad
thing" so why subtract them from GDP. As a result of his
recalculation, Kudlow argued, with a straight face I might add,
that the real growth rate of the U.S. GDP during the first quarter
was in fact a far more robust 5.29%.
While it may be true that imports per se are not bad,
it is also true that they have absolutely nothing to do with
GDP which is precisely why their value is subtracted from the
calculation in the first place. The concept of GDP is to measure
the value of goods and services produced by a nation. Since all
goods and services produced are ultimately consumed, the index
is calculated by totaling the expenditures made by individuals,
corporations, and governments, (I + C + G). However, since goods
produced for export are not consumed domestically, the value
of exports is, therefore, added to GDP. If this adjustment were
not made, the value of such production would go unmeasured. However,
since expenditures on imports do not reflect domestic production,
the value of imports is therefore subtracted from the calculation.
The net result is GDP, or Gross Domestic Product.
So, contrary to Mr. Kudlow's claims, U.S. GDP was not reduced
because Americans imported too much, it was reduced because we
produced too little. By adding the value of imports back into
GDP, what Kudlow, in fact, proposed measuring was something entirely
different, perhaps a new indicator which more accurately might
be called GDC, or Gross Domestic Consumption. While such
a ridiculous concept may in fact seem appropriate given the current
state of the highly imbalanced U.S. economy, it should not be
confused with GDP, which at least attempts to measure the value
of what a nation produces, not what it consumes.
I do agree with Mr. Kudlow on one point. This GDP report does
in fact present a distorted measure of the real output of the
U.S. economy. By failing to capture the true rate of inflation,
the deflator results in GDP being considerably higher than would
otherwise be the case were a more honest measure of inflation
used. Also, as GDP includes goods and services which do not necessarily
reflect higher standards of living, such as excessive legal or
medical expenditures, increased outlays necessary to deter rising
criminal or terrorist threats, or mere restoration of property
damaged by natural disaster, it often exaggerates true economic
growth.
In a world where government officials routinely change the way
economic statistics are calculated, for the specific purpose
of engineering a false sense of prosperity, Kudlow's suggestion
seems par for the course. However, such a biased manipulation
would be far more "appropriate" were Kudlow still working
on the federal payroll, where such propaganda would at least
be expected, rather than as a supposedly objective commentator,
where unsuspecting viewers might confuse his economic cheerleading
with legitimate insight, to the detriment of their financial
well being.
April 29, 2005
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Peter Schiff
C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.
1 800-727-7922
email: pschiff@europac.net
website: www.europac.net
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