Statistically speaking, Keynesian economics is in steep descent

gross output

It’s the subtitle that matters, Gross output will correct the fallacy fostered by GDP that consumer spending drives the economy. The actual title is “At Last, a Better Economic Measure”, it’s from The Wall Street Journal and written by Mark Skousen who has been agitating the statistical agencies in the US for around twenty years to provide just such a measure. And so now they have.

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.

GDP is a formless mess of a statistic that was devised in the 1940s as a measure that went along with the Keynesian notion that higher spending would lead to higher employment. By embedding consumer and government spending into GDP, its put a poisoned apple into the middle of this stat so that now a shift in GDP driven by higher public spending is as misleading an indicator as it is possible to have. GDP does not measure value added although it’s supposed to and therefore does not provide much of an indication about the growth in employment-generating production. So now there is to be a new measure, Gross Output, an economic indicator that will actually provide an indication of what we are interested in knowing. As Skousen writes:

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ignored by the media and Wall Street because the government issued the number annually, and it was two or three years out of date.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..

Misguided isn’t saying the half of it. For the first time we will have a quarterly stat that focuses on the production side of the economy and ignores the Keynesian idiocies of saying that consumer demand and government spending actually drive an economy forward. Outside the textbooks, Keynesian economics is becoming deader by the day.

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18 Responses to Statistically speaking, Keynesian economics is in steep descent

  1. mundi

    I await a Krugman column about this…

  2. What a glorious day!
    First the Greens are copping a hiding in the windmill stakes, and now we are starting to cut into the Keynes Malaise!
    ***Winston does a Happy Dance***

  3. Empire Strikes Back

    This is a game changer (and long overdue).

    Our local free market commentariat must agitate for the official adoption of the metric in Australia.

  4. RMR

    Empire – I like your suggestion. Who should we write to in Treasury (?) to ask for a similar statistic for Aus? Or is the Reserve Bank a better option?

  5. ChrisPer

    You are dreaming.

    There was never a greater excuse for politicians to do what they wnat, and every time the Liars Party gets back in they will open the money taps and watch their union mates shovel it up, while sharing a wink and the knowledge that some will come into the party’s re-election coffers.

  6. Empire Strikes Back

    RMR – not sure. My first step will be to “write my congressman” (as the Seppos say) referencing the US move and demand to know why we don’t have it. Next step will be to correspond with the associations (IPA, ATA, CIS etc).

    Ultimately, if MSM commentators don’t take it up, it will never happen. Henry? Judith?

  7. Empire Strikes Back

    There is opportunity cost to consider. Collecting, analysing and publishing data doesn’t come cheap. It might even impose a compliance burden on industry. If it happens, it will be a political decision.

  8. RodClarke

    it’s the first significant macroeconomic tool to come into regular use since gross domestic product was developed in the 1940s.

    This is really shameful in itself when you consider that Banks data warehouses and electronic payments systems provide so much timely micro and macro data.

  9. mundi
    #1277865, posted on April 24, 2014 at 10:41 am
    I await a Krugman column about this…

    Masochist, are we? The guys an idiot, and will predictably double down on stupid. There may be some entertainment in him wailing, but my money’s on him doubling down on stupid.

  10. Toiling Mass

    It would be interesting to calculate the amounts going back over the past 10-15 years and compare the trends to people’s own recollection – as opposed to GDP.

    From what I gather, GDP didn’t drop significantly over the RGR years, but certainly the productive economy was being bled white and left gasping.

  11. ChrisPer

    Um he innocently asked – isnt that fucking BAS the base data for this number, from every business big and small, so you can just total up that and get the value adding activities in the economy?

    If not, the BAS total each quarter woudl be a good substitute for the real number.

  12. 2dogs

    I don’t have a problem with GDP; adding up everyone’s income in an economy, which is essentially what GDP does, is a genuinely useful measure.

    What I see as a big problem with Keynesianism in the measurement stakes here is its half-hidden “special pleading” that an economy should be measured with boundaries that align to national boundaries. There is no particular reason advanced as to why this should be the case.

    If a theory about an open economy is correct, it should be true whether the economy is defined at a multinational region level or down to an individual household level. Keynesianism is stuck at the national level, and, at the same time, it can’t really explain why it has this restriction.

    Say’s law applies seamlessly regardless of how broadly an economy is defined. It is a truly elegant beast.

  13. Empire Strikes Back

    ChrisPer at 2:30 pm

    Dunno, but if so, it’s a no brainer.

  14. Trent

    Hooray for a slightly-less-hollow-but-still-pretty-meaningless economic aggregate!

  15. RodClarke

    It would be interesting to calculate the amounts going back over the past 10-15 years and compare the trends to people’s own recollection – as opposed to GDP.

    From what I gather, GDP didn’t drop significantly over the RGR years, but certainly the productive economy was being bled white and left gasping.

    Per capita GDP = people’s own recollection and was negative for many quarters during the RGR years.

  16. Yohan

    Mark Skousen’s book called ‘The Structure of Production’ is brilliant. Probably the best exposition of Austrian economics in the Marco sphere. A pdf copy of an early edition can be found…..

    http://www.institutcoppet.org/wp-content/uploads/2013/09/Skousen-Structure-production.pdf

  17. Toiling Mass

    Per capita GDP = people’s own recollection

    My own suspicion is that people experienced harder times than GDP would suggest, and that Gross Output would better reflect the severity of the downturn.

  18. sdfc

    It appears Steve doesn’t know what GDP measures. Input-output tables form part of the GDP numbers and include government.

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