Time to put a new economic tool in the box

John Mauldin July 30, 2014 14:32

Last week we took a deep dive into how the concept of GDP (gross domestic product) came about. We looked at some of the controversies surrounding GDP statistics that we use to measure the growth of the economy, and we noted that the GDP tool seems designed to reflect and serve an economic theory (Keynesianism) that prefers to focus on the demand side of economic activity.

If your measurement of the growth of the economy is entirely defined by final consumption (that is, consumer spending) and government spending, then if you want to try to improve growth you are left with just two policy dials to adjust:

1. How do we increase consumption?

2. How much government spending should there be to stimulate growth when the economy is in a recession?

But there are other ways to measure GDP that would suggest additional policy dials for spurring economic growth.

So what other tool than GDP might we use? On July 25, the Bureau of Economic Analysis started publishing a quarterly statistic called “gross output”. A good part of the reasoning behind this new statistic and the impetus to produce it comes from a book published in 1990 by my friend of 30 years, Dr. Mark Skousen. The book was titled The Structure of Production, and in it Skousen forcefully argued that production rather than demand should be the basis for analyzing the strength of an economy.

Gross output measures the total output of an economy, including investments made by businesses in order to produce their goods, such as capital outlays on new equipment, raw materials, or other business-to-business transactions.

In Structure, Skousen makes the case that modern economists downplay the importance of the business sector in the economy and overstate the importance of consumer spending. He believes that the GDP should not be used as the sole measure of economic activity.

Going back to my more visual “dials” metaphor, when you look at gross output you see that it gives us an additional and much larger dial for stimulating growth than simply trying to increase consumer spending. The real driver of the economy, as measured by gross output, is not consumer spending but private production and business spending.

And indeed, we find that that is where the jobs are, and they are far higher-paying jobs than in the retail sector, which is where final consumption resides.

The writer is an author, a commentator and publisher of the Thoughts from the Frontline newsletter.

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CG

John Mauldin

A noted financial expert, a New York Times best-selling author, an online commentator, and the publisher of investment newsletter Thoughts from the Frontline