Economists are fools
I hate to lead with such an aggressive title, but over the years, nobody (apart from bankers) has upset me more than economists.
I have been reading the stuff published by economists for decades. In China, where I worked for 12 years, GDP growth became like a religion. Thousands of articles were written on the topic, each of them quoting economists. In the process, the glorious city of Beijing was laid to waste, but that is for another article. The malign and fruitless obsession with GDP growth, and the part played by economists in encouraging it, is why I think economists are fools.
Prime Minister Abe is the latest leader to fret about GDP growth. Yet this is misguided, for several reasons. GDP growth is merely a measure of activity. What growth per se does not reveal is the nature and quality of that activity. As most economists are actually well aware, you can maintain GDP indefinitely if you are rich enough. For example, knocking down and re-building a house is a way of generating GDP, even if the various iterations of the building show zero improvement. Of course, at some point you will run out of money.
it is clear that GDP growth is a blunt or even ‘dumb’ way of looking at the economy. My suspicion however is that is precisely why it is so popular with politicians. Merely generating economic activity, especially in the short term, is quite easy – and therefore a convenient way for politicians to say they have achieved something during their term in office.
To generate GDP growth, you could build over-priced sports stadia all over the country. Indeed, the more over-priced the stada, the more GDP growth you will achieve – since the preferred measure is ‘nominal’ GDP which measures the monetary amount of an activity.
Economists, of course, are clever enough to know all about the shortcomings of worshipping GDP growth, but they seem to want to make friends with policy makers and obtain research grants, so they go along with it.
For Japan, GDP growth is especially pointless in two ways. First, it is far more important to look at GDP per person. For Japan, maintaining a non-shrinking GDP or 0% growth is a triumph in the face of the speed of the working population decline.
It is a hollow triumph, however, because once the aim becomes to protect your GDP number, you do all sorts of extreme things, like using the central bank to buy up your government bonds. But by making an artificial floor, you make it impossible to know the real price of Japanese debt.
The price of government debt is the price off which all other financial instruments are based, so you are making a mockery of your capital markets in the process. And remember, the reason we pay bankers and economists such high salaries is that they allow us to identify the ‘true’ prices of goods and services in the economy. Only they don’t. But we still pay the inflated salaries…
The distortions are obvious in other ways. Today, Japanese GDP is much bigger than it was before Abe came to power in 2012 in yen terms. But the value of the yen has collapsed 40% against the dollar in that time. So in dollar terms it has sharply contracted.
Everyone wants a simple metric, and GDP growth is the metric incessantly recycled in almost every article about Abenomics. Abe was recently brazen enough to suggest a GDP of JPY 600 trillion – a typically pointless numerical figure.
That is the reason why printing money has become so central to the debate about Abenomics. Printing money should make prices go up, and that lifts nominal GDP. Hey presto, mission accomplished! This then leads you into truly wacky territory where rising prices in a country where most people have been growing poorer over the last 20 years is seen as a good thing. But hey, nominal GDP is growing – at least in the short term.
If you choose one bad metric, you start having to use lots of other absurd metrics to achieve the original metric. Unfortunately, none of this looks likely to change soon.
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