Mark Skousen is excited that the Bureau of Economic Analysis
(BEA) has at long last taken the idea of Gross Output seriously, thus making it
as important as the GDP (Gross Domestic Product). He explains why he is happy
about this development in an article he wrote under the title: “At Last, a
Better Economic Measure” and the subtitle: “Gross output will correct the
fallacy fostered by GDP that consumer spending drives the economy.” The article
was published in the Wall Street Journal on April 23, 2014.
Although the value of Gross Output can be extracted from the
mountain of data published periodically on the performance of the economy, it
will nevertheless be very helpful to people doing a certain kind of analysis when
the BEA will start publishing the raw data as it compiles it in the field.
Another advantage of having this data is that the figures will be more accurate
than those which can be extracted.
We need to take an example to see what all this means. Suppose
you are a mogul so enamored with the auto industry, you wish to do nothing in
life but mass produce a model of the ultimate mini-car. You build an integrated
industry that starts with the mining of raw materials, that go through the
various stages of producing parts for the car. The parts get assembled into
cars that end up as finished products in the dealerships you open around the
country. You do your bookkeeping to serve both the GDP method, and the Gross
Output method.
To that end, you compile your figures as follows for each
car. Your Mining Division sells 1,000 dollars worth of raw materials to the
division that makes the parts. The added value here is the full figure of
$1,000. The Parts Division makes the parts and sells them to the Assembly Division
for 2,000 dollars. The value added here is $2,000 - $1,000 = $1,000. The
assembly division does the assembly and sells the finished product to the
showroom for 4,000 dollars. The value added here is $4,000 - $2,000 = $2,000.
Ultimately, the showroom sells the car to the final customer for 7,000 dollars.
The added value here is $7,000 - $4,000 = $3.000.
Seeing the final sale price of 7,000 dollars, you know right
away that this is the sum total of all the added values. To be sure, you
compile 1,000 + 1,000 + 2,000 + 3,000 = 7,000 dollars. You now compile the
values for the Gross Output, and they would be the sale values of each division
to the next ... all he way to the final customer. They are these: 1,000 + 2,000
+ 4,000 + 7,000 = 14,000 dollars. This is double the figure compiled for the
GDP.
Mark Skousen says there are advantages to having these two
approaches rather than having only the GDP approach. He calls Gross Output, a
supply-side statistic because it measures all the steps in the production side
of the economy as seen in the above example. And this is different from the GDP
which measures the “use” economy as represented by the figure representing the
final sale – also seen in the above example.
Well, that view is obvious and not subject to question. But
the Skousen argument becomes questionable when he says this: “[GDP] has led to
the misguided Keynesian notion that consumer and government spending drive the
economy rather than saving, business investment, technology and
entrepreneurship.” He bases that argument on the fact that a great deal of
activity is done before the final customer enters the picture.
That is true, but if the final customer is taken out of the
picture, everything that is done before him will come to a screeching halt. This
is because the showrooms will fill with cars that nobody is buying; the storage
capacity of the Assembly Division will fill with parts that cannot be
assembled; the factories making the parts will fill with raw materials that is
not needed; the smelters at the mines will stop smelting the piles of ores
piling at the hoppers, and the mills will stop milling the ores that keep
coming from the mines.
Yes, a great deal is done before the ultimate buyer gets to
do his thing and buys the car, but he is the king for whom all that is done is
done. If he goes on strike, everyone else goes to sleep. The truth is that an
economy is made of two parts in the same way that a bird is made of two wings.
The economy cannot fly without the supply side which produces the goods and the
services; and neither can it fly without the consumption side which absorbs
those goods and services and gets things moving.