Japan's Struggles Reveal the Absurdity of GDP

In his essential book Labyrinths of Prosperity, Canadian economist Reuven Brenner noted that for measuring country-specific economic growth, "Macroeconomics is a tautology and a myth, a dangerous one at that, sustaining the illusion that prosperity is necessarily linked with territory, national units, and government spending in general." The human and economic tragedy in Japan has revealed yet again the wisdom of Brenner's thinking, and it serves to discredit the artificial absurdity that is Gross Domestic Product (GDP).

Indeed, while economists regularly wax rhapsodically about the goods we manufacture in these fifty states, and the resulting boost to GDP, what they consistently ignore is how very much our production inside and outside our borders is reliant on productivity within other countries. The situation in Japan shows how very limited the thinking is of most economists.

As the Wall Street Journal's Andrew Dowell reported last week, Japan is "an important source of advanced components used heavily in Asia and elsewhere to assemble final goods", which means Japan's difficulties impact global production, and as such, country-specific GDP. Dowell found that Japanese companies manufacture 60% of the world's silicon wafers necessary for computer chips, and 90% "of a substance called BT Resin used to make printed circuit boards". Considering automakers, including the frequently protectionist General Motors, Dowell reported that Hitachi accounts for 60% of the world's supply of airflow sensors necessary for automobile production, and a supply disruption there led to a plant shutdown for GM in Louisiana, plus "Peugot-Citroen" had to cut back production "at most of its European plants."

Nobel Laureate Robert Mundell famously observed that "the only closed economy is the world economy", thus rendering GDP calculations somewhat irrelevant, and Mundell's essential observation is presently being vindicated once again. We live in an interconnected global economy, and our GDP is increasingly a function of economic health at points around the world. So to measure what is produced here is to miss the greater economic story.

Of course, the story doesn't end with supply disruptions. Credentialed economists expertly trained in that which doesn't work almost invariably talk up the grand exporting benefits that result from currency debasement. Japan's sad story proves the folly of such horrific theorizing.

As evidenced by how very much the global supply chain is integrated, cheap money simply leads to more expensive production costs. Not only do debased currencies drive up shipping and labor costs locally, but internationally it's the height of naiveté for economists to presume that the suppliers of imported inputs are going to accept the same quantity of soggy money for the goods they sell. The wildly illusory benefits of devaluation are always stolen by inflation no matter how many times economists, politicians and mainstream journalists suggest otherwise.

But then if they're not talking up the benefits of devaluation, the commentariat not too infrequently reduce trade to a form of war, with winners and losers. In this case, tax, labor and monetary machinations are proposed so that we can "win the economic battle" with Japan, China, or some other country which has the temerity to want to live like us. Happily, in its distressed state, Japan discredits this horrid bit of thinking too.

Indeed, due to the country's present economic difficulties, demand among Japanese individuals has declined. Trained economists love this situation when it applies to the United States, because such a scenario leads to reduced imports, a smaller "trade deficit", and you guessed it, rising GDP.

But as the Japanese example reminds us, trade is a two-way street. When we're not importing, we're also not exporting given the tautological reality that whether across town, across the country, or across an ocean, our ability to export is a function of our willingness to import.

And with Japan's exporting capability down, so by definition is the importing capability within its citizenry debased. Put far more simply, all trade balances, and the reduction of Japanese exports that needlessly scares trade-deficit addled economists, politicians and journalists means that "Japan's" inability to sell will lead to a commensurate inability of it to buy.

Back to GDP, once we leave out all the negative inputs that increase it (think reduced imports, currency devaluation and government spending), not to mention all the positive inputs that decrease it (bountiful imports, reduced government spending, and currency strength - there's a pattern here), we must remember the happy truth that we live in a global economy in which our local production is very much a function of what occurs well outside our borders. To seek weakness in others because they don't live in the U.S. is to seek a reduced outlook locally.

Sadly, it's taken a substantial human tragedy to reveal yet again the absurdity of a number (GDP) and a profession (macroeconomics), but if the long-term tradeoff is more liberalized global trade free of all the mercantilist sermonizing by economists, it will be a good tradeoff indeed. As our economic health goes, we're all in this together, so it's essential to ignore the country-specific numbers that create needless boundaries which retard our ability to maximize our prosperity.