Fake GDP ?

Widdekind

Member
Mar 26, 2012
813
35
16
Government accounting labels the property taxes, and mortgage interest payments, of homeowners, as "imputed rent". Homes are labeled "rental businesses", and homeowners "rent their homes from their own rental businesses". When homeowners write checks, for property taxes or interest payments, the government labels those payments as "imputed rent revenue" to homeowners' "rental businesses", which are then immediately expensed for taxes (to government) and interest (to banks). Thus, homeowners housing-related payments are accounted as "internal payments", from the homeowner as a person, to their home as a rental business, and then on to governments & banks. By such "double counting", those payments are accounted as "personal consumption expenditures (PCE)", and then also as "taxes" & "interest".

"Imputed rent", of homeowners as persons, to their homes as rental businesses -- representing double-counted payments, primarily of property taxes & mortgage interest -- total over a trillion dollars per year, most of 10% of GDP. "Big Money" (trillions of dollars) is artificially accounted as PCE, inflating GDP by large amounts, even though, in physical reality, no new product was actually produced or sold. Homeowners paying property taxes, or mortgage interest, are boosting GDP, by "buying rent service from themselves", i.e. from their homes-as-official-rental-businesses (which then pay governments & banks).

Persons are accounted as paying
less taxes (-T)
less interest payments (-i)
more personal consumption (+T+i)​
then businesses, officially including homes-as-rental-agencies, receive-but-then-immediately-pay
more "rental revenue" (+T+i)
more taxes (-T)
more interest payments (-i)​
The net effect, is to shift the appearance of taxes & interest, from official "persons" (homeowners), to "corporations" (their homes-as-rental-agencies); and, meanwhile, to account those taxes & interest payments as "checks for rent" (from those "persons" to their "corporations"), boosting GDP, by boosting the PCE component of GDP (+T+i).

Inexpertly, that seems roundabout, artificial, confusing, and fake. Real US corporations are not producing the "pseudo-product" of "fake rent" of "homeowners from their own homes". If government accountants can fake up to 10% of GDP, over a trillion dollars per year, then what next ?

fake rent, to "homes-as-rental-businesses":
  • inflates GDP revenue of "business sector", i.e. providers of final goods & professional services
  • inflates expenses of "business sector", expensed with the property tax & mortgage interest charges
  • leaves "business sector" net income (revenues less expenses), ultimately including Personal Income (PI) paid to persons, unchanged
  • decreases personal consumption (C) as a fraction of PI
  • increases personal interest & taxes (i,T) as a fraction of PI
the following figure tries to (simplistically) visualize the effects, of (removing) fake rent, in GDP and national income accounting:
nationalincomeflowdiagr.png






reference:
https://www.bea.gov/papers/pdf/RIPfactsheet.pdf
 
Last edited:
You haven't scratched the surface. Imported used capital equipment is subtracted from GDP instead of added as investment. I am going to try not to sound smart aleck about this but GDP has nothing to do with national income, it is instead the national cashflow statement as GNP was before GDP. Hayek and Friedman pointed this out first but it bears repeating national income has little or nothing to do with GDP/GNP.

There are no estimates of national income and only mediocre estimates of the national balance sheet. Sorry about being a wet blanket but even as a cashflow statement GDP sucks in so many ways I doubt I could list the major reasons.
 
Downloading data, for "NIPA table 2.5.5", from the internet, i subtracted "fake rent" from nominal GDP, to calculate nominal "true" GDP. The following figure plots "fake rent", and total government taxation, as a fraction of "true GDP", from 1947-2011. "Fake rent" has steadily increased to nearly 10% of true GDP. Then, dividing by a (somewhat) smaller denominator, the overall taxation rate increases (slightly), to about a third:
fakerenttruetaxes.png
 
Imported used capital equipment is subtracted from GDP instead of added as investment.
any good or service purchased from abroad, flows dollars abroad. That legitimately represents an "import" of something to the US, and an "export" of dollars from the US. Imported equipment is not domestic production, and is legitimately not GDP. Imports are subtracted from total sales, to value sales attributable to domestic production. Total capital accumulation, from all sources, may be tracked in a separate account, e.g. "total net worth"?
 
Imported used capital equipment is subtracted from GDP instead of added as investment.
any good or service purchased from abroad, flows dollars abroad. That legitimately represents an "import" of something to the US, and an "export" of dollars from the US. Imported equipment is not domestic production, and is legitimately not GDP. Imports are subtracted from total sales, to value sales attributable to domestic production. Total capital accumulation, from all sources, may be tracked in a separate account, e.g. "total net worth"?
Not that I've seen. But good work on your part.
 
why are you using a 2007 article with 2007 figures?
that's all i found online -- do you have a more current reference? "fake rent" has been accounted as GDP since 1929, for over 80 years. "Imputed" non-cash, non-real payments 'should' not be part of GDP, and 'should' not have been part of GDP, since Pres. Hoover.
 
Not that I've seen. But good work on your part.
US corporations value their "net worth" at current market value; and at historical cost. The latter is allot less, than the former. Inexpertly, "historical" costs are allot lower, because they reflect original "book values", from back when the equipment was bought, years to decades ago. If so, then the ratio of current market values (MV), to historical costs (HC < MV), resembles an "inflation index":
(HC / MV) = (historic price level) / (current price level)

(historic price level) = (current price level) x (HC / MV)​
From that estimated "historic price level", back when the capital was originally purchased, one could count backwards, from current "market price levels", how many years back in time is required, for price-levels to drop down, to the estimated historic level. That number of years would be the average age, of the capital equipment:
estimatedageofcapitaleq.png
 
Not that I've seen. But good work on your part.
US corporations value their "net worth" at current market value; and at historical cost. The latter is allot less, than the former. Inexpertly, "historical" costs are allot lower, because they reflect original "book values", from back when the equipment was bought, years to decades ago. If so, then the ratio of current market values (MV), to historical costs (HC < MV), resembles an "inflation index":
(HC / MV) = (historic price level) / (current price level)

(historic price level) = (current price level) x (HC / MV)​
From that estimated "historic price level", back when the capital was originally purchased, one could count backwards, from current "market price levels", how many years back in time is required, for price-levels to drop down, to the estimated historic level. That number of years would be the average age, of the capital equipment:
estimatedageofcapitaleq.png
All good but Jonah Fisher's embedded capital in capital equipment as well as physical depreciation being adjusted for inflation also have to be figured in. (By the way I like this thread it stretches my mind. Fisher's paper is free in PDF form on the webjust google it. My own interest is in how GDP understates productivity gains and overstates GDP that way.)
 
Okun's Law relates output (real GDP, "Q") to (un-)employment. A +1% increase in the employment rate (-1% decrease in UE rate) typically coincides with a +2% increase in output. Removing fictitious "imputed rent" from real GDP ("true real GDP") slightly improves the correlation coefficient (from 0.75 to 0.77). Fake rent is non-real, and does not actually employ anybody, in any real way. Removing fake rent (slightly) improves the correlation, between real employment, and actual true real output.

Why can accountants fabricate billions to trillions of dollars of fake spending ?
 
Okun's Law relates output (real GDP, "Q") to (un-)employment. A +1% increase in the employment rate (-1% decrease in UE rate) typically coincides with a +2% increase in output. Removing fictitious "imputed rent" from real GDP ("true real GDP") slightly improves the correlation coefficient (from 0.75 to 0.77). Fake rent is non-real, and does not actually employ anybody, in any real way. Removing fake rent (slightly) improves the correlation, between real employment, and actual true real output.

Why can accountants fabricate billions to trillions of dollars of fake spending ?
It is in fact their job.
 
"Imputed rent", of homeowners as persons, to their homes as rental businesses -- representing double-counted payments, primarily of property taxes & mortgage interest -- total over a trillion dollars per year, most of 10% of GDP...
The goal is measuring economic activity.

Building, maintaining, and renting out housing is a measurable service. As an economy improves lifestyles can change as millions of households switch from renting to owning. A large portion of the population now spends more money to enjoy an increase in the quality of housing. We need to measure production in a way that shows this increase in economic activity.

If not with 'imputed rent', then how?
 
"Imputed rent", of homeowners as persons, to their homes as rental businesses -- representing double-counted payments, primarily of property taxes & mortgage interest -- total over a trillion dollars per year, most of 10% of GDP...
The goal is measuring economic activity.

Building, maintaining, and renting out housing is a measurable service. As an economy improves lifestyles can change as millions of households switch from renting to owning. A large portion of the population now spends more money to enjoy an increase in the quality of housing. We need to measure production in a way that shows this increase in economic activity.

If not with 'imputed rent', then how?
Good question and I see your point but I don't see how the application of your point in owner occupied 100% equity to make one form of implicit income GDP but not others such as marriage, giving birth, getting a pet ad infinitum. Seriously how do you draw the line? The amount of loot brides get at weddings and all other forms of systematic gift giving account for as much if not more non-monetary exchange as implicit revenues from homwownership.

If implicit revenues are to be ignored generally then they should be ignored specifically as well.
 
Building, maintaining, and renting out housing is a measurable service... A large portion of the population now spends more money to enjoy an increase in the quality of housing. We need to measure production in a way that shows this increase in economic activity.
What government accountants call "Personal Savings" (S) is a catch-all lump-sum term, for all the income (dollars per year) not spent on immediate consumption (C, food, shoes, cars, boats; haircuts, guitar lessons), nor spent to government (T, taxes). Thus, Savings includes income deposited into bank accounts (colloquial "savings"), as well as income spent on assets (stocks, bonds, real-estate), and home improvements (trips to Home Depot & Lowes). So, in the equation for GDP = T + S + C, home improvements are already accounted in "S". Double re-counting the same expenses twice again is redundantly redundant, and artificially inflates official GDP. In analogy,
  • you mow your lawn;
  • you pay yourself, as a "lawn mowing agency", for imputed lawn-mowing "service" (into C, "personal consumption expenditures" on goods & services, on the RHS, of the above figure);
  • as your corporate alter ego, you take those imputed revenues (from C, on the LHS of the above figure), and pay yourself the exact same money back, as wages, boosting your personal income (PI)
from which you cover the costs, of paying yourself, to mow your own lawn.

None of that accounting "Wizardry" actually produces anything new, not already produced; nor generates any jobs, not already filled. You took a $20 bill out of your wallet, passed it from one hand to the other, and then put it back in your wallet. According to the government, that counts as productive activity. But it really isn't.
 
Last edited:
That government deficit spending is calculated as part of GDP is the biggest fraud of the whole Ponzi in the first place.

These various statistics were first developed as a means of getting a warning that the economy was starting to drop so that our leaders could do things to spur the markets, but, being politicians, they have gradually turned them inot little more than statistical lies to help them get re-elected.
 
Public borrowing (deficit spending, by their governments) is essentially the same, as private borrowing (spending beyond means, by persons & businesses). When people borrow to buy new homes, they create jobs for construction workers. When businesses borrow to buy new machines & factories, they create jobs for manufacturing workers. When governments borrow to buy roads & bridges (say), they also create jobs. In the short-term (before loans come due), spending on new borrowings is the same as spending from old savings.

Deficit spending, on borrowed money, is (still) a real actual physical cash flow. Real actual physical money changes hands, for real goods & services, generating real jobs. By contrast, "imputed" revenues, for "imputed" services (like persons renting their homes from themselves), are totally fictitious. No real money was spent. No real jobs were generated. "Imputed" revenues are non-real; are fake.
 
...lifestyles can change as millions of households switch from renting to owning. A large portion of the population now spends more money to enjoy an increase in the quality of housing. We need to measure production in a way that shows this increase in economic activity...
Good question and I see your point but I don't see how the application of your point in owner occupied 100% equity to make one form of implicit income GDP but not others such as marriage, giving birth, getting a pet...
Greenspan got into that by asking--
...how do you handle the obvious economic product that homemakers produce? Should it be imputed in the system or not? That was one of the big debates...
--right after bringing up the fact that--
...there are a number of southern states that use a huge amount of air conditioning in the summer and that appears as output in the GDP. The wonderful breezes you get up in northern Vermont during the summer, which eliminates the requirement for air conditioning, doesn't show up in the GDP...
It all boils down to the fact that our goal is to measure the economic activity of production. We're not working with the effort of production and we're not considering saving. A landlord who moves into one of his newly vacant units is still producing the same easily priced service as before, so it's counted in the GDP because it like the BEA points out--
the depreciation and cash expenses borne by owner-occupiers that are deducted from their rental income do reduce the measure of personal saving. In 2006, household owner-occupiers’ expense for depreciation amounted to almost 2 percent of disposable personal income, and their cash expenditures on intermediate inputs for upkeep, maintenance and repair, on property taxes, and on mortgage interest amounted to over 8 percent of disposable personal income.
 
...lifestyles can change as millions of households switch from renting to owning. A large portion of the population now spends more money to enjoy an increase in the quality of housing. We need to measure production in a way that shows this increase in economic activity...
Good question and I see your point but I don't see how the application of your point in owner occupied 100% equity to make one form of implicit income GDP but not others such as marriage, giving birth, getting a pet...
Greenspan got into that by asking----right after bringing up the fact that--
...there are a number of southern states that use a huge amount of air conditioning in the summer and that appears as output in the GDP. The wonderful breezes you get up in northern Vermont during the summer, which eliminates the requirement for air conditioning, doesn't show up in the GDP...
It all boils down to the fact that our goal is to measure the economic activity of production. We're not working with the effort of production and we're not considering saving. A landlord who moves into one of his newly vacant units is still producing the same easily priced service as before, so it's counted in the GDP because it like the BEA points out--
the depreciation and cash expenses borne by owner-occupiers that are deducted from their rental income do reduce the measure of personal saving. In 2006, household owner-occupiers’ expense for depreciation amounted to almost 2 percent of disposable personal income, and their cash expenditures on intermediate inputs for upkeep, maintenance and repair, on property taxes, and on mortgage interest amounted to over 8 percent of disposable personal income.
I agree with Greenspan and the OP. A good case can be made to add all implict income streams into the economy, a decent case can be made to exclude all implicit incomes but I don't see any case for cherry picking some to include and others to exclude.
 
...there are a number of southern states that use a huge amount of air conditioning in the summer and that appears as output in the GDP. The wonderful breezes you get up in northern Vermont during the summer, which eliminates the requirement for air conditioning, doesn't show up in the GDP...
It all boils down to the fact that our goal is to measure the economic activity of production.
So, Vermonters don't buy air-conditioners; and they don't buy electricity service to run them; but we should still account "breeze" as US gross domestic production? Why don't we, then, also account geothermal or solar energy as GDP? US residents benefit from "wind". But "wind" was not produced by domestic businesses.

Former Chairman Greenspan seems to be suggesting a measure, of the "gross value of benefits", acquired by US residents, from all sources (natural "for free", and artificial "for fee" in GDP). That would be a valuable statistic. That would not be GDP.



A landlord who moves into one of his newly vacant units is still producing the same easily priced service as before
People who mow their own lawns are producing a service. Those self services are explicitly excluded from GDP. If mowing your own lawn is not GDP, then why would renting your own building be GDP?




the depreciation ... borne by owner-occupiers that are deducted from their [imputed] rental income do reduce the measure of personal saving
Inexpertly, homes are officially considered "rental businesses". So, home depreciation is accounted as corporate saving, not personal saving. Home depreciation is subsumed into "Consumption of Fixed Capital", along with wear-and-tear of capital equipment (machines & factories). In the income-expenditure equation Y = C + S + T, home depreciation is still part of "Gross Saving" (S + adjustments), but is accounted as savings by businesses, not persons.

Like "imputed rent service", depreciation is based on subjective estimates, and is not a real money flow. No money changes hands, for any good or service, produced for sale, in any market. GDP measures market transactions. Estimating the value of imputed self-services would be very valuable, e.g. enabling estimates of untapped potential demand, and sectors of potential job growth. Estimating the value of depreciation is very valuable, enabling businesses to keep track of the condition of their equipment. But fake fictitious non-real pseudo cash flows do not generate any real economic benefits -- no jobs, no incomes, no taxes. They should be accounted separately, "off to the side", in separate accounts. GDP should focus strictly on real actually-occurred market transactions.

Inexpertly, depreciation is actually (business) savings, because businesses are allowed to expense away large blocs of income, to "depreciation", thereby shielding large amounts of actual real income, from taxation. That puts businessmen into the psychological mindset, of "desiring depreciation" of US capital equipment. US businesses 'ought' to be shielded from overburdensome taxation, by means besides "if our machines & factories deteriorate faster, then we can (set aside more money and) pay more dividends".

That said, the vast majority of "imputed rent", which is accounted as personal consumption expenditures (C), is actually in reality mortgage interest to banks (i), property taxes to governments (T), and personal savings (S). "Imputed rent" muddles the definition of, and accounting of, GDP, and reflects the labyrinthine "loophole" propensity, of US government codes.
 
...I don't see any case for cherry picking some to include and others to exclude.
That's fine; you're free to use whatever you're able to see because it's a free country and we all like to use what works.
...i subtracted "fake rent" from nominal GDP, to calculate nominal "true" GDP...
We might consider whether we're realistic in deciding whether a tool one guy uses to feed his family is universally "true" or "fake". Not being able to 'see' the reasons for others' choices does not confer authority over what is the 'truth'...
144000.jpg
 

Forum List

Back
Top