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It's Not Consumption that Drives the Economy

Good news from Mark Skousen:
Important Announcement and some good news: It looks like government may be starting to adopt my new macro model, based on my concept of Gross Domestic Expenditures (GDE), rather than the old GDP, which is what gives the false impression that consumption, rather than production and investing, is what makes the difference in the economy.
Skousen has long argued that standard measures in the income and product accounst provide a very misleading picture of actual economic activity – a picture not consistent with a structure of production understanding of the economy. In Skousen words:
Here’s why GDP is proving to be insufficient as “the” national income statistic: By focusing exclusively on final output, GDP measures only finished goods and services, what economists call the “use” economy. In limiting itself to final output only, GDP largely ignores or downplays the “make” economy, that is, the supply chain and intermediate stages of production required to produce all the 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. They note that consumer spending is by far the biggest part of GDP, followed by government. Private investment is a distant third.
Skousen's suggested measure, Gross Domestic Expenditure, gives a more realistic picture and highlights the importance of investment properly measured in overall economic activity: Per Skousen:
GDE is a real eye-opener. It turns out that the “make” economy (GDE) is more than twice the size of the “use” economy (GDP) and is 3-4 times more volatile over the business cycle. It demonstrates that business investment (the supply side of the economy) is much bigger than consumer spending (the demand side of the economy), thus dispelling the notion that consumer spending is the main driver of economic growth. Consumer spending turns out to represent only about 30% of total economic activity (GDE), not 70% as constantly reported.
Skousen reports that he recently received a letter from Steven Landefeld, the director of the Bureau of Economic Analysis (BEA), confirming "that the BEA recognizes the need for a more comprehensive measure of economic activity and will be reporting this new aggregate (called Gross Output) in addition to the quarterly reports on GDP." This new measure should hopefully be extremely helpful for those pursing historical research in capital-structure based macroeconomics. Thanks Mark for being a leader in an endeavor to get a data source that provides a better picture of how an economy actually works.

Nicolai J. Foss

Nicolai J Foss is the Rodolfo Debenedetti Chair of Entrepreneurship at the Bocconi University, Milano.

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