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The goalposts are moving

By bob2356 following x   2015 Mar 13, 10:11pm 18,980 views   35 comments   watch   nsfw   quote     share    


http://www.theguardian.com/us-news/2015/mar/13/white-house-pointedly-asks-uk-to-use-its-voice-as-part-of-chinese-led-bank

The US is pissed that Britain has joined the Chinese alternative to the US controlled IMF and World Bank. Some (but not all) members are China, India, Indonesia, Kazakhstan, Mongolia, etc. Members are typically rapidly growing and/or resource-rich developing nations.

The China International Payment System (CIPS) goes on line this year which allows settlements totally outside the us and the dollar.

The BRICS are bring the New Development Bank live in 2015 with 200 billion in capital. The US is totally shut out.

Airbus will be selling jets in euros as well as dollars.

The US is going to continue to see a steady and increasing shift away from the dollar around the world. Drip, drip, drip. Arrogance has a price. But wait, isn't the dollar strong? Well maybe, maybe not. Short term fluctuations, yes, Long term trend no not at all.

1   turtledove   ignore (0)   2015 Mar 13, 10:17pm   ↑ like (3)   ↓ dislike (0)   quote   flag        

The Great Economic War is going to suck!

2   bob2356   ignore (4)   2015 Mar 13, 10:32pm   ↑ like (3)   ↓ dislike (1)   quote   flag        

turtledove says

The Great Economic War is going to suck!

All of history has been the great economic war. There's nothing new here. People just think it's different this time.

3   Bellingham Bill   ignore (5)   2015 Mar 14, 8:04am   ↑ like (1)   ↓ dislike (1)   quote   flag        

This figure hit me pretty hard:

http://www.bea.gov/newsreleases/international/intinv/intinvnewsrelease.htm

Since 2010 our collective net indebtedness has doubled.

By late 2006 I fully understood how the housing bubble was supporting the Bush Recovery; I wonder if that NIIP print is what is supporting the present recovery.

We run up a foreign debt, the Fed prints the money to restock domestic money supply. . .

4   Blurtman   ignore (1)   2015 Mar 14, 8:34am   ↑ like (5)   ↓ dislike (1)   quote   flag        

American Mystery Story: Consumers Aren’t Spending Even In a Booming Job Market

Yes, it is a great mystery to 95% of journalists and economists. Because they have never learned to even contemplate that perhaps people can be so deep in debt that they have nothing left to spend. Instead, their knowledge base states that if people don’t spend, they must be saving. Those are the sole two options. And so if the US government reports that 863,000 underpaid new waiters have been hired, these waiters have to go out and spend all that underpayment, they must consume. And if they don’t, that becomes The American Mystery Story.

Let’s see. Gas was cheaper, so people spent less on that. And that drove down retail sales. But wasn’t it supposed to drive them up? Wasn’t that the boost the economy was predicted to get? You mean to tell me that lower gas prices actually function to drive spending down? That our newfound platoon of waiters took all that newfound money and spent it on .. nothing at all? Not to worry.

There is no mystery anywhere to be found in the fact that US retail sales don’t follow the jobs trend. Not if you look at what kind of jobs they are, let alone at all the other made up and manipulated numbers that are being thrown around about the US economy.

The only mystery is why everyone persists in talking about a recovery. That recovery will never come, simply because all 90% of Americans do is pay for the other 10% to get richer. There are many other factors, but that all by itself makes a recovery a mathematical mirage.

http://www.theautomaticearth.com/2015/03/the-american-story-is-a-mystery-only-to-economists/

5   indigenous   ignore (0)   2015 Mar 14, 10:00am   ↑ like (1)   ↓ dislike (2)   quote   flag        

The dollar is getting long in the tooth:

6   indigenous   ignore (0)   2015 Mar 14, 10:06am   ↑ like (1)   ↓ dislike (2)   quote   flag        

Bellingham Bill says

Since 2010 our collective net indebtedness has doubled.

By late 2006 I fully understood how the housing bubble was supporting the Bush Recovery; I wonder if that NIIP print is what is supporting the present recovery.

We run up a foreign debt, the Fed prints the money to restock domestic money supply. .

That chart is quite prescient, can you get one for domestic investment?

7   HEY YOU   ignore (7)   2015 Mar 14, 11:01am   ↑ like (3)   ↓ dislike (1)   quote   flag        

Well,everyone should vote for Democrats & Republicans. I would like to thank the dumb ass voters for their fine input over the years to lead us to this pile of shit.

8   lostand confused   ignore (0)   2015 Mar 14, 11:06am   ↑ like (3)   ↓ dislike (0)   quote   flag        

Except oil, we really don't need to import much. Stop free trade and go into a good old fashioned trade war with China. They need to export. But nah our politicians are united behind signing the biggest free trade deal in our history-in secret.

9   Strategist   ignore (2)   2015 Mar 14, 1:09pm   ↑ like (0)   ↓ dislike (2)   quote   flag        

lostand confused says

Except oil, we really don't need to import much. Stop free trade

I'm not giving up my Prius. Nor am I giving up the cheap Chinese crap in Walmart, Scotch from Scotland, French wine, German and Korean appliances, generic drugs from India, and fruits from South America.
Only those who buy "All American" have a right to demand an end to free trade.

10   HonkpilledMaster   ignore (5)   2015 Mar 14, 4:21pm   ↑ like (0)   ↓ dislike (1)   quote   flag        

Reserve Currency and Financial Power follows Industrial Output.

Look in any store, from the US to Uruguay, and it's the same story: The shelves are largely full of Chinese made goods.

It's also why US and US-European sanctions will fail: It cuts off the target from Western products, but so what? China makes it all, too.

11   indigenous   ignore (0)   2015 Mar 14, 5:18pm   ↑ like (1)   ↓ dislike (4)   quote   flag        

thunderlips11 says

Look in any store, from the US to Uruguay, and it's the same story:

I splained this to you before Lips. Capital goods dwarf the consumer goods market. To illustrate this the Chinese GDP is at the most 60% of the US GDP, how do you think that can be?

12   bob2356   ignore (4)   2015 Mar 14, 8:23pm   ↑ like (1)   ↓ dislike (1)   quote   flag        

indigenous says

I splained this to you before Lips. Capital goods dwarf the consumer goods market. To illustrate this the Chinese GDP is at the most 60% of the US GDP, how do you think that can be?

So how big is the capital goods sector and how big is the consumer goods market? Or is this just another trust me it's true because I believe it should be true statement?

13   Bellingham Bill   ignore (5)   2015 Mar 14, 8:49pm   ↑ like (2)   ↓ dislike (1)   quote   flag        

"Capital goods dwarf the consumer goods market."

This is perhaps the most retarded assertion I've seen on the internet, akin to 'the Moon dwarfs the Earth'.

It reveals a fundamental and rather stupendous lack of understanding of how economies are structured and wealth is produced in them.

14   indigenous   ignore (0)   2015 Mar 14, 10:54pm   ↑ like (1)   ↓ dislike (4)   quote   flag        

bob2356 says

So how big is the capital goods sector and how big is the consumer goods market? Or is this just another trust me it's true because I believe it should be true statement?

Since the government only recently started tracking this it is hard to say. I have heard that it is over half of the economy.

You can look at the numbers here titled GO, Gross Output

http://bea.gov/industry/gdpbyind_data.htm

This explains how it works:

What is industry gross output?
Gross output of an industry is the market value of the goods and services produced by an industry, including commodity taxes. The components of gross output include sales or receipts and other operating income, commodity taxes, plus inventory change. Gross output differs from value added, which measures the contribution of the industry’s labor and capital to its gross output.

- See more at: http://www.bea.gov/faq/index.cfm?faq_id=183#sthash.ObkPz7FO.dpuf

http://www.bea.gov/faq/index.cfm?faq_id=183

and here

What is gross output by industry and how does it differ from gross domestic product by industry?
Gross output by industry and gross domestic product (GDP) by industry are both highly useful economic statistics that are published as part of BEA's industry accounts. Gross output is principally a measure of an industry's sales or receipts, which can include sales to final users in the economy (GDP) or sales to other industries (intermediate inputs). Gross output can also be measured as the sum of an industry's value added and intermediate inputs. Value added (i.e. GDP) consists of compensation of employees, taxes on production and imports, less subsidies, and gross operating surplus. Intermediate inputs refer to the value of both foreign and domestically produced goods and services which are used as energy, materials, and purchased services as part of an industry's production process. Value added does not include intermediate inputs. Gross output does. In the industry accounts, gross output is presented annually for 402 industries and 69 commodities.

The industry accounts strive to present statistics that illustrate the industry dynamics that play out within the overall economy. Measures of the gross output of each industry, the purchases of intermediate inputs from other industries, and value added measures tell us about the contribution of an industry or sector to GDP. At the industry level, gross output is a worthwhile measure to track — especially in relation to value added. For some industries like manufacturing the total amount that is produced and sold as intermediate inputs to other industries are important components of the final products sold in the economy.

Because gross output reflects double-counting — both the sales of intermediate and final products — it is often referred to as "gross duplicated output." In contrast, industry value added is defined as the value of the industry's sales to other industries and to final users minus the value of its purchases from other industries. Value added is a non-duplicative measure of production that when aggregated across all industries equals GDP. It provides a complimentary indicator to that of final sales. While gross output is a useful measure of an individual industry's output, gross output for the economy as a whole double-counts sales between industries and is a less than reliable measure of aggregate business cycles or growth.

Gross output by industry is an essential statistical tool needed to study and understand the interrelationships of the industries that underlie the overall economy. However, because of its duplicative nature, it may not be a good stand-alone indicator of the overall health of an industry or sector. What can one infer about the economic health of an industry solely from the fact that gross output increases? Nothing, without understanding what happened to the change in intermediate inputs and to value added. Did the increase in gross output simply reflect a change in the extent of outsourcing or could it reflect a more substantive, fundamental change in the economy? Gross output alone does not provide enough information to answer that question. Moreover, focusing solely on gross output is likely to exaggerate the cyclical-nature of the economy, particularly for sectors that are more sensitive to this cyclicality, like manufacturing. For example, value added for durable-goods manufacturing dropped 15 percent in 2009, while gross output dropped 19 percent. The decline in gross output is much more pronounced than the decline in value added because it includes each of the successive declines in the intermediate inputs supply chain required to manufacture the durable goods.

http://www.bea.gov/faq/index.cfm?faq_id=1034

15   indigenous   ignore (0)   2015 Mar 14, 10:57pm   ↑ like (2)   ↓ dislike (5)   quote   flag        

Bellingham Bill says

"Capital goods dwarf the consumer goods market."

This is perhaps the most retarded assertion I've seen on the internet, akin to 'the Moon dwarfs the Earth'.

It reveals a fundamental and rather stupendous lack of understanding of how economies are structured and wealth is produced in them.

It does, so I guess that makes you dumber than a retard?

Why don't you fetch that domestic investment graph?

16   Bellingham Bill   ignore (5)   2015 Mar 15, 2:41pm   ↑ like (2)   ↓ dislike (2)   quote   flag        

In the Austrian world, horsecarts push the horses and water flows uphill.

http://www.libertyclassroom.com/courses/john-maynard-keynes-his-system-and-its-fallacies/the-calculation-of-gdp-with-durable-capital-goods/

Without demand from consumers for final goods, there is no need to produce or employ the required capital goods.

And capital goods that fail to produce more than their acquisition cost in additional output are by definition bad capital investments.

I don't need a FRED chart to show this. Anyone with a room-temperature functional IQ and/or a passing acquaintance with real-world capitalism -- i.e. not an Austrian -- already knows this is a fundamental constraint on how private enterprise normally operates.

But, here ya go : )

17   indigenous   ignore (0)   2015 Mar 15, 3:29pm   ↑ like (1)   ↓ dislike (3)   quote   flag        

Generally the idea is to collect information on investment in Capital Goods which a business has to buy in order to produce the Gross Domestic Goods. This is not included in GDP yet is larger than GDP. So just looking at GDP skews the view. For instance in 2009 GDP showed a blip where as Gross Output and your graph's red line shows a large drop in Capital Investment.

By now you know, or you will remain oblivious in perpetuity, that investment drives the economy, not consumption. So the gross output number is more prescient.

18   bob2356   ignore (4)   2015 Mar 15, 4:14pm   ↑ like (0)   ↓ dislike (1)   quote   flag        

indigenous says

Generally the idea is to collect information on investment in Capital Goods which a business has to buy in order to produce the Gross Domestic Goods. This is not included in GDP yet is larger than GDP. So just looking at GDP skews the view. For instance in 2009 GDP showed a blip where as Gross Output and your graph's red line shows a large drop in Capital Investment.

By now you know, or you will remain oblivious in perpetuity, that investment drives the economy, not consumption. So the gross output number is more prescient.

What are you talking about. Gross fixed capital formation, what you are calling capital goods, is much smaller than gdp. It's 14.7% in the us. Look at BB's chart. You did catch that there are two different scales didn't you? If not then read some of this. http://www.tradingeconomics.com/united-states/gross-fixed-capital-formation http://www.economicshelp.org/blog/6536/economics/gross-fixed-capital-formation/

You've heard it's over half of the economy? Who from? These are not hard things to look up yourself.

19   indigenous   ignore (0)   2015 Mar 15, 5:08pm   ↑ like (1)   ↓ dislike (3)   quote   flag        

bob2356 says

You've heard it's over half of the economy? Who from? These are not hard things to look up yourself.

I gave you the references from the BEA.

Steven Landefeld, director of the BEA, says this new macroeconomic tool offers a "unique perspective" and a "powerful new set of tools of analysis." Gross output is an attempt to measure what the BEA calls the "make" economy—the total sales from the production of raw materials through intermediate producers to final wholesale and retail trade. Valued at more than $30 trillion at the end of 2013, it's almost twice the size of gross domestic product, and far more volatile.

From here:

http://www.wsj.com/articles/SB10001424052702303532704579483870616640230

20   bob2356   ignore (4)   2015 Mar 15, 9:56pm   ↑ like (0)   ↓ dislike (1)   quote   flag        

You said

indigenous says

Capital goods dwarf the consumer goods market

Now capital goods has morphed into gross output somehow. They are not synonyms or even close. Which are you talking about? Are you saying gross output dwarfs the consumer goods market? Of course it does, it's all the sales, taxes, materials, and the final consumer sale. So what? What does that have to do with the price of tea in china? Gross output includes the value of the materials. So if you make a car and sell it then value of all the parts and materials are added to the final sale price along with taxes. But the parts and materials are used up and sold with the car, they aren't sitting somewhere available to sell again. That's why GDP is the net number.

Capital goods can't exceed consumer goods. If the cost of setting up your factory exceeds the sales of all the goods ever produced by the factory then it's called bankruptcy.

21   indigenous   ignore (0)   2015 Mar 15, 10:06pm   ↑ like (1)   ↓ dislike (3)   quote   flag        

bob2356 says

Now capital goods has morphed into gross output somehow

Same diff

bob2356 says

They are not synonyms or even close.

No they are not they are identical.

bob2356 says

Are you saying gross output dwarfs the consumer goods market?

Yes

bob2356 says

Capital goods can't exceed consumer goods. If the cost of setting up your factory exceeds the sales of all the goods ever produced by the factory then it's called bankruptcy.

No that is what you are missing. GDP does not include the cost of setting up the business. Anyone in business knows that you want to be selling to the capital goods market because it is much bigger and easier to make repeat sales, this is industrial sales. It doesn't show up because it is not part of the actual final goods sold it is the stuff that makes stuff. It is why the US is the biggest manufacturing country in the world, because of capital goods.

22   bob2356   ignore (4)   2015 Mar 15, 11:02pm   ↑ like (0)   ↓ dislike (1)   quote   flag        

indigenous says

bob2356 says

Now capital goods has morphed into gross output somehow

Same diff

bob2356 says

They are not synonyms or even close.

No they are not they are identical.

You have no idea what you are talking about. Capital goods are any tangible assets that an organization uses to produce goods or services such as office buildings, equipment and machinery. Taxes, materials and inventory used in gross output are NOT captital goods. Don't believe me google it and look at the definitions.

indigenous says

No that is what you are missing. GDP does not include the cost of setting up the business.

The formula for GDP is
GDP = C + I + G + (EX – IM)
where
C = private consumption
I = private investment
G = government expenditure
EX = exports of goods and services
IM = imports of goods and services

Investment (I) (also called gross private domestic investment) is about 14% of GDP and most certainly includes what you are calling industrial sales (it's actually called non residential investment) or what you call setting up a business. Here is a good explanation http://mic.com/articles/15168/us-gdp-how-three-types-of-investments-impact-economic-growth Investment component of GDP was just expanded to include R&D spending, art, music, film royalties, books, theatre. Didn't you get this stuff in economics class?

. indigenous says

It is why the US is the biggest manufacturing country in the world

Not on a per capita basis.

23   indigenous   ignore (0)   2015 Mar 15, 11:05pm   ↑ like (1)   ↓ dislike (0)   quote   flag        

bob2356 says

You have no idea what you are talking about.

Did you read the article? Are you saying that the WSJ and the BEA got it wrong but you know more than them?

24   bob2356   ignore (4)   2015 Mar 16, 6:48am   ↑ like (0)   ↓ dislike (1)   quote   flag        

indigenous says

bob2356 says

You have no idea what you are talking about.

Did you read the article? Are you saying that the WSJ and the BEA got it wrong but you know more than them?

No it's subscription only. Either post an ariticle that's not subscription or cut and paste the parts of the WSJ and BEA articles that say capital goods is the same as gross output and that non residential investment is excluded from gdp. I'll be waiting, waiting, waiting, waiting.

Did you read your own articles explaining gross output double counting along with the limitations and uses of gross output?

25   indigenous   ignore (0)   2015 Mar 16, 7:12am   ↑ like (1)   ↓ dislike (0)   quote   flag        

bob2356 says

No it's subscription only.

A trick is to copy and paste the title into Google and you can get the article.

Here is the whole thing, hopefully you read this sooner than " The Great Deformation"

At Last, a Better Economic Measure
Gross output will correct the fallacy fostered by GDP that consumer spending drives the economy.
By MARK SKOUSEN
April 22, 2014 7:35 p.m. ET
Starting April 25, the Bureau of Economic Analysis will release a new way to measure the economy each quarter. It's called gross output, and it's the first significant macroeconomic tool to come into regular use since gross domestic product was developed in the 1940s.

Steven Landefeld, director of the BEA, says this new macroeconomic tool offers a "unique perspective" and a "powerful new set of tools of analysis." Gross output is an attempt to measure what the BEA calls the "make" economy—the total sales from the production of raw materials through intermediate producers to final wholesale and retail trade. Valued at more than $30 trillion at the end of 2013, it's almost twice the size of gross domestic product, and far more volatile.

ENLARGE
CHAD CROWE
In many ways, gross output is a supply-side statistic, a measure of the production side of the economy. GDP, on the other hand, measures the "use" economy, the value of all "final" or finished goods and services used by consumers, business and government. It reached $17 trillion last year.

The measure of the economy's gross output has been around since the 1930s. It was developed by the economist Wassily Leontieff, but he focused on individual industries, not the aggregate data as a measure of total economic activity. Gross output has largely been ignored by the media and Wall Street because the government issued the number annually, and it was two or three years out of date. That should change now that it will be released along with GDP every quarter. Analysts and the media will be able to compare the two.

Why pay attention to gross output? For starters, research I published in 1990 shows it does a better job of measuring total economic activity. GDP is a useful measure of a country's standard of living and economic growth. But its focus on final output omits intermediate production and as a result creates much mischief in our understanding of how the economy works.

In particular, it has led to the misguided Keynesian notion that consumer and government spending drive the economy rather than saving, business investment, technology and entrepreneurship. GDP data at the end of 2013 put consumer spending first in importance (68% of GDP), followed by government expenditures (18%), and business investment third (16%). Net exports (-2%) makes up the difference.

Thus journalists and many economic analysts report that "consumer spending drives the economy." And they focus on retail spending or consumer confidence as the critical factors in driving the economy and stock market. There is an underlying anti-saving mentality in this analysis, as evidenced by statements frequently made during debates on tax cuts or tax rebates that if consumers save their tax refund instead of spending it, it will do no good for the economy. Presidents including George W. Bush and Barack Obama have echoed this sentiment when they encouraged consumers to spend rather than save and invest their tax refunds.

Although consumer spending accounts for about 70% of GDP, if you use gross output as a broader measure of total sales or spending, it represents less than 40% of the economy. The reality is that business outlays—adding capital investment and all business spending in intermediate stages of the supply chain—are substantially larger than consumer spending in the economy. They make up more than 50% of economic activity. The 2012 data are gross output $28,693 billion, and GDP $16,420 billion.

The critical importance of business activity is clear when you look at employment statistics and leading economic indicators. Employees in the consumer side of the economy (retail outlets and leisure businesses) account for about 20% of the labor force, and another 15% work for various levels of government. Yet the vast majority of employees, 65%, work in mining, manufacturing and the service industries.

Most of the leading economic indicators published monthly by the Conference Board are linked to the earlier stages of production and business activity. These include manufacturers' new orders, non-defense capital goods, building permits, unemployment claims and the stock market. Retail sales aren't listed among the 10 leading indicators either in the U.S. or other major nations. Even the highly touted "consumer confidence index" published by the Conference Board and highlighted by the media was changed in January 2012 to the "average consumer expectations for business conditions."

Gross output also does a better job of gauging the ups and downs of the business cycle. For example, in 2008-09, nominal GDP declined only 2% while nominal gross output fell sharply by 8%, far more indicative of the depths of the recession. Interestingly, since the 2009 trough, gross output has been rising faster than GDP, suggesting a more robust recovery.

Finally, as a broader measure of economic activity, gross output is more consistent with economic-growth theory. Studies by Robert Solow at MIT and Robert Barro at Harvard have shown that economic growth comes largely from the supply side—increased technology, entrepreneurship, capital formation and productive savings and investment. Higher consumption is the effect, not the cause, of prosperity.

Gross output complements GDP and can easily be incorporated in standard national-income accounting and macroeconomic analysis. As Steve Landefeld, Dale Jorgenson and William Nordhaus conclude in their important work, "A New Architecture for the U.S. National Accounts" (2006), "Gross output is the natural measure of the production sector, while net output [GDP] is appropriate as a measure of welfare. Both are required in a complete system of accounts."

Gross output measures spending in both the "make" economy (intermediate production), and the "use" economy (final output). It is a better, more comprehensive measure of the nation's economic activity than GDP, and a better indication of the economy's growth prospects.

Mr. Skousen is a Presidential Fellow at Chapman University and the author of "The Structure of Production" (New York University Press, 1990, 2007), which introduced the concept of gross output as an essential macroeconomic tool.

26   indigenous   ignore (0)   2015 Mar 16, 7:27am   ↑ like (1)   ↓ dislike (0)   quote   flag        

bob2356 says

Did you read your own articles explaining gross output double counting along with the limitations and uses of gross output?

Why yes I did, still not the point.

27   indigenous   ignore (0)   2015 Mar 16, 7:35am   ↑ like (1)   ↓ dislike (0)   quote   flag        

See how it is a better indicator of trouble?

28   tatupu70   ignore (0)   2015 Mar 16, 7:37am   ↑ like (1)   ↓ dislike (1)   quote   flag        

indigenous says

See how it is a better indicator of trouble?

Because it's easier to see a bigger bar?

29   indigenous   ignore (0)   2015 Mar 16, 7:39am   ↑ like (1)   ↓ dislike (0)   quote   flag        

Here is another article at Forbes:

Beyond GDP: Get Ready For A New Way To Measure The Economy
This story appears in the December 16, 2013 issue of Forbes.
Comment Now Follow Comments
Cover of "The Structure of Production"
Cover of The Structure of Production

By Mark Skousen

“A balanced Input-Output framework…provides a more accurate and consistent picture of the U. S. economy.”

– Survey of Current Business

Starting in spring 2014, the Bureau of Economic Analysis will release a breakthrough new economic statistic on a quarterly basis. It’s called Gross Output, a measure of total sales volume at all stages of production. GO is almost twice the size of GDP, the standard yardstick for measuring final goods and services produced in a year.

This is the first new economic aggregate since Gross Domestic Product (GDP) was introduced over fifty years ago.

It’s about time. Starting with my work The Structure of Production in 1990 and Economics on Trial in 1991, I have made the case that we needed a new statistic beyond GDP that measures spending throughout the entire production process, not just final output. GO is a move in that direction – a personal triumph 25 years in the making.

GO attempts to measure total sales from the production of raw materials through intermediate producers to final retail. Based on my research, GO is a better indicator of the business cycle, and most consistent with economic growth theory.

GO is a measure of the “make” economy, while GDP represents the “use” economy. Both are essential to understanding how the economy works.

While GDP is a good measure of national economic performance, it has a major flaw: In limiting itself to final output, GDP largely ignores or downplays the “make” economy, that is, the supply chain and intermediate stages of production needed to produce all those finished goods and services. This narrow focus of GDP has created much mischief in the media, government policy, and boardroom decision-making. For example, journalists are constantly overemphasizing consumer and government spending as the driving force behind the economy, rather than saving, business investment, and technological advances. Since consumer spending represents 70% or more of GDP, followed by 20% by government, the media naively concludes that any slowdown in retail sales or government stimulus is necessarily bad for the economy. (Private investment comes in a poor third at 13%.)

For instance, the New York Times recently reported, “Consumer spending makes up more than 70% of the economy, and it usually drives growth during economic recoveries.” (“Consumers Give Boost to Economy,” New York Times, May 1, 2010, p. B1) Or as the Wall Street Journal stated a few years ago, “The housing bust has chilled consumer spending — the largest single driver of the U. S. economy…” (“Home Forecast Calls for Pain,” Wall Street Journal, September 21, 2011, p. A1.)

Or take this report during the economic recovery:

“Friday’s estimates of second-quarter gross domestic product [1.3%, well below consensus forecasts] provided a sobering look at how a decline in public spending and investment can restrain growth….The astonishingly slow growth rate from April through June was due in large part to sluggish consumer spending and an increase in imports, which subtract from growth numbers. But dwindling government spending also held back growth.” (“The Role of Government Spending,” New York Times, July 29, 2011.)

In short, by focusing only on final output, GDP underestimates the money spent and economic activity generated at earlier stages in the production process. It’s as though the manufacturers and shippers and designers aren’t fully acknowledged in their contribution to overall growth or decline.

Gross Output exposes these misconceptions. In my own research, I’ve discovered many benefits of GO statistics. First, Gross Output provides a more accurate picture of what drives the economy. Using GO as a more comprehensive measure of economic activity, spending by consumers turns out to represent around 40% of total yearly sales, not 70% as commonly reported. Spending by business (private investment plus intermediate inputs) is substantially bigger, representing over 50% of economic activity. That’s more consistent with economic growth theory, which emphasizes productive saving and investment in technology on the producer side as the drivers of economic growth. Consumer spending is largely the effect, not the cause, of prosperity.

Second, GO is significantly more sensitive to the business cycle. During the 2008-09 Great Recession, nominal GDP fell only 2% (due largely to countercyclical increases in government), but GO collapsed by over 7%, and intermediate inputs by 10%. Since 2009, nominal GDP has increased 3-4% a year, but GO has climbed more than 5% a year. GO acts like the end of a waving fan. (See chart below.)

Screen Shot 2013-11-26 at 8.49.25 PM

I believe that Gross Output fills in a big piece of the macroeconomic puzzle. It establishes the proper balance between production and consumption, between the “make” and the “use” economy, and it is more consistent with growth theory. As Steve Landefeld, director of the BEA, and co-editors Dale Jorgenson and William Nordhaus state in their work, A New Architecture for the U. S. National Accounts (University of Chicago Press, 2006), “Gross output [GO] is the natural measure of the production sector, while net output [GDP] is appropriate as a measure of welfare. Both are required in a complete system of accounts.”

Historical Background

The history of these two economic statistics goes back to several pioneers. Two economists in particular had much in common — they were both Russian Americans who taught at Harvard University, and both won the Nobel Prize. Simon Kuznets did breakthrough work on GDP statistics in the 1930s. Following the Bretton Woods Agreement in 1946, GDP became the standard measure of economic growth. A few years later, Wassily Leontief developed the first input-output tables, which he regarded as a better measure of the whole economy. I-O accounts require examining the “intervening steps” between inputs and outputs in the production process, “a complex series of transactions…among real people.”

I-O data created the first estimates of Gross Output. However, GO was not emphasized as an important macroeconomic tool until my own work, The Structure of Production, was published in 1990 by New York University Press. In chapters 6 and 9, I created a universal four stage model of the economy (see the diagram below) demonstrating the relationship between total spending in the economy and final output.

Screen Shot 2013-11-26 at 8.49.13 PM

In chapter 6, I made the point that GDP was not a complete picture of economic activity, and compared it to GO for the first time, contending that GO was more comprehensive and more accurately revealed that business investment was far bigger than consumption in the economy.

Since writing Structure, I discovered that the BEA’s Gross Output does not include all sales at the wholesale and retail level. The BEA only includes value-added data for commodities after they become finished products. Gross sales are ignored at the final two stages of production. David Wasshausen, a BEA staff researcher, offers this rationale: since “there is no further transformation of these goods…to the production process, they are excluded from wholesale/retail trade output.”

Therefore, in the 2nd edition of Structure, published in 2007, I created my own aggregate statistic, Gross Domestic Expenditures (GDE), which includes gross sales at the wholesale and retail level and is therefore significantly larger (more than double GDP). For a comparison between GDE, GO and GDP, see my working paper.

The BEA has been compiling GO statistics from input-output data for years, but the media have largely ignored these figures because they came out only every five years (known as benchmark I-O tables). Since the early 1990s, the BEA has been estimating industry accounts annually. Even so, the data was never up-to-date like GDP. (The latest input-output industry accounts are for 2011).

That has gradually changed. Under the leadership of BEA director Steve Landefeld, the BEA now has the budget to report the input-output data, including Gross Output, on a quarterly basis, and has already begun publishing quarterly data prior to 2012. This is a major breakthrough involving the cooperation of the Bureau of the Census, Bureau of Labor Statistics, the Federal Reserve Board, and other government agencies.

Controversies Over This New Statistic

Several objections have been made over the years to the use of GO and GDE. Economists are especially fixated over the perceived problem of “double counting” with GO and GDE. I am the first to note that GO and GDE involve double counting. A commodity is often sold repeatedly as it goes through the resource, production, wholesale and retail stages. Why not just measure the value added at each stage rather than double or triple count? they ask. GDP eliminates double counting and measures only the value added at each stage.

There are several reasons why double counting should not be ignored and is actually a necessary feature to understanding the overall economy. As accountants and financiers know, double counting is essential in business. No company can operate or expand on the basis of value added or profits only. They must raise the capital necessary to cover the gross expenses of the company — wages and salaries, rents, interest, capital tools and equipment, supplies and goods-in-process. GO and GDE reflect this vital business decision making at each stage of production. Can publicly-traded firms ignore sales/revenues and only focus on earnings when they release their quarterly reports? Wall Street would object. Aggregate sales/revenues are important to measure on an individual firm and national basis.

In my own research, I find it interesting that GO and GDE are far more volatile than GDP during the business cycle. As noted in the chart above, sales/revenues rise faster than GDP during an expansion, and collapse during a contraction (wholesale trade fell 20% in 2009; retail trade dropped over 7%).

Economists need to explore the meaning of this cyclical behavior in order to make accurate forecasts and policy recommendations. Double counting counts.

Another objection involves outsourcing and merger/acquisitions. Companies that start outsourcing their products will cause an increase in GO or GDE, while companies that merge with another company will show a sudden decrease, even though there is essentially no change in final output (GDP).

That’s a legitimate concern. Similar problems occur with GDP. When a homeowner marries the maid, the maid may no longer be paid and therefore her services may no longer be included in GDP. Black market activities often fail to show up in GDP data as well. Certainly if a significant trend develops in outsourcing or merger & acquisition activity, it will be reflected in GO or GDE statistics, but not necessarly in GDP. It bears further investigation to see how serious this issue is. No aggregate statistic is perfect, but GO and GDE offer forecasters an improved macro picture of the economy.

In conclusion, GO or GDE should be the starting point for measuring aggregate spending in the economy, as it measures both the “make” economy (intermediate production), and the “use” economy (final output). It complements GDP and can easily be incorporated in standard
national income accounting and macroeconomic analysis. To see how, take a look at the 4th edition of my textbook, Economic Logic (Capital Press, 2014), available in paperback and Kindle.

Mark Skousen is editor of Forecasts & Strategies and a Presidential Fellow at Chapman University in 2014. He is the author of The Structure of Production (New York University Press, 1990, 2007), which introduced the concept of Gross Output as an essential macroeconomic tool.

http://www.forbes.com/sites/realspin/2013/11/29/beyond-gdp-get-ready-for-a-new-way-to-measure-the-economy/

30   indigenous   ignore (0)   2015 Mar 16, 7:42am   ↑ like (1)   ↓ dislike (0)   quote   flag        

tatupu70 says

Because it's easier to see a bigger bar?

Yes

31   zzyzzx   ignore (1)   2015 Mar 16, 7:48am   ↑ like (2)   ↓ dislike (0)   quote   flag        

When I saw the thread title, I assumed that this thread was going to be about Obamacare.

Obligatory:

32   bob2356   ignore (4)   2015 Mar 16, 9:26am   ↑ like (0)   ↓ dislike (1)   quote   flag        

indigenous says

Here is another article at Forbes:

Beyond GDP: Get Ready For A New Way To Measure The Economy

This story appears in the December 16, 2013 issue of Forbes.

Comment Now Follow Comments

Cover of "The Structure of Production"

Cover of The Structure of Production

indigenous says

A trick is to copy and paste the title into Google and you can get the article.

Here is the whole thing, hopefully you read this sooner than " The Great Deformation"

At Last, a Better Economic Measure

No where does either article say capital goods is the same as gross output and that non residential investment is excluded from GDP. You do remember what you said don't you? Here look at it again. Address the question for once.

indigenous says

ob2356 says

Now capital goods has morphed into gross output somehow

Same diff

bob2356 says

They are not synonyms or even close.

No they are not they are identical.

bob2356 says

indigenous says

No that is what you are missing. GDP does not include the cost of setting up the business. Anyone in business knows that you want to be selling to the capital goods market because it is much bigger and easier to make repeat sales

33   indigenous   ignore (0)   2015 Mar 16, 10:14am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Typical Bob, wants to focus on the minutiae instead of discussing the main point.

This is typical because the whole point of the GO stat is that investment drive business not consumption. Which flies in the face of the Keynesians.

34   bob2356   ignore (4)   2015 Mar 16, 11:48am   ↑ like (0)   ↓ dislike (0)   quote   flag        

indigenous says

Typical Bob, wants to focus on the minutiae instead of discussing the main point.

This is typical because the whole point of the GO stat is that investment drive business not consumption.

I would say someone wanting to discuss GDP vs GO without knowing how GDP is calculated or what what capital investment is would be an issue somewhat considerably beyond minutiae. Especially the part where you don't seem understand the word investment. Most the increase in the GO over GDP is in operating expenses, not investment. As your own article says GO captures capital investment AND all business spending in intermediate stages of the supply chain.

No one is discussing what "drives" business. That is your strange liberatarian spin on it. GDP and GO are both simply models to chart economic activity. GO isn't something new, it's been in economics textbooks for decades. The only new thing is BEA is now reporting it quarterly.

Your own articles make the point that GO is a complement to GDP not a replacement. They graph different things in different ways. Did you not read that far? Here is a refresher.

indigenous says

As Steve Landefeld, director of the BEA, and co-editors Dale Jorgenson and William Nordhaus state in their work, A New Architecture for the U. S. National Accounts (University of Chicago Press, 2006), “Gross output [GO] is the natural measure of the production sector, while net output [GDP] is appropriate as a measure of welfare. Both are required in a complete system of accounts.”

indigenous says

In conclusion, GO or GDE should be the starting point for measuring aggregate spending in the economy, as it measures both the “make” economy (intermediate production), and the “use” economy (final output). It complements GDP and can easily be incorporated in standard

national income accounting and macroeconomic analysis. To see how, take a look at the 4th edition of my textbook, Economic Logic (Capital Press, 2014), available in paperback and Kindle.

35   indigenous   ignore (0)   2015 Mar 16, 11:51am   ↑ like (0)   ↓ dislike (0)   quote   flag        

The fact that it gets mentioned or that the BEA is going to report on it are new. But it is a very good barometer that has gone largely ignored.


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