Wednesday, May 28, 2014

Italy to Include Sex, Drugs in GDP

There is something to be said for including black market transactions when measuring a nation's economic activity. Murray Rothbard argued that government spending should not be counted as part of GDP. (SEE:The Fallacy of the "Public Sector"). On the other end of the spectrum, away from government spending, is black market activity, which is  free exchange, displaying mutual benefit. It, thus, should be considered as part of economic activity that adds value.

However, it is dangerous for government to get involved in any activity, they are always up to no good--even when calculating national income. Here's Trish Regan on what is behind sudden desire of Italy to measure illegal activity and count it as part of GDP:
Italy is changing how it calculates its gross domestic product, a measurement of the overall economy, to include black market activity — everything from prostitution to illegal drug sales to smuggling and arms trafficking. Economists predict illegal sales will add 1.3 percentage points to GDP this year.

Hey, it's one way to boost growth...

By including the black market, for which there are no concrete ways to measure and accurately determine value, the Italian government will be able to manipulate its GDP numbers in a way that's bound to open it to criticism and agitate its Northern neighbors...

The reason Italy is becoming creative with its accounting is because it wants to (and the European Union needs it to) improve its appearance.

A larger overall economy will enable Italy to lower its debt-to-GDP ratio, which is an essential part of meeting the EU's financial standards. EU countries are not supposed to let their yearly bills reach more than 3% of the overall economy (or their debt exceed 60% of GDP.) If they do, they're hit with hefty fines.

The other benefit of lowering the debt-to-GDP ratio, is that Italy should theoretically be able to borrow more money....

While Italy's move may be considered unorthodox, even shady, it's not illegal. The EU seems to encourage the creative accounting; To give countries such as Italy a lifeline, new EU rules require member states to include the value of all income-producing activity in GDP calculations — and illegal activity is often income-producing. Italy is the first and only country to take advantage. Others, such as Spain (for which 20% of the overall economy is believed to be black market), and Greece, may soon follow.

The beauty of the black market, at least if you're the borrower, is that its value can be interpreted however you want.

In the U.S., for example, the illegal marijuana business is estimated to be worth between $10 billion and $100 billion a year. That's a big spread, and it all has to do with how an economist measures the numbers. If you're an economist in Italy who needs to make the country's economy look bigger, no doubt you'll want to go with the liberal calculation. The truth is, no one really knows.

Italy isn't the first country to recalibrate its numbers. Boosting GDP is part of a growing trend worldwide. Last month, Nigeria declared itself the biggest economy on the continent of Africa by recalculating GDP. Ghana added 60% to its economy in 2010 by establishing new GDP accounting rules.


  1. They forgot "rock and roll".

  2. First they make inflation disappear, and now they're creating growth out of thin air! Is there anything our benevolent central planning overlords can't do!?

  3. It's not going to boost growth at all since they have to revise previous year to reflect the new accounting.

  4. COMING NEXT to USSA: Our Regime will also add the electricity used up by Wolfie's troll comments that will skyrocket our GDP.

  5. When I saw this last week on ZeroHedge I laughed.

    When I realized they were serious and that government stats would be the benchmark...well, I got angry and tried to cry. I can't even cry about this bullshit anymore.