Author Archives: Mark Skousen

Gross Output

GO Beyond GDP: A Breakthrough in Macroeconomics

A Paper Presented to the Mont Pelerin Society Meetings

on May 8, 2017, Seoul, Korea

(anniversary of Friedrich Hayek’s birthday)

by Mark Skousen

Presidential Professor,

Chapman University

“Gross output [GO] is the natural measure of the production sector, while net output [GDP] is appropriate as a measure of welfare.  Both are required in a complete system of accounts.” — Dale W. Jorgenson, J. Stephen Landefeld, and William D. Nordhaus (2006) 

“This is a great leap forward in national accounting. Gross output, long advocated by Mark Skousen, will have a profound and manifestly positive impact on economic policy.”                                               —  Steve Forbes (2014)

The purpose of this paper is to introduce the benefits of gross output (GO), a broader measure of the economy that the federal government began publishing on a quarterly basis along with gross domestic product (GDP) starting in April 2014.  I am honored to discuss this new statistic on May 8, 2017, here at the Mont Pelerin Society meeting, which happens to be Friedrich Hayek’s birthday.  Hayek is the founder of the Mont Pelerin Society, and GO is a measure of Hayek’s triangle.  I believe GO deserves recognition as a major triumph in Austrian economics since Friedrich Hayek won the Nobel Prize in 1974.

In this paper, I argue that GO is more consistent with economic growth theory, and more helpful in measuring and anticipating the ups and downs of the business cycle.  GO also demonstrates that, contrary to what is commonly reported in the financial media, business spending is far bigger and more important than consumer spending in the economy.  Thus, GO is also a supply-side statistic, and its adoption by the government’s Bureau of Economic Analysis (BEA) is a significant advance in supply-side economics. 

It is my contention that GO is a major breakthrough in national income accounting.  Just as publicly-traded companies release a quarterly financial statement that highlights revenues/sales as the “top line” and net income or profits as the “bottom line,” so now the economics profession has finally caught up with the accountants and Wall Street finance by identifying GO as the top line in national income accounting to go along with GDP, the bottom line.  In fact, it is the intention of the BEA to publish both GO and GDP simultaneously within the next year or two, as publicly-traded companies do. 

In sum, GO is one of the most significant innovation in national income accounting since GDP was invented in the 1940s, and a major advance in the development of macroeconomics.  It is fertile ground for new research in economic growth in theory and practice. 

Why is GO Important?

First, some background: 

In the 1980s, I began doing research on an alternative model of macroeconomics that culminated in my book, The Structure of Production, published by New York University Press in 1990.  I came to the conclusion that gross domestic product (GDP) was an incomplete and sometimes misleading measure of the economy, and that it told only part of the story of the business cycle. 

Over the years, it has become apparent that the introduction of GDP in the 1940s helped support the Keynesian notion that business decision-making to expand or contract is dependent on current aggregate demand and the relatively level of spending by consumers, business and government (C + I + G).  Indeed, since consumption expenditures represent by far the largest sector of the economy, as measured by GDP, and business investment as the smallest, the focus by the media and government officials led to the false impression that consumer spending, not business investment, is the main driver of economic growth.    

The quarterly release of GDP statistics to the media and the general public perpetuates this Keynesian mindset.  The latest GDP statistics (2016) are broken down into these major categories of spending: 

GO

Figure 1. Breakdown in GDP, 2016.

Source:  Bureau of Economic Analysis, www.bea.gov.  2016

Thus, consumer spending represents 68.9% of GDP in the United States in 2016, followed by government spending, 17.5%; and last, private investment, 16.4%.  Net exports is negative at -0.3%.[1]

Based on a superficial reading of GDP data, the financial media is quick to focus on, first, consumer spending, and second, government spending as the key driver of economic growth. 

It is not uncommon to see the following statements in the media following the release of GDP data: 

“With personal consumption accounting for nearly 70 percent of all economic activity, however, the administration will be hard pressed to lift growth substantially if consumers remain cautious about opening their wallets.” – Nelson D. Schwartz, “Economy Grows at Slowest Rate in 3 Years,” New York Times, April 28, 2017, page 1.

“Consumer spending is the lifeblood of the U. S. economy…”  Barron’s, August 15, 2016, p. M1. 

“Household spending generates more than two-thirds of total economic output, so sturdy [consumer] spending gains should translate into economic growth.” – “Spending Rises, Inflation Stays Low,” Wall Street Journal, September 30, 2014, p. A2. 

“Consumer spending makes up more than 70% of the economy, and it usually drives growth during economic recoveries.” — “Consumers Give Boost to Economy,” New York Times, May 1, 2010, p. B1. 

Or as the Wall Street Journal stated a few years ago,

“Consumers are the engine of the U. S. economy, accounting for about 70% of economic demand…” — “Consumers Stepped Up Spending in March,” Wall Street Journal, April 17, 2012, p. A7.

And in a broader context, here’s a report from the New York Times discussing the role of government, investment, and consumer spending in the economy: 

     “Friday’s estimates of second-quarter gross domestic product [1.3%, well below consensus forecasts] provided a sobering look at how a decline in public spending and investment can restrain growth…The astonishingly slow growth rate from April through June was due in large part to sluggish consumer spending and an increase in imports, which subtract from growth numbers.  But dwindling government spending also held back growth.”  — “The Role of Government Spending,” New York Times, July 29, 2011

These examples from the national media demonstrate how its conventional interpretation of GDP as the representative of the economy favors a Keynesian perspective that puts consumer spending first, government stimulus second, and business investment a poor third when it comes to economic performance.  Trade doesn’t even rate.

The Keynesian Diversion:  Pro-Consumption, Anti-Saving

The GDP data is consistently with the Keynesian aggregate demand model, introduce in 1936 with the publication of John Maynard Keynes’s General Theory.  The British economist promoted the idea that consumption is more vital, dependable and productive than saving in a mature economy.  As noted in the Keynesian cross model developed by Paul Samuelson, an increase in the “propensity to consume” leads to full employment.  In his magnum opus, Keynes applauded “all sorts of policies for increasing the propensity to consume,” including confiscatory inheritance taxes and the redistribution of wealth in favor of lower-income groups, who consumed a higher percentage of their income than the wealthy (Keynes 1973 [1936]: 325). 

Canadian economist Lorie Tarshis, the first to write a Keynesian textbook in the post-war, warned that a high rate of saving is “one of the main sources of our difficulty,” and one of the goals of the federal government should be to encourage consumption and “reducing incentives to thrift” (Tarshis 1947: 521-22).

MIT professor Paul Samuelson introduced the “paradox of thrift” is his 1948 edition of Economics, the thesis that saving more could result in less income.  “Franklin’s old virtues [of thrift] may be modern sins” (Samuelson 1948: 270).  As another Keynesian textbook put it more bluntly, “While savings may pave the road to riches for an individual, if the nation as a whole decides to save more, the result could be a recession and poverty for all” (Baumol and Blinder 1988: 192).  Even today Keynesian economists content that Asian nations suffer from a “saving glut” and should adopt policies that encourage consumer spending (Bernanke 2015). 

The Keynesian anti-saving mentality applied especially during an economic downturn.  But even during a recovery, the Keynesians argued that consumption was more significant than saving in promoting growth when resources were “unemployed.”  Keynesian economist Hyman Minsky confirmed this unorthodox approach when he wrote, “The policy emphasis should shift from the encouragement of growth through investment to the achievement of full employment through consumption production” (Minksy 1982: 113). 

This pro-consumption policy was officially approved during the Kennedy administration when the 1963 Annual Economic Report of the President focused on the demand side to stimulate economic activity via the tax cuts: “The most important single thing we can do to stimulate investment in today’s economy is to raise consumption by major reduction of individual tax rates” (Kennedy 1963: xvii).  Thus, according to the Keynesian model, it is through increased personal consumption expenditures that business investment is stimulated. 

A Keynesian anti-saving mentality even crept into George W. Bush administration in the 2000s, when Bush pushed through Congress several tax cuts to stimulate spending.  As President Bush said in December 2006 at a news conference, “I encourage you all to go shopping more” (new conference transcript, December 20, 2006).   Oh, if only the Christmas shopping season could last year around!  CNN expressed a similar sentiment a few years later:  “The rebates will put about $120 billion in the hands of individuals in the hope that they will spend it and boost a faltering U.S. economy.  Economists generally agree that the economy should see a boost from the rebate checks.  But most also agree that the full impact will be less than the total value of the stimulus package.  That’s because some recipients are expected to save their rebates or use them to pay down credit cards or other debt instead of spending it.”  (CNN Report, “Bush signs stimulus bill; rebate checks expected in May,” Feb 13, 2008.) http://www.cnn.com/2008/POLITICS/02/13/bush.stimulus/

Leading Economic Indicators

Contradict Keynesian GDP Model

And yet we continue to see plenty of evidence to support the traditional classical model of economic growth, that growth is dependent on the supply side of the economy:  increases in productive savings and capital formation, improved technology and entrepreneurship, and advances in education, training and human capital, have led to higher standards of living over time.  According to Robert Solow (1957) and Robert Barro (2011), growth is more a function of technological advances, productive investment, and entrepreneurship than consumer spending.  Consumer spending is largely the effect, not the cause, of prosperity (Hanke 2014). 

Among the US leading economic indicators published monthly by the Conference Board, most are linked to the earlier stages of production and business activity:  Average weekly hours, manufacturing; Average weekly initial claims for unemployment insurance; Manufacturers’ new orders, consumer goods and materials; ISM® Index of New Orders; Manufacturers’ new orders, nondefense capital goods excluding aircraft orders; Building permits, new private housing units; Stock prices, 500 common stocks; Leading Credit Index™; Interest rate spread, 10-year Treasury bonds less federal funds; and Average consumer expectations for business conditions.  Note that the highly touted “consumer confidence index” that is highlighted in the media has been changed to the “average consumer expectations for business conditions” (Conference Board 2017). 

Similar conclusions can be found looking at the leading economic indicators in other nations.  For example, the Conference Board has six indicators to predict economic growth in Korea:  Stock Prices, Value of Machinery Orders, Index of Inventories to Shipments, Export FOB, Yield of Government Public Bonds, and Private Construction Orders. 

In fact, of the 13 economies in the world covered by the Conference Board, none identify consumer spending and retail sales as leading indicators.  As a Forbes economist John Papola recently concluded, “Economic growth (booms) and declines (bust) have always been led by changes in business and durable goods investment, while final consumer goods spending has been relatively stable through the business cycle.” (Papola 2013).

Does increased savings hurt economic growth?  A recent econometric study by the St. Louis Fed contradicts this conventional wisdom.  Even in the short run, the author concludes, “a higher saving rate in the current quarter is associated with faster (not slower) economic growth in the current and next few quarters” (Thornton 2009)

How do we reconcile the GDP statistics that seem to support the Keynesian model with the historical evidence that reinforces the neo-classical model of economic growth?  What’s missing in the macroeconomic model?

 

Sin of Omission:  The Supply Chain.

The paradox is resolved once it is recognized that GDP is an incomplete measure of economic activity.  It leaves out a big chunk of the business sector, i.e., the supply chain.  By definition, GDP accounts for the value of final products and services only, and omits intermediate inputs, a key ingredient in the macroeconomic landscape. 

While GDP is a reasonable estimate of national welfare and economic growth, it is highly misleading in underreporting the role that business plays in economic performance.  It vastly underestimates the full contributions of business in the “make” economy, that is, the full value of business-to-business (B2B) transactions that move the supply chain along the intermediate stages of production toward the production of finished goods and services (the “use” economy). 

GDP includes only a small portion of the B2B transactions – it only accounts for “gross private fixed investment,” the value of final capital goods, the tools, equipment and machinery used to advance the production process.  The value of goods in process – valued at more than GDP itself – is left out, often erroneously dismissed as “double counting.” 

A Short History of National Income Accounting

The fateful decision to leave out any calculation of the supply chain in GDP was made decades ago in a debate between two Russian American economists at Harvard: Simon Kuznets and Wassily Leontief.  Kuznets did the original work in the 1930s on national income accounting, and determined that national income (“net output”) should be the key indicator (Kuznets 1934: 1).  To properly measure national income, he subtracted intermediate production from gross output to come up with a “net output” figure, which he later called Gross National Product (now Gross Domestic Product or GDP). 

Leontief, on the other hand, contended that the interrelations between goods was critical to understanding how the economy works, and developed a more complex system of input-output tables under the umbrella of gross output (Leontiff 1966).  Both won the Nobel Prize for their work, but ultimately textbook economics and popular economics ended up with the “net” figure, GDP, as the key measure of the economy. 

We continue to suffer the consequences.  The GDP model has led to much mischief in theory and policy, as we noted above. 

In the 1970s and 1980s, economists became disenchanted with the state of macroeconomic theory and practice.  I was among them.  In my research to find a new macro model, I was particularly impressed with the work of Austrian economist Friedrich Hayek and his small volume of lectures at the London School of Economics, Prices and Production (1931).  It introduced Hayek’s triangles, a theoretical measure of spending at all stages of production. 

His work was resurrected by the later “neo-Austrian” work of Sir John Hicks.  According to Hicks, a nation’s complete measure of capital and the economy must include durable goods as well as “goods that are in the pipeline, goods in process of production” (Hicks 1973a: 191).[2]

In the spirit of Leontief, Hayek, and Hicks, I suggested that we needed a new macro statistic that measured spending at all stages of production, a figure that includes the value of the supply chain.   See pp. 178-184 in chapter 6 of The Structure of Production.   In this work, I developed a universal 4-stage model of the economy, a modified form of Hayek’s triangle.  See figure 2 below. 

Gross Output

Figure 2.  Universal 4-Stage Model of the Economy

Source:  Mark Skoqusen, The Structure of Production (New York University Press, 3rd ed., 2015), p. xviii, and Economic Logic (Capital Press, 2014), p. 58.

I defined spending at all four stages of production gross output (GO), and stage 4 as GDP, and made some initial estimates.  (Both Hayek and Hicks’s works were entirely theoretical.)  In Structure, I contend that GO is a more comprehensive measure of the economy, serves as a valuable tool in analyzing the business cycle, restores the business sector as the major driver of the economy, and deserves to be updated on a quarterly basis along with GDP.  More recently, I contend that GO should be reported as the “top line” in national income accounting, and GDP as the “bottom line.” 

Surprise Announcement by the BEA

A giant step forward occurred in national income accounting when in early 2014, the Bureau of Economic Analysis (BEA) of the

  1. S. Department of Commerce (under the creative leadership of the director Steve Landefeld) announced it would begin publishing Gross Output, along with Gross Output by Industry, on a quarterly basis. It is the first new measure of the economy to be published quarterly since GDP was invented in the 1940s.[3]

This new macro statistic includes intermediate inputs for the first time, defined by the BEA as “the value of both foreign and domestically produced goods and services which are used as energy, materials, and purchased services as part of an industry’s production process.”  As a result, we now have a more complete picture of the economic structure.  The BEA now tracks 402 industries and 69 commodities in its Gross Output by Industry. 

To see the latest data on GO, go to https://www.bea.gov/iTable/iTable.cfm?ReqID=51&step=1#reqid=51&step=51&isuri=1&5114=q&5102=15

GO does not replace GDP by any means.  Both need to be reported.  As Dale W. Jorgenson, J. Stephen Landefeld, and William D. Nordhaus state, “Gross output [GO] is the natural measure of the production sector, while net output [GDP] is appropriate as a measure of welfare.  Both are required in a complete system of accounts” (Jorgenson et al 2006: 6).

GDP estimates the value of final use in the economy.  It does a consistent job of measuring spending by consumers and government, but does not tell the whole story of commercial activity.  GDP includes fixed capital expenditures but omits a critical component–spending by business to move the production process along the supply chain, what economists call goods-in-process or what businesses call B2B spending.  This omission of business’s contribution to the supply chain amounted to $21.3 trillion in 2016, substantially larger than GDP itself ($18.7 trillion). 

GO Offers a Better Perspective of Total Economic Activity

What can we learn from GO? 

First, GO is a much better measure of total economic activity and a better indicator of the business cycle.  Figure 3 demonstrates the size and volatility of GO in relationship with GDP. 

Figure 3.  Adjusted Gross Output (GO*) versus GDP, 2007-2016.

Source:  BEA data, plus US Census Bureau data on monthly wholesale and retail trade added to create Adjusted GO.

In the third quarter of 2016, Adjusted GO (GO*) amounted to almost $40 trillion, more than double GDP of $18.7 trillion.[4] 

Recently the BEA has published GO data going back to 1947 on an annual basis: http://bea.gov/industry/gdpbyind_data.htm

Figure 4 below shows changes in GO and GDP, demonstrating how GO does a better job of measuring the depth of the recession and recovery.  During the 2008-09 financial crisis, nominal GDP decreased only 5%, but Adj. GO fell over 25%.  Moreover, during the recovery and expansion phrase, GO tends to rise faster than GDP.  See figure 5 below.

Figure 4.  Quarterly changes in Adj. Gross Output (GO*) and GDP, 2007-2016. 

Source:  BEA data, plus US Census Bureau data on monthly wholesale and retail trade added to create Adjusted GO.

Second, GO may also be a good forecaster of the economy’s condition.  When GO is falling faster than GDP, a recession is imminent.  When GO is moving back up faster than GDP, it suggests a recovery.  David Colander (Middlebury) states:  “For forecasting, the new measure [gross output] may be more helpful than the GDP measure, because it provides information of goods in process.” (2014: 451)  Economic analyst David Ranson adds:  “GO is better correlated with financial-price movements than most of the other indicators.  It tends to portray the economy as more cyclical than real GDP does, the recession of 2008-09 as deeper, and the recovery as slower.  The universal use of real GDP as a measure of the economy’s vitality is subject to misunderstandings, pitfalls, and criticism — especially in the short run. GDP includes only ‘final’ goods and services, leaving out the huge economy that consists of businesses buying and selling intermediate goods to one another.” (2015: 4).[5]

Third, GO by Industry disaggregates the economy into 402 industries and 69 commodities, allowing economists to see more clearly how the structure of the economy is shifting over time.   Austrian economists who are critical of aggregate statistics will find this approach appealing and fertile ground for research on potential imbalances and asset bubbles in the economy. 

The Importance of Business in the Economy

Fourth, GO shows that business spending is far more important than consumer spending.  The overarching view of economic activity changes dramatically when you switch from the narrow GDP model to the broader GO model.  See figure 5 below comparing the GO* and GDP models. 

Figure 5.  GDP Model vs GO Model in 2016 (calculations by author).  II stands for Intermediate Inputs. 

Source:  Bureau of Economic Analysis, www.bea.gov.  2016

The GDP model gives the impression that spending by consumers is the main driver of the economy, representing two thirds of GDP.  (See figure 1.) But by using the broader GO model, we can refigure the breakdown in total economic activity and see very different results. 

Thus, we can refigure the breakdown of total economic activity as follows:

Figure 6.  Breakdown of GO 2016. 

Source:  www.bea.gov, additions from author. 

Using the GO model above, it turns out that consumer spending is only about a third of total economic activity, and business spending (B2B transactions, or I+II in figure 6) is close to 60% and thus far more significant than the retail or consumer market. 

From the GO data, I have created the Skousen B2B Index, which measures all business spending throughout the production process.  As you can see from figure 7 below, it is almost double the level of consumer spending in the United States and more volatile.  B2B is also much more volatile than consumer spending. 

Figure 7.  US Business Spending and Consumer Spending, 2007-2016. 

Source:  BEA data, plus US Census Bureau data on monthly wholesale and retail trade to create the Skousen B2B Index. 

By incorporating the supply chain, national income accounting gives a full business perspective of the production process.  John Hicks recognized this years ago.  “It is the typical business man’s viewpoint, nowadays the accountant’s viewpoint, in the old days the merchant’s viewpoint.” (Hicks 1973:12)  As former BEA director Steve Landefeld noted when GO was introduced in 2014, “Gross Output provides an important new perspective on the economy and a powerful new set of tools of analysis, one that is closer to the way many businesses see themselves.” (BEA News Conference, 25 April 2014). 

CNBC’s Larry Kudlow best reflects the implications of the GO model: “Though not one in a thousand recognizes it, it is business, not consumers, that is the heart of the economy.  When businesses produce profitably, they create income-paying jobs and then consumers spend.  Profitable firms also purchase new equipment because they need to modernize and update all their tools, structures and software” (Kudlow 2006). 

GO Provides a Powerful Link between Micro and Macro

In a very real sense, GO fills in the missing piece of the macroeconomic puzzle.  GO is truly a snapshot of the total economy, because it includes both the full production process and the final product (GDP). 

In economics, the development of GO provides a vital link between microeconomics, the theory of the firm, to macroeconomics, the theory of the economy as a whole.  Here below in figure 8, I reproduce John Taylor’s 4-stage micro model in the production of a cup of espresso.

 

Figure 8.  Four Stages of Production of Espresso Coffee. 

Source:  John B. Taylor, Economics, 5th ed. (Boston: Houghton Mifflin, 2006)

This is similar to the 4-stage macro model in figure 1.  Thus, we see a link between micro and macro. 

In microeconomics, profits and losses are derived from a firm’s revenues minus expenses at each stage of production.  The final price of the retail good or service is equivalent to the combined profit margins or value added of all the previous stages of production.  In macro, we witness a similar phenomenon:  GO adds up all the revenues of all firms throughout the stages of production, while GDP determines the value of the final/finished goods and services, or value added (gross profit).[6]

GO as a Unifying Force in Economics

The introduction of GO can be viewed as a unifying force in accounting, finance and economics.  Even the varying schools of economics see value in this new macro statistic. 

GO appeals to supply-side economists.  As Prof. Steve Hanke (Johns Hopkins) states, “With GO, GDP’s monopoly will be broken as the U.S. government will provide official data on the supply side of the economy and its structure” (Hanke 2014).  According to Hanke, GO confirms Say’s law, that the business sector of the most important force in the economy.  Thus, entrepreneurship, technology, saving and investment, and capital formation form the foundation of economic growth.  Accordingly, business activity drives the economy much more so than consumer spending or government stimulus.

Monetarists may find GO a move in the right direction.  GO can be viewed as a way to measure Irving Fisher’s famous Equation of Exchange, where MV=PT, in The Purchasing Power of Money (1911).[7]  Fisher is the father of monetarism and the Quantity Theory of Money, which argues that price inflation (P) is determined largely by increasing in the money supply (M).  As Jeremy Siegel (Wharton) wrote me, “Gross output is truly a measure of the aggregate demand for money (MV).”  GO can also be viewed as an attempt to quantify PT, the “volume of trade,” although it omits financial transactions of assets (stocks, bonds, real estate, collectibles, etc.). 

Even Keynesians have embraced GO.  GO expands J. M. Keynes’s Aggregate Demand function (The General Theory, 1936) to include the demand for all goods and services along the supply chain, not just final effective demand (final use, or GDP).  As William D. Nordhaus (Yale) wrote me, “This will open up the potential for new insights into the behavior of the economy.”

Finally, GO can be viewed as a major advance in Austrian economics, since it is a measure of Hayek’s triangle.  I consider the BEA’s decision to publish GO every quarter along with GDP as the biggest advance in Austrian economics since Hayek won the Nobel Prize in 1974.  Think of it as the Hayek-Keynes Part II debate.  This time Hayek wins (or at least ties). 

 

Conclusion:  GO Creates a New Paradigm Shift in Macroeconomics

In sum, gross output goes a long way toward completing the macroeconomic puzzle.  It links macro with microeconomics.  And it is a powerful unifying force – bringing together the disciplines of accounting, finance, business, and economics; and finding common ground in all the major schools of economics. 

GO is now being integrated into most of the top economics textbooks.  The following textbooks have added or plan to add sections on GO:  McConnell Brue Flynn; Roger LeRoy Miller; David Colander; John Taylor; and Glenn Hubbard.  Since GO complements GDP, it’s not difficult to integrate GO in the chapter on national income accounting.  (To see how this is done, see chapters 14 and 15 of my Economic Logic.) 

Other countries are moving ahead with measuring the supply chain in the economy.  It has been adopted in the UK on an annual basis (called “Total Output”).  The US is in the forefront of this system of national accounts, and I expect the G20 countries to follow within the next ten years.

Double Counting and Other Issues

Although much progress has been made in the acceptance of GO, there is still considerable debate about this new measure.  Only a handful of academic journals have discussed it, and the textbooks are just starting to incorporate it.  The adoption and approval of GO is far from complete. 

Some economists have raised concerns about GO:  that it is nothing more than “double counting,” and that mergers, vertical integration, and outsourcing distorts GO.  Even the BEA raises doubts about the accuracy of GO, and downplays its significance when it reports every quarter. In frequently asked questions, the BEA states:

“Gross output by industry is an essential statistical tool needed to study and understand the interrelationships of the industries that underlie the overall economy.  However, because of its duplicative nature, it may not be a good stand-alone indicator of the overall health of an industry or sector.  What can one infer about the economic health of an industry solely from the fact that gross output increases?  Nothing, without understanding what happened to the change in intermediate inputs and to value added.  Did the increase in gross output simply reflect a change in the extent of outsourcing or could it reflect a more substantive, fundamental change in the economy?  Gross output alone does not provide enough information to answer that question.  Moreover, focusing solely on gross output is likely to exaggerate the cyclical-nature of the economy, particularly for sectors that are more sensitive to this cyclicality, like manufacturing.” (BEA, “What is gross output by industry and how does it differ from gross domestic product by industry?”, Frequently Asked Questions:  https://www.bea.gov/faq/index.cfm?faq_id=1034)

My response:  GO does indeed involve the repeatedly sale of a commodity as it goes through the production, while GDP measures value added only and thus avoids double counting.  I agree that double counting should be avoided in measuring final output, but that does not mean it is without value and should be ignored.  For two reasons, multiple transactions in the supply chain play a vital and necessary role in the capitalist system.

First, products are often transformed as they move along the production process, e.g., iron ore becomes steel; coffee beans are roasted and grounded; cowhide becomes leather and then shoes; wholesalers distribute goods from one location to another – all serving useful, productive purposes that should be measured. 

Second, businesses are engaging in real economic activity throughout the “double counting” process.  Checks are being written and investment funds are being advanced to pay for gross expenses of a business, including goods-in-process.  B2B transactions are the critical steps in moving the production process along the supply chain toward final use.  Firms cannot run a business on value added alone.  In sum, double counting counts.   No analyst on Wall Street can afford to ignore sales, the top line in financial statements, and focus on profits only.  Equally the smart economist will look at the direction of GO as well as GDP in determining economic performance. 

Outlook for GO

Despite concerns about its efficacy, the BEA continues to publish GO and GO by Industry every quarter, and plans to publish this data simultaneously with GDP in the near future. 

GO is a work in progress, and researchers are likely to find fertile ground with this new macro data.  The introduction of GO is a paradigm shift in economics, and as such, debates and in-fighting in the profession are common place and will continue in our goal to find a complete and accurate model of the economy.  Despite its imperfections, GO is a giant step in the right direction. 

Cited Works

Barro, Robert J. 2011.  “How to Really Save the Economy.”  New York Times (September 10). 

Baumol, William J. and Alan S. Blinder. 1988.  Economics: Principles and Policies. 4th ed.  San Diego:  Harcourt Brace Jovanovich.

Bernanke, Ben. 2015. “The Global Savings Glut.”  Brookings Institute.  https://www.brookings.edu/blog/ben-bernanke/2015/04/01/why-are-interest-rates-so-low-part-3-the-global-savings-glut/

Colander, David. 2014. “Gross Output.” Eastern Economic Journal 40:451-455. 

Conference Board. 2017.  “The Conference Board Leading Economic Index.” http://www.conference-board.org/data/bcicountry.cfm?cid=1

Forbes, Steve.  2014. “New, Revolutionary Way To Measure The Economy Is Coming — Believe Me, This Is A Big Deal.” Forbes Magazine (April 14): http://www.forbes.com/sites/steveforbes/2014/03/26/this-may-save-the-economoy-from-keynesians-and-spend-happy-pols/

Hanke, Steve. 2014. “GO: J. M. Keynes Versus J.-B. Say,” Globe Asia (July) http://www.cato.org/publications/commentary/go-jm-keynes-versus-j-b-say

Hicks, John R. 1973a.  “The Austrian Theory of Capital and Its Rebirth in Modern Economics.” In Carl Menger and the Austrian School of Economics, ed. By J. R. Hicks and W. Weber. Oxford: Oxford University Press.

Hicks, John R. 1973b.  Capital and Time. Oxford:  Oxford University Press. 

Jorgenson, Dale W, J. Stephen Landefeld, and William D. Nordhaus.  2006.  A New Architecture for the US National Accounts.  Chicago:  NBER and University of Chicago Press.  

Kennedy, John F. 1963.  Economic Report of the President.  Washington, DC:  US Printing Office. 

Keynes, John Maynard. 1973 [1936].  The General Theory of Employment, Interest and Money. New York: Macmillan.

Kudlow, Larry. 2006.  “On Jobs, Tax Cuts, and the Democrats.” National Review Online (September 5). 

Kuhn, Thomas. 1962.  The Structure of Economic Revolution. Chicago: University of Chicago Press. 

Kuznets, Simon. 1934. “National Income, 1929-1932.” National Bureau of Economic Research, Bulletin 49 (June 7).

Leontief, Wassily. 1966.  Input-Output Economics.  New York: Oxford University Press. 

Minsky, Hyman. 1982.  Can “It” Happen Again? Essays in Instability and Finance.  New York:  M. E. Sharpe Publishers. 

Papola, John. 2013. “Think Consumption is the ‘Engine’ of our Economy?  Think Again,” Forbes, January 2, 2013.  https://www.forbes.com/sites/beltway/2013/01/30/think-consumption-is-the-engine-of-our-economy-think-again/#54b6956f6497

Ranson, R. David. 2015.  “Alternative data to track the economy and better explain capital-market prices,” Economy Watch, HCWE & Co., November 3.   http://www.hcwe.com/trials/EW-1015.pdf.

Tarshis, Lorie. 1947.  The Elements of Economics.  Boston:  Houghton Mifflin. 

Thornton, Daniel L. 2009.  “Personal Saving and Economic Growth,” Economic Synopses, St. Louis Fed, December 17. 

Samuelson, Paul A. 1948.  Economics:  An Introductory Analysis.  New York:  McGraw Hill. 

Mark Skousen, “At Last, a Better Way to Economic Measure” lead op ed, Wall Street Journal, April 23, 2014: http://www.wsj.com/articles/SB10001424052702303532704579483870616640230

Skousen, Mark. 2015 [1990].  The Structure of Production.  New York:  New York University Press. 

Skousen, Mark. 2017 [2008].  Economic Logic.  5th ed. (Washington, DC: Capital Press)

Solow, Robert. 1957. “Technical Change and the Aggregate Production Function.”Review of Economics and Statistics 39 (August): 312–320.

For More Information on Gross Output

“Gross Output” Wikipedia entry:  https://en.wikipedia.org/wiki/Gross_output

The GO data released by the BEA can be found at www.bea.gov under “Quarterly GDP by Industry.” Click on interactive tables “GDP by Industry” and go to “Gross Output by Industry.” Or go to this link directly: https://www.bea.gov/iTable/iTable.cfm?ReqID=51&step=1#reqid=51&step=51&isuri=1&5114=q&5102=15

For the latest analysis of quarterly gross output statistics, see my press releases at www.mskousen.com

Mark Skousen, The Structure of Production (New York University Press, 1990), with new introductions in 2007 and 2015.

Mark Skousen, “At Last, a Better Way to Economic Measure” lead op ed, Wall Street Journal, April 23, 2014: http://www.wsj.com/articles/SB10001424052702303532704579483870616640230

Steve Forbes, Forbes Magazine (April 14, 2014): “New, Revolutionary Way To Measure The Economy Is Coming — Believe Me, This Is A Big Deal”: http://www.forbes.com/sites/steveforbes/2014/03/26/this-may-save-the-economoy-from-keynesians-and-spend-happy-pols/

Mark Skousen, Forbes Magazine (December 16, 2013): “Beyond GDP: Get Ready For A New Way To Measure The Economy”: http://www.forbes.com/sites/realspin/2013/11/29/beyond-gdp-get-ready-for-a-new-way-to-measure-the-economy/

Gene Epstein, “A New Way to Gauge the Economy,” Barron’s, April 26, 2014: http://www.barrons.com/articles/SB50001424053111903409104579515671290511580

Steve Hanke, Globe Asia (July 2014): “GO: J. M. Keynes Versus J.-B. Say,”: http://www.cato.org/publications/commentary/go-jm-keynes-versus-j-b-say

David Colander, “Gross Output,” Eastern Economic Journal 40:451-455 (2014):  http://www.palgrave-journals.com/eej/journal/v40/n4/full/eej201439a.html

Mark Skousen, rejoinder, “On the GO:  De-Mystifying Gross Output,” Eastern Economic Journal 41:284-288 (2015):  http://www.palgrave-journals.com/eej/journal/v41/n2/full/eej201465a.html

Mark Skousen, “Linking Austrian Economics to Keynesian Economics,” Journal of Private Enterprise, Winter, 2015: http://journal.apee.org/index.php?title=Parte7_Journal_of_Private_Enterprise_vol_30_no_4.pdf

Footnotes

[1] In addition to overplaying the influence of consumer spending, GDP underplays the role of trade.  Trade, measured by the value of exports plus imports, amounted to 26.9% of GDP in the United States in 2016.  It’s substantially higher in most other countries, over 58% of world GDP in 2015.  It’s 85% in the Republic of Korea.  See  http://data.worldbank.org/indicator/NE.TRD.GNFS.ZS

[2] Intrigued by their efforts, I traveled to Europe to meet Hayek and Hicks.  In 1985, I met with Friedrich Hayek at his summer home in the Austrian Alps, and we discussed his macroeconomic theories of capital and the business cycle, and he expressed hope that someday economists would carry on his Austrian macro model. 

Three years later, in the summer of 1988, I met 84-year-old Sir John Hicks, the famed Nobel laureate who transformed Keynesian economics into the grand neoclassical synthesis with his 1937 article in Econometrica, “Mr. Keynes and the ‘Classics’.”  Despite his age and physical ailments, his mind was alert and, during our meeting, he recounted how he had gradually become disenchanted with modern economic theory he helped to develop.  In particularly, he seemed displeased by the failure of orthodox economists to teach the importance of time and the stages-of-production concept in macroeconomics, a subject he emphasized in his own textbook, The Social Framework (1971), and later in his treatise, Capital and Time (1973b). 

[3] Leontief originally estimated gross output (GO) in his input-output tables that came out every five years, and in the early 1990s, the BEA began publishing GO every year, but the data was always several years behind. 

[4] Unfortunately, the BEA measure of GO does not include all wholesale and retail trade figures.  As a BEA explains, “The output for industries that buy and sell merchandise but do not provide any additional fabrication is measured as margin.  By I-O convention, this margin is measured as sales receipts less the cost of goods” (Bureau of Economic Analysis, Concepts and Methods of the U. S. Input-Output Accounts:  Measuring the Nation’s Economy.  2nd ed. U. S. Department of Commerce, 2009, pp. 4-5).  By the BEA’s measure, GO reached $32.4 trillion in 2016.  When you include total wholesale and retail trade, it adds an additional $7.6 trillion to what I now term “adjusted GO” — $40 trillion, more than double GDP ($18.7 trillion). 

[5] I send out a press release every quarter analyzing the latest quarter GO data.  See www.mskousen.com

[6] Because GDP includes returns of the factors of production (incomes, rents, interest, and profits), GDP is actually equivalent to the accounting term gross profit, not net income or profits, in a financial statement.  I thank David Colander (Middlebury College) for pointing this out. 

[7] I thank Vernon Smith (Chapman University) and Jay Carlson (Utah Valley University) for pointing out how GO is an updated version of Fisher’s equation of exchange. 

GO

New Academic Article Supports GO and Austrian Theory of the Business Cycle

Mark Gertsen (University of Groningen) has just published an academic study in favor of gross output (GO) as a powerful new macroeconomic tool and statistic. His article, “Interest Rates, Roundaboutness, and Business Cycles: An Empirical Study,” is published in the fall 2019 issue of the Quarterly Journal of Austrian Economics.

You can read it here:  https://doi.org/10.35297/qjae.010024 

Using advanced econometric methods on GO data in 28 developed countries (compiled annually by the OECD), Gertsen confirms the Austrian theory of the business cycle, and concludes that changes in interest rates creates a boom-bust business cycle in GO, especially in the early-stages of production. To prove his thesis, he states, “I make use of the Gross Output (GO) metric pioneered by Skousen. Gross Output measures the combined value of all stages of production in the economy.”

 

Thanks, AEIOU,

Mark Skousen

Presidential Fellow, Chapman University

Newsletter:  www.markskousen.com

Free weekly e-letter:  https://www.markskousen.com/signups/skousen-investor-cafe/

Personal website:  www.mskousen.com

Annual conference:  www.freedomfest.com

GO

Don’t Worry about the U.S. Consumer

Take a look at today’s article about the U.S. consumer by Brian Wesbury, chief economist at First Trust Chicago:  https://www.ftportfolios.com/Commentary/EconomicResearch/2019/12/2/dont-worry-about-the-us-consumer
He uses my gross output (GO) statistic to refute the myth that consumer spending drives the economy.  It’s a beautifully written article on how business is a far more important catalyst for economic growth than consumer spending (Say’s law).
This article shows why GO should be included in the textbooks.  So far about half a dozen do so.

Best wishes, AEIOU,

Mark Skousen
Presidential Fellow, Chapman University
Producer, FreedomFest
“The World’s Largest Gathering of Free Minds” 
July 13-16, 2020, Paris Resort, Las Vegas
www.freedomfest.com

If GDP Lags, Watch the Economy GO

‘Gross output’ reflects the full value of the supply chain, and it portends much faster growth.

Reprinted from THE WALL STREET JOURNAL.

 By Mark Skousen

The Bureau of Economic Analysis will release its preliminary first-quarter growth figure on Friday. According to the Atlanta Fed consensus tracker, economists are predicting gross domestic product to have risen at a meager 2% annual rate. But a powerful behind-the-scenes indicator suggests the real rate may turn out to be significantly higher.

“Gross output,” or GO, reflects the full value of the supply chain—the business-to-business spending that moves all goods and services toward the final retail market. Based on my work and research by David Ranson, chief economist at HCWE & Co., changes in the supply chain are a strong leading indicator of the next quarter’s GDP.

The supply chain, which the BEA calls “intermediate inputs,” took off in the fourth quarter of 2017, growing at a 7.5% annualized rate. That’s more than double the rate of real GDP growth and the fastest pace since before the Great Recession. Real GO, which includes both GDP and the supply chain, rose at a 4.7% rate. The growth was broad-based, with strong numbers in mining, manufacturing, utilities and construction. The fourth quarter 2017 GDP growth rate of 2.9% did not reflect the dramatic increases in intermediate outputs because GDP by definition measures only spending at the end of the economic chain.

The GO model is more in keeping with the Conference Board’s list of 10 leading economic indicators, which are linked to manufacturing and capital markets. For three quarters in a row in 2017, GO accelerated, probably due to the anticipated tax breaks and deregulatory environment. The boom in intermediate business activity should translate into higher economic growth soon, barring international instability, trade wars, or tighter-than-expected monetary policy.

As I noted in these pages in 2014, measuring gross output is a breakthrough in national income accounting. By reporting GO as well as GDP, the BEA has helped economists catch up with the accounting and finance professions. Public companies have long reported the top line (revenue) and the bottom line (profit) at the same time each quarter. For a national economy, GO corresponds to the top line (total activity) and GDP to the bottom line (final product). As the economists Dale Jorgenson, J. Steven Landefeld and William Nordhaus wrote in a 2006 book: “Gross output [GO] is the natural measure of the production sector, while net output [GDP] is appropriate as a measure of welfare. Both are required in a complete system of accounts.”

GO also dispels the popular Keynesian myth that consumer spending is the driver of economic growth. For example, the New York Times recently warned: “With personal consumption accounting for nearly 70 percent of all economic activity . . . the administration will be hard pressed to lift growth substantially if consumers remain cautious about opening their wallets.” But GDP is an incomplete measure of economic activity. It overlooks the value of all goods-in-process, which amounted to more than $14.7 trillion in 2017.

The broader-based GO highlights the reality that business spending is actually substantially larger than consumption. Consumption is 69% of GDP but just 39% of GO, while business spending is 17% of GDP but 52% of GO. This model therefore better recognizes the vital contributions of entrepreneurship, capital investment and innovative technology. As Larry Kudlow, the new director of the National Economic Council, wrote in 2006: “It is business, not consumers, that is the heart of the economy. When businesses produce profitably, they create income-producing jobs and thus consumers spend. Capital formation is the key to worker productivity and consumer prosperity.”

The first-quarter 2018 GO release won’t come until July 20, but BEA director Brian Moyer says the agency plans to release both GO and GDP at the same time within the next year or two. Hopefully by then the media will catch on to this advance in supply-side national accounting and leading indicator of robust economic performance.

This article appeared originally on wsj.com and in the April 24, 2018, print edition of the Wall Street Journal.

 


About the Author

Mark Skousen is a Presidential Fellow at Chapman University.  He introduced gross output as a macroeconomic tool in his work The Structure of Production (New York University Press, 1990).

GO

GO Slow: New Leading Indicator Predicted Slowdown in GDP

by Mark Skousen
Presidential Fellow, Chapman University
Editor, Forecasts & Strategies

For the previous two quarters (Q2 and Q3, 2017) Gross Output, the new broader measure of the economy that includes the supply chain, was growing at a slower rate than GDP.  According to my research, that suggested a slowdown in GDP.

Today the Bureau of Economic Analysis released the advance estimate for Q4 2014 GDP.  After two consecutive quarters (Q2 & Q3) of 3%-plus growth in real terms, the GDP grew only 2.6% in Q4 — just as GO predicted.

For some time now, I’ve been arguing that gross output (GO), the top line in national income accounting, is a more accurate measure of total economic activity.  Because it includes business-to-business (B2B) transactions in the earlier stages of production, GO can anticipate changes in GDP (the bottom line) as much as 12 weeks in advance.

Since the first quarter of 2017, GO has been growing at slower rate than GDP.  In Q2, real GO rose at a tepid 1.7%, substantially less than 3.1% for GDP, and in Q3 2017, real GO accelerated at 2.7% growth rate, but still less than the 3.1% real GDP growth for the 3rd quarter.  I concluded in November, “Second quarter GO suggests potential slowdown in the economy, despite the currently rising GDP.”  Please reference the 2017 Q2 and 2017 Q3 press releases for more information.

The following chart provided by David Ranson, chief economist at HCWE & Co., shows the relationship between GO, II and GDP since the third quarter of 2016.

GO

Data: Quarterly seasonally-adjusted chain-type quantity indices of intermediate inputs, gross output and gross domestic product (Bureau of Economic Analysis).

 

As David Ranson comments:  “In this chart we compare the growth of gross output (GO) and intermediate output (II) with the growth of GDP over the past year (all in real terms). The chart begins with the third quarter of 2016 because, prior to that, all three variables were moving in close parallel. At that point a substantial divergence opened up, as the growth of intermediate output (and GO) raced ahead of GDP growth. That implied an acceleration in GDP growth which we have been experiencing. Now, just-released third-quarter figures for GO and II suggest that a re-convergence has begun: in the second and third quarters of 2017 growth in GO and II has fallen below the growth rate of GDP. That implies that GDP will stabilize and possibly decelerate later in 2018.”


For more information on Gross Output (GO), the Skousen B2B Index, and their relationship to GDP, see the following:

Mark Skousen, “At Last, a Better Way to Economic Measure” lead editorial, Wall Street Journal, April 23, 2014: http://on.wsj.com/PsdoLM

Steve Forbes, Forbes Magazine (April 14, 2014): “New, Revolutionary Way To Measure The Economy Is Coming — Believe Me, This Is A Big Deal”:

http://www.forbes.com/sites/steveforbes/2014/03/26/this-may-save-the-economoy-from-keynesians-and-spend-happy-pols/

Mark Skousen, Forbes Magazine (December 16, 2013): “Beyond GDP: Get Ready For A New Way To Measure The Economy”:

http://www.forbes.com/sites/realspin/2013/11/29/beyond-gdp-get-ready-for-a-new-way-to-measure-the-economy/

Steve Hanke, Globe Asia (July 2014): “GO: J. M. Keynes Versus J.-B. Say,” http://www.cato.org/publications/commentary/go-jm-keynes-versus-j-b-say

David Ranson, “Output growth data that the economy generates months earlier than GDP,” Economic Watch, July 24, 2017. HCWE & Company. http://www.hcwe.com/guest/EW-0717.pdf

Mark Skousen, “Linking Austrian Economics to Keynesian Economics,” Journal of Private Enterprise, Winter, 2015:  http://journal.apee.org/index.php?title=Parte7_Journal_of_Private_Enterprise_vol_30_no_4.pdf

To interview Dr. Mark Skousen on this press release, contact him at mskousen@chapman.edu, or Ned Piplovic, Media Relations at skousenpub@gmail.com.