GDP totalitarianism: Krugman's mischaracterization of Japan's plight as "star performance"

Paul Krugman points to Japan's apparent resurgence in GDP and asks: "There seems to be some kind of lesson here about macroeconomics, but I can’t quite put my finger on it …"

My comment:

The lesson here is that one needs to be careful when trying to understand natural disasters using flow-based identities like Y=C+I+G. The latter fails to account for large draw-downs in national wealth due to, say, tsunamis. Using a stock identity, and stock related data like national net worth, will be more helpful in this situation.

For a proper accounting treatment of Japan's experience, Krugman should refer to the 722 page UN System of National Accounts Manual (pdf). Krugman wants to use the production accounts for his analysis, which are represented as flows. He should be using the wealth account, in particular new worth, which is a stock. The tsunami will have resulted in a large fall in Japan's net worth. This is elementary, so I don't know why a Nobel-prize winning economist wouldn't know this.

I agree with Nick Rowe that GDP has a totalitarian grip on our way of economic thinking.

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