here. We will come back to the BEA’s tables in a little bit, as there are some fascinating insights to be gleaned about the US economy.
This first graph compares seasonally adjusted GDP and GO. Notice how much more sensitive gross output was to the 2009 Great Recession. Also note that measuring by gross output we find that the US economy is about $30 trillion in total production and transactions, roughly twice the amount measured by GDP.
We might as well address one of the objections to gross output here. It seemingly “double counts” transactions to produce a final number. And there is no question that it does. But that is not the point. To ignore all of the business activity that it takes to create a product that goes into retail consumption misses the primary driver of employment and wealth creation. All along the production chain, each business adds value to what eventually becomes the final product.
I would not argue that gross output should be the primary tool in the economic measuring box. But neither should GDP. Just like a screwdriver and a hammer, they both have their uses.
Next, let’s compare growth rates of GDP and GO for the last eight years. Notice that these numbers are not adjusted for inflation, so you see the massive falloff in production during the 2009 Great Recession. We use nominal GDP here so that we can have an apples-to-apples comparison. One other thing to note is that GO did not fall in the first quarter of 2014, although GDP did. This goes a long way toward explaining why we saw positive improvement in the employment numbers even when the economy had seemingly fallen into the doldrums if not a quarterly recession.
GO also acted as a leading indicator, at least this one time, of the Great Recession. GO might also suggest that we are not in a recession today. (Please note that this instance doesn’t prove anything, as there are only two data points, and we would need many more to actually establish a semi-predictive relationship. But it has piqued my interest.)
Just for the record, here is what US GO growth versus real GDP growth looks like. You can see the negative real GDP trend clearly in 2011, but again on that occasion a recession was not confirmed by gross output.
Finally, I was curious to see the relationship between the unemployment rate, GDP, and GO. We can clearly see unemployment rising dramatically during the recession (note the inverted scale on the right-hand axis) and then gradually falling along with the solid growth shown in the gross output statistic, in spite of very weak post-recession GDP numbers (in what should have been a recovery).
We also see that GO is significantly more sensitive than GDP is to the business cycle. During the 2008-09 recession, nominal GDP fell only 2% (due largely to countercyclical increases in government spending), but GO collapsed by over 7%, and intermediate inputs fell by 10%. Since 2009, nominal GDP has increased 3-4% a year, but GO has climbed more than 5% a year.
Steve Hanke’s essay on Keynes and Say (excerpted above) concludes with an enthusiastic endorsement of the new BEA gross output statistic and what it will mean for economic analysis. I personally think it will take a good long while for the statistic to work its way into the mainstream, but this is a start, and it’s a good one. Let’s rewind the tape to Steve:
But, when it comes to the public and the debate about public policies, there is nothing quite like official data. So, until now, demand-side GDP data produced by the government has dominated the discourse. With GO, GDP’s monopoly will be broken as the U.S. government will provide official data on the supply side of the economy and its structure. GO data will complement, not replace, traditional GDP data. That said, GO data will improve our understanding of the business cycle and also improve the quality of the economic policy discourse.
So, what makes up the conventional measure of GDP and the new GO measure? And what makes up the gross domestic expenditures (GDE) measure, a more comprehensive, close cousin of GO? The accompanying two tables answer those questions. And for readers who are more visually inclined, bar charts for the two new metrics – GO and GDE – are presented.
[I apologize for the fuzziness of the next two charts – they were this way in the original. –JM]
These changes are big – not only conceptually but also numerically. Indeed, in 2013 GO was 76.4% larger than GDP, and GDE was 120.4% larger. Why? Because GDP measures only the value of all final goods and services in the economy. GDP ignores all the intermediate steps required to produce GDP. GO corrects for most of those omissions. GDE goes even further, and is more comprehensive than GO.
Even though the always-clever Keynes temporarily buried J.-B. Say, the great Say is back. With that, the relative importance of consumption and government expenditures withers away (see the accompanying bar charts). And, yes, the alleged importance of fiscal policy withers away, too.
Contrary to what the standard textbooks have taught us and what the pundits repeat ad nauseam, consumption is not the big elephant in the room. The elephant is business expenditures.
Time to Put a New Economic Tool in the Box
That last paragraph is worth reading twice. And let’s think through what it means. That’s something I think most of us intuitively understand: that private business is the driver of the economy and jobs. If you are trying both to increase the size of the economy (growth) and to raise overall employment, the biggest policy dial, if you look at these alternative measures of the economy, becomes business activity and productivity.
Of course, it is one thing to say that we want to increase business activity and another thing to do it. Elsewhere I have shown evidence that we are now losing more companies than we are creating, for the first time in decades. We are making it so hard in the United States to create new businesses that we are losing the principal driver of economic growth and new jobs. The dual burdens of complex regulations and ever-higher taxes reduce the amount of money available to actually produce products and services for customers.
First, Let’s Kill All the Regulations
How’s this for a catchy new policy for the upcoming presidential election cycle? I would like to see someone promise (and actually follow through with) a mandatory reduction of 20% of all federal regulations in the US. Each cabinet-level department would be required to reduce their regulation count by 5% a year for four years. They would get to choose which rules are unnecessary, duplicative, or just plain dumb. I would count as a double bonus different departments getting rid of rules that conflict with each other’s. (That happens so much that it drives businesses crazy. Such regulations mean that, no matter what you do, you’re violating somebody’s rule.)
And if we really think private production is important, then why not create policies to reward savers and investors rather than punish them? Of course that would mean appointing people to the Federal Reserve who would not suppress interest rates to the benefit of bankers and borrowers and the detriment of savers.
The counterargument will be that lower interest rates spur business growth. And those who support that position will point to charts which show that lower rates have been accompanied by business growth since World War II. I think that is a correlation without causation.
The real cause of post-recession recoveries was not low rates but rather businesses restructuring their operations to become more productive and more responsive to consumer demand. Sure, lower-cost capital is useful, but in the real world of small and medium-sized businesses the driver is productivity and investments which, coupled with proper cost-savings management, create turnarounds.
I’ve lived through a few recessions in the past almost 65 years. The one resounding theme you hear when you talk to business people during a recession is that there is not a lack of low-cost money but rather a lack of customers. So yes, final consumption (consumer spending) is clearly an important part of the growth equation. But these additional measurement tools show that consumption is not the only part, or even the most important part: we need to be just as focused on productivity as we are on consumer demand. It is not either/or. It is both/and.
I find it highly ironic that the very Keynesian economists who deride supply-side economics as trickle-down voodoo support monetary policies that are even more demonstrably trickle-down and which almost all of the research on the wealth effect says do not work. And meanwhile, trickle-down fiscal policies (increased government spending) are somehow supposed to stimulate private production on a long-term basis. All such policies truly do is distort the market and increase the national debt.
Borrowing money today for consumption (as opposed to borrowing to buy productive assets) is simply bringing forward future consumption. That money will have to be paid back in the future, at which time it will not be available for consumption. Debt is future consumption moved forward, and it simply creates current demand at the expense of future demand. Unless of course you live in an academic world where you can increase debt ad nauseum, with no restraints on spending or deficits, whether personal or public.
Where Did the Jobs Come From?
GDP growth in the first quarter was a disquieting -2.9%. Yet unemployment fell? How did that happen? If we go to the gross output statistics in today’s BEA release, which the BEA has broken down by industry, the answer becomes quite clear. Overall, gross output was up marginally for the quarter. But there are sectors within the economy that were humming along on all eight cylinders. Mining, which includes energy production, was up almost 15% over the last year. In fact mining was responsible for all of the growth in gross output for private industries in the first quarter. And we know that energy is where a large percentage of the new jobs are. I should note that the other driver of growth in GO was utilities.
The two main culprits responsible for the negative GDP number last quarter were healthcare and exports. Sure enough, we look in the individual BEA data and see that healthcare and social assistance spending were down.
As a business practice, you generally want to do more of what is working and less of what is not. And if energy production is producing new jobs, shouldn’t we be doing more to encourage energy production? Which will have the added bonus of lowering energy costs? That seems like a twofer to me.
Summing up, I think the BEA is to be commended for giving us another tool in our economic measurement box. GO helps make the point that productivity and private investment are essential to a growing economy. To focus only on consumer spending and government deficits as policy tools is insufficient to produce the desired results and might even sow the seeds of the next crisis, as did the Fed in the last decade.
It is hubris on the part of economists today to think we can turn a few dials and control the business cycle and the economy. There is a role for central banks and monetary policy, just as there is a place for government and deficit spending, but neither of these policy dials should be primary. The main producer of economic growth will always be private industry and individual effort. When government helps to create an environment where entrepreneurship can thrive, we will see economic growth that provides jobs and income. Hayek did not believe it was possible to spend your way out of an economic crash. He believed that genuine recovery from a post-boom crash
