How much dirt do you have to move until you get rich?

Yesterday, we were looking at one of the biggest humbugs in the economic world - Gross Domestic Product. Today, we carry on...hoping to get somewhere.

If we pay someone to dig a big hole in the ground, the nation's GDP will go up. The more holes we dig - the bigger...the deeper - the more the GDP increases. If we dig a hole big enough, the GDP will really soar. You can see why. You could employ a whole army of diggers...a whole fleet of Caterpillar tractors...thousands of gallons of fuel. If there were a small-town with a high unemployment rate, the problem could be easily solved - just dig a big hole on the outskirts of town! Readers will think we are joking. But serious economists have proposed similar things, and many public works projects - such as the Civilian Conservation Corps, in which our own father was enrolled during the Great Depression - did nothing more than that.

Big holes mean big spending, which leads to big GDP increases. And GDP increases means growing wealth for the people, right? Well, if it were really that easy, you'd see a lot more holes being dug. But it's not that easy because, when you take resources - labor, fuel, machinery - and put them to work digging a gigantic hole, all you have to show for it is a hole in the ground. People are only 'wealthier' in the sense that, if they wanted a big hole in the ground, they've now got one. Unless you actually wanted dirt moved, you could move the Himalayas and not be a dime richer...because you would have squandered your wealth moving dirt -rather than producing the things that you really wanted.

GDP figures only make any sense at all when people are buying the things that add to their real wealth. If a city were bombed flat, for example, the GDP would go up as they rebuilt it; but they would be no better off. Nor are they better off when they are merely substituting one service for another of equal value. We mentioned yesterday what happens when a man pays someone to cut his lawn for him. If he did it himself, the GDP would remain the same. If he pays a neighbor to do it, the GDP goes up. If he pays his neighbor to mow his lawn...and his neighbor pays him to mow the neighbor's lawn, the GDP goes up twice. Is anyone any richer? No.

But what about when a man hires his neighbor to cut his lawn so that he can watch a baseball game on TV? The nation's GDP goes up. The man has given up money to get leisure. His neighbor has given up something, presumably leisure, to get money. Who's better off?

We don't know...but the society of these two men is hardly any richer.

But the real digging in the last few years has been to provide people with better houses. Whole mountains have been moved to provide roads, water, sewage, and foundations.

Surely, people are better off as a result, no? They have newer, bigger, better houses - equipped with granite countertops. The house is a tangible, useful thing. The householder can live in it. He can rent it out. He can pass it on to his heirs. Yes, the GDP went up - estimates vary about how much the housing boom of the 2002-2006 period added to GDP, with about 2 percentage points as the consensus view - but real wealth must have gone up too. Didn't it?

We spoke about how easy it would be to make people rich if all you had to do were to dig holes. That didn't seem like such a good idea; but suppose all you had to do was to build houses? Ah...there, you'd have something of real value at the end of it.

Why do policy makers hesitate? Why do they not just sign up plumbers, roofers, carpenters and the whole jolly cast of house builders to put up houses everywhere? 'Give [us] your tired, your poor, your huddled masses,' they could say to the whole world, 'and we will give them a new split foyer...with granite countertops!'

Of course, there are other things of value, not just houses. Take automobiles, for example; if you can increase people's real wealth - and the GDP - simply by building things of value, why not build more cars? Hummers! Yes, of course...GMC trucks too.

GM is in trouble - Ford too. Here's a way to increase the GDP...and put Ford and GM back in business. And not only that, it would be a way to rebuild America's failing manufacturing capacity.

Are you beginning to suspect that there might be a fly in the ointment, dear reader? We are.

If it was so easy, why didn't the Soviets didn't think of it? They had factories. They had labor. They had plenty of raw materials. They had a GDP too...and had GDP numbers that were the envy of the world, or at least that part of the benighted world that believed them. But instead of making people rich...the Soviet economy made them poor. Thanks to central planning, the Soviets were able to turn their economy into a value-subtracting system. The finished products were worth less than the raw materials that went into them.

What is the problem?

The problem, dear reader, is that wealth is not really measured in things - neither in houses nor automobiles. In fact, these things can actually hinder the creation of wealth, since they take resources from projects that might be more productive. And they then cost money to service, especially if they were purchased on credit. A house needs to be maintained; taxes need to be paid; it needs to be heated and cooled; it needs insurance; it needs furnishings. A new house is a blessing to a family that can afford it; it is a curse to a family that can't.

In the great housing bubble of the 2000-2006 period, the dirt moved...but it left a big hole in the nation's real prosperity.

Bill Bonner is the President of Agora Publishing.  For more on Bill Bonner, visit The Daily Reckoning.