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Jake's View
PUBLISHED : Tuesday, 12 November, 2013, 2:29am
UPDATED : Tuesday, 12 November, 2013, 2:29am

GDP scores quest built on shaky ground

Wasteful mainland capital projects highlight folly of slavish adherence to flawed economic measure, and Keynes deserves some of the blame


Jake van der Kamp is a native of the Netherlands, a Canadian citizen, and a longtime Hong Kong resident. He started as a South China Morning Post business reporter in 1978, soon made a career change to investment analyst and returned to the newspaper in 1998 as a financial columnist.

Like it or not, the mainland may have to keep depending on investment to drive growth if the government continues to target economic expansion of as much as 7 per cent over the next decade.

SCMP, November 11

One of the counts I have long held against the work of the economist John Maynard Keynes is his part in coming up with the concept of gross domestic product.

Agreed that people like to have some idea of how well their economy is doing and that this can be important to investment planning, but perhaps doing without an overall measure of economic performance is better than relying on a bad one, and GDP is certainly a bad one.

This much was recognised even when it was devised in the middle of the second world war. GDP has its uses in helping government planners estimate how much tax they can collect and how big a military effort they can mount, which is useful during war, but it is much too narrow a measure of economic performance to gauge the wealth of an economy.

It is, for one thing, a form of cash-flow statement that takes no account of how useful any investment project might be or of its useful life. In Europe and America, for instance, it happens occasionally that government builds a public housing block only to demolish it and leave the land idle again when the tenants prove unhappy with it.

In GDP, this counts not as a waste but as two useful capital projects. The costs of construction and demolition are both treated as fixed capital formation and nothing is deducted as a loss on a bad investment. Thus in GDP, one minus one equals two.

Beijing is engaged in an artificial stimulus to push up headline GDP numbers

But while ignoring common-sense accounting practices, GDP figures confidently assert what no corporate accountant would ever attempt. GDP comes in both nominal dollar of the day figures and in deflated constant price figures. Statisticians make guesses about inflation in different sectors of the economy and then juggle them to provide a "real" economic growth rate.

There are other big uncertainties here and yet we all pretend that economic growth can be measured with precision this way to the right of the decimal when even the first place to left of the decimal is a guess. In reality, what we have with GDP is like an old car with a manual three-speed transmission - (1) zero to 4 per cent growth; (2) 4 to 8 per cent growth; and (3) probable nonsense. Don't even ask for a figure if you're in reverse.

But I think perhaps the worst thing that this obsession with GDP does is focus governments on headline growth numbers, as a form of report card, to the cost of the people whom the economic effort is meant to serve.

Governments face a difficulty, however, in stimulating growth. If people are worried about their jobs or their level of debt, then they won't go shopping and the growth of personal consumption expenditure, the biggest component of GDP in non-fascist economies, will be slow.

Similarly, corporations worried about their balance sheets will generally not expand rapidly and exporters will not sell if overseas markets do not buy. Governments can do nothing about this. The old principle applies: you can lead a horse to water but you can't make it drink.

All that governments can really do is expand themselves aggressively, which invariably means big infrastructure projects. This is not a bad thing if lack of decent infrastructure was holding back the rest of an economy and there is a good test of whether it has truly done so. It is whether the rest of the economy then expands as fast the infrastructure spending, allowing for a lag of maybe two or three years.

And on the mainland, fixed-capital formation has been running at more than 40 per cent of GDP for more than 10 years, far above levels elsewhere in the world, while household expenditure has lagged.

There has been no catch-up. The evidence strongly suggests that much of the capital spending is indeed wasteful. Beijing is engaged in an artificial stimulus to push up headline GDP numbers with little regard for real benefit.

And I blame John Maynard Keynes in part for encouraging this wasteful practice.


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Private goods experts otherwise known as the political-business class do not like the GDP because it is the scorecard of their performance over time. They prefer stock valuations which poorly associate with economic health. For example, the US stock market was doing very well in 2007 just before the financial collapse of the banking system in 2008. This repeating story of using money interests as the principle decision maker for civilization has been tested since the beginning of recorded history. Historically this does not work. A brief tour of history may include the pharaohs of Egypt leading to Babylon up until more recent history with the founding of the USA. Unfettered capitalism resulted in the global depression of the “gilded age” in the late 19th C, the great depression 30 years later and most recently the S&L fiascoes of the 1980s and finally the unfettered capitalism crash in 2008. Even the revered capitalist Rockefeller stated in 1935, “In the end it was not worth it.” The idea of the GDP was an attempt after the US Great Depression to understand the national statement of accounts. Advocating for not keeping score is contrary to basic accounting and standard business practice. Can you imagine a CEO arguing that the accounting department need not quantify quarterly reports because it reflects badly on management? For those of you who like to keep score visit and support EconomicGPS "the GDP Performance Scorecard" for detailed analysis. goo.gl/poKWHi @thadncs
Keynes commented at the time that GDP was a crude tool for wartime use only - a little unfair to blame Keynes for Mao & Deng's fascination with his number...
To be fair, even the US core consumer price index (CPI) leaves something to be desired. Energy and food prices are excluded, because they “can be very volatile, and this wide amount of movement would unfairly bias the measure of inflation.”
But food and energy are the main components of the consumption baskets of most ordinary citizens. We are well aware that our individual rates of inflation are much higher than the official reported data.
No doubt a Jewish father teaches his son never to trust anybody, ever, himself included.
Besides Keynes, the incentive system is to blame. I think top provincial government officials usually get further promotion with high annual provincial GDP growth rate figures. Before the incentive system is changed, it's business as usual.
What's more, people may cheat. From a certain book...
"Thanks to Wikileaks, it has become known that Chinese officials themselves have questioned the reliability of China's GDP numbers. Provincial estimates of growth don't add up to the national numbers. The national numbers are released quickly after each quarter ends and, unlike in the United States, are never revised. Even without political bias, the national numbers would seem to be highly inaccurate and unbelievable. Analysts will be watching statistics such as electricity consumption and cement output as well as global commodiity prices."


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