Thanks to Russ Robert of Cafe Hayek for pointing me to Jerry Jordan’s Investors Business Daily article, Government Accounting is Like Lemonade Stand Economics.
I attempted to explain the same topic that Jordan writes about last September in my post, Government is an expense.
My key point then was that GDP is often misused as a measure of health for the economy, but that is like measuring the health of a business by adding its revenues and expenses together.
Jordan explains it better than I did with a lemonade stand example. In his example, kids invest $10 in a lemonade stand, make $7 back by selling cups of lemonade and folks think that is good because there was $17 worth of economic activity, instead realizing there was a $3 loss.
GDP is not a good measure of the health of the economy because it’s like considering the $17 of lemonade stand spending and saying that was good, rather than realizing that $3 of value was lost in the process. None of us would last long if we kept turning $10 into $7. But, that’s essentially what we do when we increase government spending to keep GDP up.
The lemonade stand kids should learn from the signal they received from the market. The signal is that selling lemonade in the neighborhood is not worth their while because customers do not value a glass of lemonade in that time and place to pay enough for it.
So, the kids should try other things. Maybe they should try a different drink or different corner. Or maybe they should offer to do yard work for their neighbors.
They should keep experimenting to discover things that their neighbors do find worthwhile enough to pay enough to make it worth the kids’ while too. Full disclosure, I tried the lemonade stand experiment a few times too. I tried it in the street and at family garage sales. It never produced profits for me. I did much better doing things like mowing lawns, raking leaves, shoveling snow and assembling bicycles.
We do no good encouraging the kids to keep at turning $10 into $7 to maintain that $17 of economic activity.