Robert Rodriguez and his funds are one of my favorite things to find ideas about investing. Here is what he mentioned about the GDP in one of the FPA Crescent funds quarterly commentaries (found on the quarter ended 12/31/2011):
The most widely used measure for the economy is GDP, and we therefore use it in our economic discussions for the same purpose. However, it’s important to appreciate its flaws, especially those listed below:
1) GDP measures revenue, but the focus should be on a host of variables, including income, return on capital, and employment.
2) GDP can be bought. The government prints money and gives it to someone who ostensibly needs it. That individual spends it and GDP rises. Therefore, the more money the government prints, the faster the economy grows (nominally, anyway).
3) Not everything that reduces GDP is bad for the economy. For example, cancer treatments and services cost $264 billion a year in the United States. Those costs represent someone else’s sales (e.g., hospitals, HMOs, drug companies) and contribute to GDP. If we found a cure for cancer, GDP would then be negatively impacted. Yet how could one argue that curing cancer would be bad for the economy?
We are not suggesting there’s a superior measure to GDP, just that economic discussions should take into account the limitations of the metrics at hand.
Cheers and happy 2012 !