"Gross output (GO) is the centre of a revolution in macroeconomics with major policy implications"
"Today I would like to follow in Milton Friedman’s footsteps by making the bold case that business investment, broadly defined, is far more important in the dynamics of US economic growth than either consumer spending or government stimulus....
"It is the contention of this lecture that gross output (GO) is the centre of a revolution in macroeconomics by forming the foundation of a 'new architecture' in national income accounting with major policy implications. As Steve Forbes said, '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'...
"My thesis flies in the face of the conventional wisdom that the US economy is a 'consumer society' and that consumer spending and government stimulus drive the economy.
"It is not surprising that the financial press frequently focuses on monthly reports of retail sales and consumer sentiment to determine the outlook for jobs and the economy.... 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 drivers of economic growth. Business investment rates a poor third. Trade doesn’t even matter.
"And yet numerous studies have shown that economic growth is ultimately determined by savings, capital investment, technology and entrepreneurship, all supply-side statistics. 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)....
"As a Forbes economist John Papola recently concluded, 'Economic growth (booms) and declines (bust) have always been led by changes in business and durable good' investment, while final consumer goods spending has been relatively stable through the business cycle.” (Papola 2013).
"The source of this conflict centres around the misuse of GDP as 'the' measure of the economy: Since personal consumption expenditures represents over two-thirds of GDP in the United States, the media naturally concludes that consumption is the most important factor in the direction of the economy, followed by government spending and lastly business activity.
"GDP is entirely appropriate as a measure of final use in the economy, but fails to encompass the total production process. GDP does a good job of determining spending by consumers and government, but does not tell the whole story of commercial activity. Critics have pointed out many of the defects of GDP, including the lack of reporting black-market activities and household production, and its failure to recognizing how important trade is in the economy. But GDP fails in another way: It only accounts for fixed capital expenditures, and omits a vital component of business investment–spending by business to move the production process along the supply chain, what economists call goods-in-process or circulating capital. Business cannot survive without financing the entire supply chain. This omission of business’s contribution to the supply chain in the United States amounted to $22.1 trillion in 2017, substantially larger than GDP itself....
"I do not wish to suggest that GO replace GDP, but rather that they are complementary and measuring different things.... The benefit of GO is that the supply chain is included, so GO is truly the full measure of economic activity.... With GO, we can at last have a national statistic that is compatible with economic growth theory.
"But there are many other advantages to GO. For example, it does a better job of demonstrating the magnitude of the business cycle.... GO may also be a powerful leading indicator. 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.” ... In economics, the development of GO also provides a vital link between microeconomics, the theory of the firm, to macroeconomics, the theory of the economy as a whole....
"In many ways, GO is a triumph for Hayek, Hicks and other neo-Austrian supply-side economists ...
"In sum, gross output is a paradigm shift in economics.... the missing piece that completes the macroeconomic puzzle."
2 comments:
I'm still learning on this topic, but it looks like what's being said here aligns with the graph above. At the height of the GFC from about mid 2018 for a year onwards the economy was clearly not doing well, and that's reflected in the big decline in business spending, which took about 4 years to return to previous levels. But if you just looked at consumer spending it's hardly a blip, and you'd conclude nothing substantial had happened at all.
Exactly. And it gets worse, because central banks and governments did their level best to 'tamper with the tape,' i.e., to stimulate consumer spending to keep that line up. Thus does misunderstanding lead to error, and thence to catastrophe.
George Reisman talks about this 'hole' in the GDP accounts as like an "iceberg." It does appear, he acknowledges, but all that is seen in the accounts is the very tip.
"The truth is that the great bulk of spending and income payments in the economic system is concealed under net investment! Net investment is analogous to an iceberg, nine-tenths of whose volume is concealed beneath the surface. Only in the case of net investment, what is concealed can easily be much more than nine-tenths.
"Net investment is the difference between two enormous monetary magnitudes, which are never radically different from one another in size..."
The two "monetary magnitudes" are, on side, business's "costs of goods sold"; and on the other, their "productive expenditure," i.e., capex and wages.
Being both so large, and their sums nearly equal, they all but nett out. Leaving mainstream economists all-but blind to their existence. But, as you note, especially in times of crisis, these are not trivial things to ignore.
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