>> Beyond GDP: A Breakthrough in National Income Accounting
by Mark Skousen
"It is apparent that a large part of a country's total production serves for the
production of capital goods and not for the production of consumer goods, and
that the production of capital goods must itself become a specialized branch of
manufacturing." —Wilhelm Ropke 1
Good news! The U.S. Department of Commerce, which compiles Gross
Domestic Product (GDP), has just added a new national income statistic, Gross
Output (GO), as a measure of total spending in the economy. I have been
making the case for this new statistic for over ten years. Now it is a reality. In
The Structure of Production (1990) and Economics on Trial (1993), I was critical
of GDP for two reasons:
First, GDP is a Keynesian concept that measures only the output of final goods
and services and excludes intermediate production. Second, government
spending is included in GDP data, an autonomous addition to national output.2
Both peculiarities of GDP have led to much mischief. In the first case, by
focusing solely on final output, many economists and commentators in the
media have concluded that consumer spending is more important than capital
investment in an economy, based on the fact that consumption expenditures
usually represent about two-thirds of GDP. In the second case, including
government spending in GDP has led many pundits to believe that an increase
in that spending—even if accomplished through deficit spending—will
automatically increase economic growth (or conversely, a cut in government
spending will inevitably lead to a recession). Both conclusions are false.
Most students of economics are unaware of the fact that GDP was created by
Simon Kuznets during World War II to quantify final aggregate demand
according to the new economics of Keynes. As such, GDP ignores all
intermediate spending in the economy, based on the tenuous argument that
earlier stages of production constitute double counting.
However, the goods-in-process sector of the economy—the natural resource,
manufacturing, and wholesale stages—are important for several reasons.
Austrian economist Eugen von Bohm-Bawerk and German economist Wilhelm
Ropke, among others, demonstrated that interest rates and technology greatly
influence the structure of production and that changes in the early stages are
especially important in the business cycle.
In an effort to measure intermediate production, The Structure of Production
introduced a new national income statistic, Gross Domestic Output (GDO)—a
more complete measure of spending at all stages of production—as an
"Austrian" alternative to the Keynesian GDP. It counts spending (sales or
revenues) of firms at all stages of production, not just at the retail level.
GO: A New National Statistic
For a decade I thought my criticisms of GDP had fallen on deaf ears and no one
was interested in using a new national income statistic like GDO that accurately
included total spending in the economy, not just final output. However, I am
happy to report that the Commerce Department's Bureau of Economic Analysis
has just begun to publish a new series called "Gross Output," an annual
measure of total spending at all stages. GO is defined as Intermediate Input (II)
plus GDP (final output).3
Intermediate Input (II) represents the sale of all products in the natural resource,
manufacturing, and wholesale markets. GDP represents the final retail market.
I am currently working on a professional paper analyzing GO and II statistics
and how they increase our understanding of the economy. Since this paper will
not be published for some time, let me give you a few of my preliminary
conclusions. Overall, much of the data appears to confirm several Austrian
themes.
First, the data support the Austrian theory that the structure of production
lengthens as an economy grows. Indeed, from 1987 until 1998 real GDP rose
from $6.1 trillion to $8.8 trillion, or 39 percent (using 1996 as a base year). But
real Intermediate Input (II) increased from $4.3 trillion to $6.5 trillion, or 53
percent, much faster than GDP. In other words, the producer/capital goods
market grew more rapidly than the consumer/retail good market. This suggests
that the number of stages of production increased.
Second, the data seem to confirm the Austrian view that production in the
intermediate processes tends to be more volatile than final output and thus more
sensitive to the business cycle. For example, during the 1990-91 recession, real
GDP fell $31.5 billion, while real II fell $74.6 billion—more than twice retail sales.
Since then, intermediate production has grown substantially faster (41 percent)
than consumer spending (27 percent) from 1991 to 1998. I would like to test
these statistics during previous boom-bust cycles (such as 1973-75 and
1980-82), but unfortunately, the data for II and GO are incomplete prior to 1987.
Third, GO data support the Austrian argument that business investment—not
consumer spending—is the driving force behind economic growth. The
Keynesian argument that consumer spending is the largest sector of the
economy is specious and is based on a misunderstanding of GDP statistics. It
is true that personal consumption expenditures typically represent 67 percent of
GDP, but GDP is not total spending in the economy. On measuring total
spending (GO), one sees that the capital/producer goods industry is
substantially larger than the final consumer/retail goods industry. Using 1998
data, we find that personal consumption expenditures amount to $5.8 trillion,
only 38 percent of GO, and gross business investment (which includes all
intermediate production, plus gross fixed investment) amounts to $7.9 trillion, 52
percent of total spending.
In sum, intermediate production does matter, and GO is a better indicator of
what is happening in the entire economy, not just the retail sector. Hopefully,
the next step will be for the Commerce Department to release up-to-date
quarterly data for GO and II as they currently do for GDP. We could learn a lot
more about the direction of the economy with these new Austrian national
income statistics.<<
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