By Mark Skousen
Today (Columbus Day) I submitted my paper “GO Beyond GDP: Introducing Gross Output as a Top-Line in National Income Accounting” to the American Economic Review. I think it appropriate to submit it on Columbus Day as I believe GO is a major discovery in national income accounting and one of the most important macroeconomic event since GDP was invented in the 1940s. I consider GO the missing piece of the macroeconomic puzzle. By including the supply chain, GO restores the importance that the business sector — the entrepreneur, the inventor and capital investment — plays in growing the economy. It debunks the idea that “consumer spending drives the economy.” It turns out that business (B2B) spending is almost double the size of consumer spending in the US, and far more cyclical.
Now, the question is, will the AER editors recognize this paradigm shift in macroeconomics? It certainly helps that the government — Bureau of Economic Analysis (BEA) — has adopted and is now publishing GO on a quarterly basis, just like GDP. It’s also being added to next edition of many of the major economics textbooks.
Top line (GO) and bottom line (GDP) in national income accounting
Here is a short summary of my paper:
- Government starting measure gross output (GO): In April 2014, the Bureau of Economic Analysis began publishing a new measure of the aggregate economy called gross output (GO), the first macro measure to be released on a quarterly basis since gross domestic product (GDP) was invented in the 1940s.
- What is GO? GO is a broader measure of economic activity, adding up sales/revenues at all stages of production, and serves as a complement to GDP.
- The BEA now defines GDP in terms of GO minus intermediate production. GO attempts to measure the production process or the “make” economy while GDP is a measure of final goods and services, or the “use” economy.
- New top line in national income account: I make the case that GO and GDP together should play a vital role in national accounting statistics, much like the top line (sales) and bottom line (earnings) in quarterly financial statements.
- Top line and bottom line accounting are employed in compiling the quarterly earnings reports of publicly-traded companies.
Does consumer spending drive the economy? The media often reports that “consumer spending is two-thirds of the economy,” based on a misuse of GDP as a measure of the economy. The source of the fallacy is that GDP measures final spending only. GO is the more complete measure of total economic activity. It demonstrates that business spending is a significantly larger segment of the economy than consumer spending is. In fact, business spending (B2B) is almost double the size of consumer spending. Business spending is 60% of total economic activity, while consumer spending is only about one third (not two-thirds as normally reported).
- GO and GO by Industry may be helpful in forecasting the direction of the economy. Business spending tends to be more volatile than GDP. Earlier-stage and intermediate inputs in GO may also be helpful in forecasting the direction of economic growth.
- In this paper, I argue that gross output should be the starting point of national income accounting. GO is also more highly correlated with leading macroeconomic indicators of the business cycle than GDP is and is, additionally, more intellectually consistent with the economy-wide growth at all stages of production and distribution that growth theory attempts to model.
What Others are Saying about Gross Output
and “The Structure of Production”
“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, Forbes magazine (2014)
“Economist Mark Skousen can be credited with pioneering the concept of gross output in his 1990 book, The Structure of Production. Among other things, Skousen notes that GO acts as a more sensitive seismograph in registering the shock of business cycles.” – Gene Epstein, Economics Editor, Barron’s
“The next economics will have to be centered on supply and the factors of production rather than being functions of demand. I’ve read Mark Skousen’s monumental book twice, and it comes the closest to achieving this goal.” – Peter F. Drucker, Claremont Graduate University
“National income accounting has long been unfathomably flawed and worse by the decade but Mark Skousen’s introduction of gross output (GO) has been a big step forward in portraying a more total picture of the economy and where and when it’s vulnerable. Kudos to Mark for it being adopted.” – Ken Fisher, CEO, Fisher Investments, Forbes columnist
“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.” – David Ranson, chief economist, H. C. Wainwright Economics.
“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.” – Steve Landefeld, director, Bureau of Economic Analysis (2014)
“Now, it’s official. With Gross Output (GO), the U.S. government will provide official data on the supply side of the economy and its structure. How did this counter revolution come about? There have been many counter revolutionaries, but one stands out: Mark Skousen of Chapman University. Skousen’s book The Structure of Production, which was first published in 1990, backed his advocacy with heavy artillery. Indeed, it is Skousen who is, in part, responsible for the government’s move to provide a clearer, more comprehensive picture of the economy, with GO.” – Steve H. Hanke, Johns Hopkins University (2014)
“Congratulations on your work. It has been a long slog to get the national accounts to introduce innovative measures, and Steve Landefeld [long-time director of the BEA] has been a superstar in this respect… This will open up the potential for new insights into the behavior of the economy.” – William D. Nordhaus, Yale University
“The more data the better, and your GO gives us valuable extra information. I wish you all the best with your new top-line measure of the economy.” – Jeremy Siegel, Wharton School of Finance, University of Pennsylvania
“The development of Gross Output is a good idea and a better measure [of economic activity] than GDP.” – David Colander, Eastern Economic Journal (2014)
“I am enormously impressed with the care and integrity which Skousen has accomplished his work.” – Israel Kirzner, New York University
“The two most important works on ‘Austrian’ capital theory since Hayek’s winning of the Nobel Prize are Roger Garrison’s Time and Money and Mark Skousen’s Structure of Production. All members of the Austrian School should take his book seriously.” – Richard Ebeling, Northwood University
“I’m a big fan of GO.” – Garrett Jones, George Mason University
“A good idea!” – Alan Blinder (Princeton University)
“Skousen’s Structure of Production should be a required text at our leading universities.” – John O. Whitney, Emeritus Professor in Management Practice, Columbia University
“The government’s announcement puts Mark Skousen’s triumphant foundational GO work and Irving Fisher’s ‘total transactions’ model on the same pedestal of economic achievement.” – Jay Carlson, Utah Valley University