April 27, 2014
THE "MAKE" ECONOMY:
Beyond GDP: Get Ready For A New Way To Measure The Economy (Mark Skousen, December 16, 2013, Forbes)
Starting with my work The Structure of Production in 1990 and Economics on Trial in 1991, I have made the case that we needed a new statistic beyond GDP that measures spending throughout the entire production process, not just final output. GO is a move in that direction - a personal triumph 25 years in the making.GO attempts to measure total sales from the production of raw materials through intermediate producers to final retail. Based on my research, GO is a better indicator of the business cycle, and most consistent with economic growth theory.GO is a measure of the "make" economy, while GDP represents the "use" economy. Both are essential to understanding how the economy works.While GDP is a good measure of national economic performance, it has a major flaw: In limiting itself to final output, GDP largely ignores or downplays the "make" economy, that is, the supply chain and intermediate stages of production needed to produce all those finished goods and services. This narrow focus of GDP has created much mischief in the media, government policy, and boardroom decision-making. For example, journalists are constantly overemphasizing consumer and government spending as the driving force behind the economy, rather than saving, business investment, and technological advances. Since consumer spending represents 70% or more of GDP, followed by 20% by government, the media naively concludes that any slowdown in retail sales or government stimulus is necessarily bad for the economy. (Private investment comes in a poor third at 13%.)For instance, the New York Times recently reported, "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, "The housing bust has chilled consumer spending -- the largest single driver of the U. S. economy..." ("Home Forecast Calls for Pain," Wall Street Journal, September 21, 2011, p. A1.)Or take this report during the economic recovery:"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.)In short, by focusing only on final output, GDP underestimates the money spent and economic activity generated at earlier stages in the production process. It's as though the manufacturers and shippers and designers aren't fully acknowledged in their contribution to overall growth or decline.Gross Output exposes these misconceptions. In my own research, I've discovered many benefits of GO statistics. First, Gross Output provides a more accurate picture of what drives the economy. Using GO as a more comprehensive measure of economic activity, spending by consumers turns out to represent around 40% of total yearly sales, not 70% as commonly reported. Spending by business (private investment plus intermediate inputs) is substantially bigger, representing over 50% of economic activity. That's more consistent with economic growth theory, which emphasizes productive saving and investment in technology on the producer side as the drivers of economic growth. Consumer spending is largely the effect, not the cause, of prosperity.
Posted by Orrin Judd at April 27, 2014 5:11 AM