This ratio, however, is nothing more or less than a statistic, and it highlights how our entire economic system today depends on the way we read such statistics. As the U.S. budget wars repeatedly demonstrate, GDP (gross domestic product), unemployment, inflation and trade statistics determine how the government spends (or does not spend) trillions of dollars. These numbers also shape whether large businesses invest or don’t, and whether small businesses spring to life or remain ideas to be acted on later.
Our debates, however, are based on a simple assumption that the set of numbers we use to measure the economy are accurate, or at least close enough. But what if they aren’t? What if we are making powerful assumptions about the economy based on statistics that are at best half-right?
Consider this, the Congressional Budget Office — which is responsible for “scoring” budgets and analyzing their long-term effects — only came into existence in 1974. Now, however, major spending bills in the United States must be justified based on statistics and formulas, and those become the basis of partisan commentary and ideological debates about what we spend and how we pay for it. You would think that there is a long history here, that the relationship between debt, economic growth and spending can be charted with a heap of statistics so that we can determine the effects with some certainty.
That isn’t the case. GDP has only existed as a reliable statistic since the 1930s (and even then, more attention was paid to national income and then to gross national product ; GDP didn’t become the first among equals among economic statistics until 1991). Given that deficits, other than in times of war, were not much a part of U.S. policy until the 1970s, understanding the relationship between debt and GDP, therefore, is largely guesswork based on a limited amount of data for a very short time.
Other countries have even less history of collecting these numbers. Global financial markets were roiled recently by the announcement that China’s official GDP came in at 7.7 percent instead of the expected 8 percent. But the whole idea of using these numbers as absolute gauges of China’s economic health is barely 20 years old. Given that Beijing’s Five Year Plans set growth targets, many think political pressures make these numbers less reliable. Even without those pressures, considerable portions of China’s economy (and those of other countries as well) do not exist statistically: Private loans, for instance, fuel part of China’s economy, but they rarely show up in national accounts.