It’s the subtitle that matters, Gross output will correct the fallacy fostered by GDP that consumer spending drives the economy. The actual title is “At Last, a Better Economic Measure”, it’s from The Wall Street Journal and written by Mark Skousen who has been agitating the statistical agencies in the US for around twenty years to provide just such a measure. And so now they have.
Starting April 25, the Bureau of Economic Analysis will release a new way to measure the economy each quarter. It’s called gross output, and it’s the first significant macroeconomic tool to come into regular use since gross domestic product was developed in the 1940s.
GDP is a formless mess of a statistic that was devised in the 1940s as a measure that went along with the Keynesian notion that higher spending would lead to higher employment. By embedding consumer and government spending into GDP, its put a poisoned apple into the middle of this stat so that now a shift in GDP driven by higher public spending is as misleading an indicator as it is possible to have. GDP does not measure value added although it’s supposed to and therefore does not provide much of an indication about the growth in employment-generating production. So now there is to be a new measure, Gross Output, an economic indicator that will actually provide an indication of what we are interested in knowing. As Skousen writes:
In many ways, gross output is a supply-side statistic, a measure of the production side of the economy. GDP, on the other hand, measures the “use” economy, the value of all “final” or finished goods and services used by consumers, business and government. It reached $17 trillion last year.
The measure of the economy’s gross output has been around since the 1930s. It was developed by the economist Wassily Leontieff, but he focused on individual industries, not the aggregate data as a measure of total economic activity. Gross output has largely been ignored by the media and Wall Street because the government issued the number annually, and it was two or three years out of date. That should change now that it will be released along with GDP every quarter. Analysts and the media will be able to compare the two.
Why pay attention to gross output? For starters, research I published in 1990 shows it does a better job of measuring total economic activity. GDP is a useful measure of a country’s standard of living and economic growth. But its focus on final output omits intermediate production and as a result creates much mischief in our understanding of how the economy works.
In particular, it has led to the misguided Keynesian notion that consumer and government spending drive the economy rather than saving, business investment, technology and entrepreneurship..
Misguided isn’t saying the half of it. For the first time we will have a quarterly stat that focuses on the production side of the economy and ignores the Keynesian idiocies of saying that consumer demand and government spending actually drive an economy forward. Outside the textbooks, Keynesian economics is becoming deader by the day.