“By integrating the vital role of the supply chain into national income accounting, Mark Skousen’s development of gross output (GO) has created a more dynamic and broader view of the economy, and of the central role that business plays in national income, the business cycle and economic growth. I recommend that economists seriously consider his new approach to macroeconomics.” — Finn Kydland, Nobel-Prize-Winning Economist
My work on gross output (GO), a measure of total spending in the economy, has been written up in the Wall Street Journal, Forbes, Barrons and other business media.
On Monday, it finally reached the New York Times, “the newspaper of record.” Peter Coy, the long-time economics editor of the NYTimes, contacted me about doing an article about GO.
You can read the article here.
Since writing my magnum opus, “The Structure of Production” (NYU Press, 1990), I have made the argument that GDP is an incomplete measure of the economy because it leaves out the value of the supply chain. It measures final output only and ignores all the business-to-business (B2B) spending in the earlier stages of production.
GO solves this problem by including the full value of the supply chain in its calculations.
What Drives the Economy: Consumers or Business?
The main reason I got involved in the development of GO was because GDP overemphasizes consumer spending as the driver or heart of the economy. It’s a major myth continuing to be perpetuated by the media.
By leaving out the value of the supply chain, GDP downplays the vital role of business as the driver of economic growth. With GO you get the full picture. Consumer spending is important, but it’s only about one-third of total economic activity when you use GO as the full measure of the economy, while business spending is over 60% of the total spending.
Business activity is by far the most important factor in determining economic performance and our standard of living.
GO: The Mother of GDP
Coy has a cute title for GO: GDP’s cousin. But really, GO is the mother of GDP. Without GO, you never get to final output (GDP). See the following diagram.
GO measures total spending in the economy (all the stages of production) that produces the final stage GDP (#4 in the above diagram).
Just like in individual companies, you can’t have profits without sales!
Is GO Just Double Counting?
In his article on GO, Coy links GO to the issue of “double counting.” He states, “Gross output is bigger than gross domestic product because of deliberate double counting.”
Indeed, it is true that GO engages in double, triple and even quadruple counting. For example, in the making of a cup of coffee, it counts the cost of the coffee beans at each stage of production — when the beans are grinded and roasted, when they are packaged and sold at the wholesale level and then again when they are sold as a cup of coffee at Starbucks.
GO is simply an attempt to measure the total number of transactions (exchanges) of all goods and services in a calendar year by consumers, government agents and businesses. It adds up the number of checks, bank transfers, cash transactions and other forms of payment to move the production process along to final output.
GO obviously includes double and triple counting of the same good over and over again, but in each case the product (or service) in question is being changed. Either the product itself is changed or it is moved to a different location (distributed from producer to wholesaler or retailer). Thus, it’s vital in GO to double and triple count. It is not a “mistake.” But rather, it is vital to the production process.
GDP does not measure total gross expenditures of the business sector, only value added. It eliminates all double and triple counting. That is perfectly legitimate when measuring the value of final goods and services (GDP).
I’m not suggesting GO replace GDP. They are complementary. GO is the top line in national income accounting, measuring total spending throughout the economy, and GDP is the bottom line, measuring final spending only. It couldn’t be simpler.
If you want to measure what businesses actually spend to move the production process along to final output, you have to include double and triple counting. Without it, you don’t get the finished product — unless you have total integration of all stages of production, like one gigantic firm that handles producing the product from the resource stage to final use (such as Exxon).
But in the vast majority of businesses, companies buy from a supplier, transform it and move it along to the next stage of production at another company.
It’s vital to realize that business cannot make a profit without financing the gross expenditures of goods in process, not just value added. It raises capital to cover all costs, including “goods in process.”
Thus, in business double counting counts, and is vital to the dynamics of the capitalist system.
It’s been a tough slog introducing a new macro statistic in economics. But as Sir Humphry Davy once said: “Nothing tends so much to the advancement of knowledge as the application of a new instrument.”
What is GO Predicting Now?
GO is also a good forecaster of the economy. Are we headed for a recession? It looks like it, slowly but surely. Business-to-business spending is down 9% in real terms. The second-quarter GO data doesn’t come out until late September. But given the weakness in China, and further banking troubles in the U.S., the outlook is not bright as we enter 2024.
How to Learn More About GO
To learn more about GO, go to my website, www.grossoutput.com.
For serious students and an in-depth discussion of GO, check out my book “The Structure of Production,” available on Amazon in paperback here.
I also explain in layman’s terms the value of GO in my 15-page essay “Economics of Life Made Simple,” published earlier this year as the cover story of Skeptic magazine.
The response has been overwhelming. One reader, a successful lawyer from North Dakota, was so enamored that he has made copies to send to all his clients.
“This is the best brief in economics I’ve ever read,” the attorney said.
Another fan is an accounting professor who said, “I didn’t understand economics until I read your essay!”
You can read it here.
Printed copies are available for $3 each at www.skousenbooks.com (minimum order three copies). I pay shipping inside the United States. I include a free copy of the essay if you order one or more of my books.
You Blew It!
Why Kamala Harris is So Unpopular
Recently, a reporter from Yahoo AOL wrote a story on “Why is Kamala Harris So Unpopular?” Read it here.
The writer blames it on gender and racial bias. She writes, “In 2021, Harris made history as the first black and first female of Indian descent to become vice president. Jonathan Hanson, political scientist and lecturer at the University of Michigan, says Harris is stepping into new territory.”
“’So we would need to consider the additional possibility that her numbers are being weighed down, due to either gender-related bias or race/ethnicity-related [bias],’ Hanson told Yahoo News.”
No doubt Joe Biden chose her because of her race and gender, but frankly, I don’t think her unpopularity has anything to do with race or gender.
The real reasons are quite clear. She often makes meaningless statements that go nowhere and make no sense, like this one in March 2022: “Talking about the significance of the passage of time, right, the significance of the passage of time, so when you think about it, there is great significance to the passage of time.”
She often sounds like a fourth grader trying to explain things with her hands.
Finally, her response to tough questions is often to cackle, which turns off a lot of voters.
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Good investing, AEIOU