bluegrass50 posted an outsourcing diary. This got me thinking - is the government GDP calculation a complete fraud and have we been in recession much longer and deeper than anyone has been speaking to?
Let me walk you through the thought:
From Wikipedia on GDP:
GDP is defined as the total market value of all final goods and services produced within the country in a given period of time (usually a calendar year). It is also considered the sum of value added at every stage of production (the intermediate stages) of all final goods and services produced within a country in a given period of time, and it is given a money value.
The most common approach to measuring and understanding GDP is the expenditure method:
GDP = consumption + gross investment + government spending + (exports
− imports), or,
GDP = C + I + G + (X-M)
Ok, equations are nice, so what?
The question is whether outsourcing is captured in GDP. Let me posit two scenarios below the fold:
One, Company X lays off 200 employees and signs a contract with Company A in a foreign country to provide those services. We all agree that this should be a deduct in income and an increase in imports. But does that happen?
The services sales in the US will still stay in the GDP - after all I billed a US customer for that service from the US insurer. Therefore, the GDP retains that portion of the value.
The cost of the service from the foreign country is an import. Therefore, the GDP should decrease by the net of the foreign billing.
But, US incomes decrease too - therefore, the net should be (Sales - minus outsource cost - US lost income). The result is GDP equals (Insurer Profit) - that's it, the GDP is this company's profit that's it.
Two, Company X lays off 200 employees and hires people in the foreign company to provide those services. Now, Company X may say these are Company X employees - are they in the GDP calculation. They shouldn't be - but does anyone here believe the government actually audits these numbers? You got to be kidding me. Remember, for tax purposes, Company A may still include these as "wage expenses" in their consolidated tax return - heck, for some countries there is an incentive adder tax deduction for enconomic activity in their country.
In this case, the income impacts would offset - there is no net loss of income, the sale still occurs in the US. GDP hums along.
I can tell you from personal knowledge a number of intellectual firms (lawyers, accountants and other such) who have international breadth are using the scenario two for their reporting. The Small Business Administration estimates that 50.6 % of non-farm employment is in small businesses. If these companies are internalizing outsourcing, how can the GDP possibly include it.
I seem to remember a number of comments that indicated that GDP(E) - excess of exports over imports - was a "plug" or calculated as opposed to source based number. My sense is that in that case both scenarios above might be missed in the imports calculation.
Let's face it, if only 3% of small business staffing is going through outsource and unreported, we are negative on GDP growth. Anyone want to be it is higher than that?