How ‘Gross Output’ Predicted the Economy’s Slowdown


“Gross Output, long advocated by Mark Skousen, will have a profound and manifestly positive impact on economic policy and politics.”

–Steve Forbes, Forbes magazine (April 14, 2014 issue)

The editors of the Wall Street Journal gave me the lead editorial in the April 23 edition: “At Last, a Better Economic Measure.” You can read it here. The editors don’t let the author see the headline but they captured the concept perfectly with their headline. The graphic cartoon was also perfect — check it out.

Basically, I contend that Gross Output (GO) is better than Gross Domestic Product (GDP) in measuring the economy. GO is an attempt to measure spending at all stages of production. It corrects the fallacy fostered by GDP that consumer spending drives the economy. Actually, business spending at all stages of production is larger than consumer spending when you use GO as the measure of economic activity (over 50%, compared to less than 40% for consumer spending).

GDP Leaves out B-to-B Transactions

After my Wall Street Journal article came out, I was at a dinner party and a venture capitalist who does deals mainly in China came up to me and said, “I read your article in the Journal and couldn’t believe that B-to-B [business-to-business transaction] is left out of GDP. Unbelievable.”

Basically, Gross Output includes B-to-B; GDP doesn’t. The data demonstrates that business spending/investment (B-to-B) is much larger than consumer spending, and that business spending, more than consumption, drives the economy.

Too often economists dismiss B-to-B as nothing more than “double counting.” What a slight to the business community. They don’t seem to understand that gross savings/investment capital is necessary to fund B-to-B and move products down the supply chain to the final user. You can’t run a business on value added only. Double counting (B-to-B) should count, and the new quarterly Gross Output is an attempt to measure just that.

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Finally, I see GO as a triumph in Hayekian macro (measuring stages of production)… you could even see GO vs GDP as the next debate between Hayek and Keynes, since GDP is in a way a Keynesian concept (final effective demand) while GO is a Hayekian concept (all stages of production).

In my original work, “The Structure of Production” (New York University Press, 1990, 2007), I suggest that we need to look at the economy from a new perspective:

  • Stages of production (Gross Output)… not just final output (GDP).
  • The structure of interest rates (yield curve)… not just the 10-year Treasury rate.
  • Relative price indices (commodity prices, producer prices)… not just the Consumer Price Index (CPI).
  • The structure of employment… not just the unemployment rate.

What the Latest Gross Output Data Shows: Slowing Economy

Here’s what GO shows: nominal GO collapsed by 8% in 2008-09, then showed robust growth, faster than GDP, during the recovery. But in 2013, the GO growth rate has been slowing down — to a 3.6% growth rate last year in current prices. In the 4th quarter 2013 findings released on April 25, GO grew only 1.1%.

I was not surprised, then, when the U.S. Bureau of Economic Analysis announced on Tuesday that 1st quarter GDP was basically flat — 0.1% growth. It appears that GO is a leading indicator!

In sum, the Gross Output statistics show a sluggish U.S. economy. At first during the recovery, GO was growing faster than GDP. Now, GO is underperforming GDP, a negative sign.

What do the other statistics show? The yield curve is positive, price inflation is relatively flat right now (commodity prices and consumer prices are fairly stable) and employment is sluggish. Overall, with easy-money policies in place, I remain bullish on the stock market. Mining stocks are the most volatile, being the furthest away from final consumption, while consumer retail stocks are fairly stable.

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You Blew It! Celebrity Fighting Inequality Gets Paid Big Bucks

According to a formal offer letter obtained under New York’s Freedom of Information Law, The City University of New York intends to pay Paul Krugman $225,000, or $25,000 per month (over two semesters), to “play a modest role in our public events” and “contribute to the build-up” of a new “inequality initiative.” “You will not be expected to teach or supervise students,” the letter informs Professor Krugman. Krugman has accepted the offer and is leaving Princeton.

Slate magazine asks, “Was he [Krugman] not aware that CUNY is a publicly funded institution that pays bona fide full-time professors far less than Krugman was being offered to essentially serve as a mascot for the school’s new inequality initiative — a mascot with a truly minimal teaching load? If Krugman cares so much about income inequality, his detractors wondered, why would he accept such a sum for doing so little work? And as someone who has done so much to draw attention to the evils of ‘the underserving rich,’ how could the offer not leave him feeling like at least a little bit of a jerk?”

Good question. Of course, Slate then justifies Krugman’s decision because he is, according to Slate, “America’s foremost public intellectual.” Really? I know Paul Krugman personally, and I’d rather call him a clever polemicist, not an intellectual who deals constantly in philosophy of ideas and seeks objective truth (the definition of an intellectual).

Actually, the CUNY offer is chump change. I invited Paul to a debate at FreedomFest a few years ago. His agent wanted an honorarium of more than $100,000 plus two first-class airline tickets, along with other amenities… for a couple of hours of work.

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In case you missed it, I encourage you to read my e-letter column posted last week about what a leading economist says about the U.S. government adopting my Gross Output statistic. I also invite you to comment in the space provided below.

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