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Vedder and Gallaway: The Great Depression of 1946 11 Whether our estimates are correct or not, it is clear that the aggregate government statistics on output, prices, etc., must be used with extreme caution, and that data "revisions" do not always bring about improved insight into historical phenomena. Why the Error in the Government's Revised Statistics? Why is it that the official GNP statistics for the reconversion period become continually worse over time? Examination of the calculation procedures used reveals that the recent estimates are a complete statistical artifact. The aggregate GNP price deflator is the weighted sum of several component price indices, such as the personal consumption expenditures index (which, in turn, has several components), the index for exports, imports, government purchases of goods and services, and private investment. Numbers are indexed around a base year, currently 1982. Over time, the price index for the government purchases of goods and services has risen significantly more than for other components. For example, in 1982 it is estimated that the aggregate price of government goods and services averaged 8.13 times the 1946 level, compared with "only" a 4.55-fold increase in the price of consumer goods. Since 1982 is set equal to 100, that means the 1946 index number for the government goods and services price deflator is 12.3 (100 divided by 8.13); the figure for the personal consumption expenditure deflator is 22.0. As reconversion proceeded, the weights used to measure consumption's contribution to the aggregate price index dramatically increased, while the weights used to measure government purchases contribution dramatically decreased. 15 Since the consumption index had A numerical example, suggested by an anonymous referee, might help the reader see the point. 1946 as base year 1949 as base year Consumption Government Consumption Government Year Deflator Deflator Deflator Deflator 1946 100 100 40 25 1947 105 200 60 50 1948 200 300 80 75 1949 250 400 100 100 If the weights of the consumption and the government expenditures components of the GNP deflator in this hypothetical example were 60% and 40%, respectively, in 1947,
12 The Review of Austrian Economics, Vol. 5, No. 2 a bigger number (22 in 1946) than the government purchases index (only 12.3), the calculated aggregate GNP deflator rose in part merely from the shift from government spending to consumer spending. The 1990 data show the total GNP price deflator rose from 15.7 to 19.4 from 1945 to 1946, an increase of 23.6 percent. Yet the subcomponents of the index are all reported to have increased less—consumption by less than nine percent, investment by about 15 percent, government purchases by four percent, etc. Only by changing the weights and by arbitrarily giving higher numbers to the non-government purchases component of the index do you get this type of result, which is then used with nominal GNP data in calculating equally artificial real GNP. Had prices of governmental purchases risen exactly the same as other components in the index over time, the distortion would not have been observed. In earlier years, the distortion was smaller because the disparity between the government purchases price index and the other index components was much smaller than observed now (since the series have diverged more over time because of consistently faster rising prices of governmental goods and services). Reevaluating Governmental Expenditures It can be argued that even our estimates above understate the robustness of the postwar economy, and overstate wartime growth, because of a second flaw in the data. While transactions in the private market economy are appropriately valued for GNP calculations by using equilibrium prices, governmental purchases of goods and services may be overvalued, since they are not generally sold in a truly competitive market environment. 16 Looking at it from the demand side, many consumers of governmental services are forced to "purchase" those services at a cost (reflected in taxes, inflation, or higher interest rates) above what the consumer would be willing to pay if permitted to buy the services on a non-coercive basis. Typically there is a "deadweight loss" as opposed to the consumer surplus typical in non-coercive market transactions. From the supply perspective, monopolistic governmental bureaucrats lack the incentive to minimize resource use, and thus services and 80% and 20% in 1948, then the deflator would have risen by 29.4 percent (from 170 to 220) between 1947 and 1948 using 1946 as the base year. If one uses 1949 as the base year, however, we would have calculated an increase of 41.1 percent (from 56 to 79) for the same period. 16 For a study that carries the argument here much further than we have chosen to take it, see Robert Batemarco, "GNP, PPR, and the Standard of Living," Review of Austrian Economics 1 (1987): 181-86. See also Murray Rothbard, America's Great Depression (Kansas City: Sheed and Ward, 1963).
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