Fake GDP ?

Discussion in 'Economy' started by Widdekind, Jul 18, 2012.

  1. Widdekind
    Offline

    Widdekind Member

    Joined:
    Mar 26, 2012
    Messages:
    813
    Thanks Received:
    35
    Trophy Points:
    16
    Ratings:
    +35
    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:
    [​IMG]






    reference:
    https://www.bea.gov/papers/pdf/RIPfactsheet.pdf
     
    • Thank You! Thank You! x 1
    Last edited: Jul 18, 2012
  2. william the wie
    Offline

    william the wie Gold Member

    Joined:
    Nov 18, 2009
    Messages:
    7,334
    Thanks Received:
    677
    Trophy Points:
    175
    Ratings:
    +1,635
    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.
     
  3. Widdekind
    Offline

    Widdekind Member

    Joined:
    Mar 26, 2012
    Messages:
    813
    Thanks Received:
    35
    Trophy Points:
    16
    Ratings:
    +35
    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:
    [​IMG]
     
  4. Widdekind
    Offline

    Widdekind Member

    Joined:
    Mar 26, 2012
    Messages:
    813
    Thanks Received:
    35
    Trophy Points:
    16
    Ratings:
    +35
    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"?
     
  5. william the wie
    Offline

    william the wie Gold Member

    Joined:
    Nov 18, 2009
    Messages:
    7,334
    Thanks Received:
    677
    Trophy Points:
    175
    Ratings:
    +1,635
    Not that I've seen. But good work on your part.
     
  6. jillian
    Online

    jillian Princess Supporting Member

    Joined:
    Apr 4, 2006
    Messages:
    69,567
    Thanks Received:
    13,014
    Trophy Points:
    2,220
    Location:
    The Other Side of Paradise
    Ratings:
    +22,441
    why are you using a 2007 article with 2007 figures? last i checked, that was prior to this administration. is that why you made your link so tiny? so no one would notice?
     
    • Thank You! Thank You! x 1
  7. Widdekind
    Offline

    Widdekind Member

    Joined:
    Mar 26, 2012
    Messages:
    813
    Thanks Received:
    35
    Trophy Points:
    16
    Ratings:
    +35
    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.
     
  8. Widdekind
    Offline

    Widdekind Member

    Joined:
    Mar 26, 2012
    Messages:
    813
    Thanks Received:
    35
    Trophy Points:
    16
    Ratings:
    +35
    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:
    [​IMG]
     
  9. william the wie
    Offline

    william the wie Gold Member

    Joined:
    Nov 18, 2009
    Messages:
    7,334
    Thanks Received:
    677
    Trophy Points:
    175
    Ratings:
    +1,635
    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.)
     
  10. Widdekind
    Offline

    Widdekind Member

    Joined:
    Mar 26, 2012
    Messages:
    813
    Thanks Received:
    35
    Trophy Points:
    16
    Ratings:
    +35
    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 ?
     

Share This Page

Search tags for this page

content