This article first appeared at The McAlvany Intelligence Advisor on Wednesday, December 4th, 2013:
For the past 25 years, Austrian school economist Mark Skousen, nephew of W. Cleon Skousen (author of The 5000 Year Leap), has been trying to get the Bureau of Economic Analysis (BEA) to count the rest of the economy that the GDP doesn't measure. In April, the BEA will start reporting the GO – the Gross Output – of the US for the first time. Skousen could scarcely contain himself:
Starting in 1990, I have made the case that we needed a new statistic beyond the 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.
The Gross Domestic Product (GDP) statistic has failed in its mission to inform about economic output ever since it was developed at the Bretton Woods Conference in 1944. It measures only “final output” – that is to say, retail sales – and vastly overstates the role of the consumer in the economy, while dismissing all the economic activity taking place underneath. Such activity includes all the costs and investments involved in exploring, finding, extracting, refining, creating and transporting products to market. It has led to the common fallacy endlessly repeated by the media that “the consumer represents 70% of the economy.” No, it does not. Not by a long shot.
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….
Since consumer spending [under GDP analysis] represents 70% or more of GDP … the media naively concludes that any slowdown in retail sales or government stimulus is necessarily bad for the economy….
In short, by focusing only on final output, GDP underestimates the money spent and economic activity generated at earlier stages in the production process….
Using GO as a more comprehensive measure of economic activity, spending by consumers turns out to represent around 40% of total year sales, not 70% as commonly reported.
Spending by business … is substantially bigger, representing over 50% of economic activity.
When the GO is reported by the BEA in April, Skousen expects a number at least twice as large as the GDP, currently reported by the BEA to be $16.8 trillion.
Even with the GO, there are still problems with trying to measure economic output. For instance, no judgment is made about “good” spending and “bad” spending. All spending is counted, good or bad. That leads to conclusions that all spending must be good because it increases GDP: wars, disasters, hurricanes, auto repairs, medical expenses, legal fees, insurance premiums. It fails to measure the difference in spending for a college education compared to spending on alcohol or cigarettes or marijuana. If it's spending, it must be good. Even spending that results from borrowing is counted, ignoring that borrowing is just burdening future generations. It results in silliness such as counting the investment involved in building a new house and then counting the cost to raze it following a flood or a tornado.
And then there's the black market, estimated worldwide at close to $2 trillion annually, and the grey market, and organized crime, and garage sales and flea markets and Craigslist, and so on.
There's the Bitcoin economy, growing at leaps and bounds. How will the BEA measure those transactions taking place on the internet between individuals in different countries using a currency that keeps the transactions opaque? How will they measure the vast improvement in communications that have improved a trillion-fold just since 1971? How will they measure the impact of the miniaturization of the transistor where 100 million of them can now fit on the head of a pin, and where seven billion of them drive Nvidia's graphics chips?
But the real part of the economy is something that cannot be measured at all: the quality of life. How does one measure the value of pleasure gardening, or painting a portrait or a pastoral scene? What about the value of spending time off from work to take the kids to the zoo, or skiing? The information explosion has allowed people the time to develop themselves in the arts, science, and history. How do they count the value of time spent volunteering? As Bret Swanson wrote at TechPolicyToday.com, this vast improvement of communications technology “expands freedom and multiplies possibilities.… Information leads to the next adventure, the next discovery….” Try measuring that.
When Robert Kennedy addressed the students at the University of Kansas in 1968, he said:
“…the gross national product does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials.
It measures neither our wit nor our courage; neither our wisdom nor our learning; neither our compassion nor our devotion to our country.
It measures everything, in short, except that which makes life worthwhile….
It takes just three-and-a-half minutes to view the YouTube video entitled “Reunion” linked below to get a full measure of what makes life worthwhile. Precious little of what will be seen there will ever be picked up and measured either by the GDP or the GO. Life simply cannot be measured that way – thankfully. There's vastly more to this economy than just numbers.
Forbes: Beyond GDP: Get Ready For A New Way To Measure The Economy
TechPolicyDaily.com: Giving thanks for abundance, from Plymouth to Pinterest
CafeHayek.com: Changes in measured GDP aren't capturing everything
YouTube: Google search: Reunion
Bloomberg: GDP: An Imperfect Measure of Progress
heritage foundation: GDP: I Do Not Think It Means What You Think It Means
Current US GDP: $16.8 trillion
Amazon.com: The 5000 Year Leap by Cleon Skousen