Here
and
Now

opinions

Economists are fools

14 Comments

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 waste, but that is another story.

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 Shinzo 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 of, 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 this 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 stadiums all over the country. Indeed, the more over-priced the said structures, 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 that the working population is declining.

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 abased, 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 their level of salaries.

The distortions are obvious in other ways. Today, Japanese GDP is much bigger than it was before Abe came to power in December 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. The prime minister was recently brazen enough to suggest a GDP of ¥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 metrics, you start having to use lots of other absurd metrics to achieve the original metric. Unfortunately, none of this looks likely to change soon.

© Japan Today

©2024 GPlusMedia Inc.

14 Comments
Login to comment

Great to hear some sanity. He might also have said that more and more GDP becomes "defensive spending", which is the costs of putting right the consequences of previous "growth". You end up with much the same thing but are now paying more, as individuals and as a society, to get it. This is increasingly the case as the natural world degrades and the services we previously got for free now have to be paid for, even down to something as simple as replacing green space with anti-depressants.

10 ( +10 / -0 )

Why don't you read some more up to date books on economy? "Why Nations Fail" is an easy to understand piece that does a good job at explaining why those seemingly foolish politcians act the way they do.

-1 ( +2 / -3 )

Economists aren't fools. The people that hire them and pay them are. To wit:

A very rich employer wanted to hire a right hand man. He first interviewed a mathematician.

Interview: What's 2 + 2 ?

Mathematician: 4. (wtf?)

Then he decided to interview an engineer.

Interview: What's 2+2?

Engineer: Well, that depends on the constraints of the system, what's going on at the upper and lower threshholds, etc.

Then he decided to interview an economist.

Interview: What's 2+2?

Economist: Well, what would you like it to be?

9 ( +9 / -0 )

GDP growth is merely a measure of activity. What growth per se does not reveal is the nature and quality of that activity. - Dan Slater

Damn straight. Thank you Mr. Slater. Given the opportunity, Mr. Slater's 700 words deserve a close and considered expansion.

If Mr. Slater would consider: "If you choose one bad metrics, you start having to use lots of other absurd metrics to achieve the original metric." - this is the spring board to the real world measure of government effectiveness.

Not only "effectiveness", but to what end? Thanks again to JT for this pause for thought.

7 ( +7 / -0 )

Economics is a very simple principle, to be economical you want the greatest effect for the smallest amount of effort; you want the best deal or result for the money or time which you spend. Going to work by the shortest, fastest, and least expensive route is a simple explanation of economical thinking.

Before the 1980's, GDP was in fact the best measure of economic growth and activity, because in those days private sector economic activity was the main driver of GDP, and public sector economic activity played a far lesser role. Central banks limited themselves simply to keeping a steady supply of money, and letting the market run.

But from the 80's onwards, when government deficit spending became the norm, and the size of the public sector grew, the composition of GDP began to change. But even in those days, the effect was not that great, though deficits and debts increased, the government still kept most of it's fingers out of the economic pie.

In recent years, deficit spending has skyrocketed, and the resulting debts are so spectacular that in order to keep things going, the government and central banks have to intervene by lowering interest rates, and devaluing currency, these are both done not so much to ease the debt burden, but to allow for even more public sector spending.

When public sector spending makes up a greater part of GDP, then we can't really call it GDP anymore, because public sector generates little in the way of domestic product. The sad truth is that most money invested by the public sector generates a loss. For every $100 it collects in revenue, a fraction is returned in services after subtracting costs, graft, and losses.

The private sector is profit-driven, which means that for every $100 it invests, it wants more than $100 in return. Generally this has a compounding effect in the economy, and GDP based upon private-sector spending and consumption offers a clear picture of growth. It is very easy to look at the performance of private companies, if the bottom line figure is bigger each year, then they are producing more, hiring more, paying more, and this economic activity spreads around, and the result is GDP growth.

Since 2012 Shinzo Abe has spent a great deal of money on "stimulus" projects. This money came from nowhere, and it seems that there has been no economic return for the investment. Yet this money, created by the central bank, and then borrowed at interest, is counted as part of GDP. No labor or economic activity created this money, though some of it has found it's way into the pockets of ordinary people, who have indeed spent it. But the net effect of the stimulus is negative, as the amount spent was greater than the return derived. Honestly, it would have been better for all if the money had not been printed, borrowed, and spent, but then it could not have been added to the nations "GDP".

By-and-large, professional economists are academics who do not run businesses, employ people, or provide tangible products or services. They are a lot like fortune-tellers, who manipulate the foolish with phony predictions. It is not the politicians who are foolish, they know they are being fed a lot of crap, but the people don't. The people believe that "government economists" actually know what they are talking about, and that economics is a hard science, even as evidence around them mounts toward the contrary.

0 ( +4 / -4 )

He is right. GDP is a measure of size, not economic health, as I have pointed out to the hordes of doomsayers on this board.

This is a major reason why people who have predicting Japan's crisis and collapse 15 years ago are consistently proven wrong. You would think they would have learned by now. It's not rocket science. But some people are utterly stubborn.

1 ( +3 / -2 )

I think some are fools; the rest are simply dishonest.

-2 ( +4 / -6 )

Finally, someone talking sense.

What growth per se does not reveal is the nature and quality of that activity.

I've always felt that the best type of person for GDP growth would have several maxed out credit cards, be severely obese, suffer from cancer, and be going through a complicated divorce, while the worst for GDP would be a happy, healthy, person who saves part of their income and wears clothes longer than a single season.

2 ( +2 / -0 )

If you want to get technical, there actually ARE far more and better indicators of economic health.

Money Velocity (higher is better)

Capital Expense (higher is better)

Percent of Working Class Age People who are full time employed (higher is better)

number of small business startups per year (higher is better)

free market interest rates (lower is better)

individual savings rate (higher is better)

Housing Starts (higher is better)

Privately held debt (lower is better)

etc. etc.

3 ( +3 / -0 )

Similar to the "efficient market" believes, lies spouted by economists so their little "mathematical model" of the world makes a lot of sense to their "everything must be measurable" brain.

1 ( +1 / -0 )

Some excellent points in Slater's article about the limitations and flaws of the GDP measurement, but all this was already known long ago too.

"The welfare of a nation can scarcely be inferred from a measurement of national income". Simon Kuznets on GDP and well-being in 1934.

Kuznets being in fact one of the main developers of the GDP measurement, for which he later won a Nobel prize in Economics. But hey why listen to him, what does he know???

4 ( +4 / -0 )

Come on, Mr. Slater, many of us are critical of Abenomics, but using that (or any other misguided growth policy), as a pretext to bash GDP and economists in general is a bit like blaming Toyota and its cars for a speeding driver. Kings, emperors, and politicians have been obsessed with expansion and growth (in the form of land, titles and gold) since long before economists and GDP arrived on the scene, so you can hardly blame them. Moreover, isn't growth something positive if it brings people out of poverty (as happened for millions in both Japan and China)? GDP is an admittedly imperfect measure, but it is hardly economists' fault that politicians have misused it.

While we're on that topic, I do think you need to be a bit more honest in your analysis. For example, nominal GDP is hardly the standard measure, most countries use real GDP (Japan is an exception and a recent one at that). Also, as others have pointed out, most analysts use far more precise measures like GDP per capita, unemployment, and investment (the GDP measure is used predominantly for the the media because it's easy to understand). And to suggest that tearing down and rebuilding a house "adds" to GDP is not right; GDP is measured in value-added, meaning that it would only increase by the net improvement in the house.

So yes, I get your annoyance (for the record, I am a sociologist, not an economist), but let's stick to the facts. Otherwise you start looking as silly as the politicians.

-1 ( +1 / -2 )

Not one of them has a solution.

0 ( +0 / -0 )

Login to leave a comment

Facebook users

Use your Facebook account to login or register with JapanToday. By doing so, you will also receive an email inviting you to receive our news alerts.

Facebook Connect

Login with your JapanToday account

User registration

Articles, Offers & Useful Resources

A mix of what's trending on our other sites