Happy GO-Day: Wednesday’s Economic CAT Scan Shows Resiliency
This last Wednesday was a milestone for data nerds like me, and for general economic understanding. For the first time, the government released something called ‘Gross Output’ (GO) along with its official GDP numbers. You may not know it, but when economic commentators talk about GDP as though it refers to the nation’s economic output, they really don’t know what they’re talking about. GDP (and its predecessor, GNP) are based on a deeply flawed, Keynesian-distorted understanding of the economy. The statistic skews very heavily towards consumption, and that’s not an accident. It came out of academic circles who had abandoned centuries of sound classical economics in favor of a flattened view of the economy which sees only consumption as important and spending as economic salvation. GO is the beginning of the end for flat-earth economics.
I was an early adopter of the idea of Gross Output because I started interviewing Mark over two decades ago about economic theory. So I’ve had a chance to watch and see how the idea developed and eventually became an official government aggregate, and I hope to continue to observe and use it while it goes on to become a widely acknowledged one. In the meantime, I’m happy to enjoy a competitive edge against economists who rely solely on GDP thinking that they are getting an aggregate of economic output when they are only getting a slice of an aggregate. My friend, Steve Forbes, likes to call GO a CAT Scan of the economy. I would use a similar but slightly different analogy. GDP is like Flatland in the eponymous Victorian novel, a place with only two dimensions. The Flatlanders can’t see a sphere – they only see a circle. They can’t see a cube – they only see a square. Most importantly, they can’t see the Hayekian Pyramid which shows all the stages of production.
GDP is Flatland, whereas GO is Sphereland — it shows an extra dimension ignored by virtually the entire economic commentariat.
I found GO particularly helpful in seeing how the pandemic and subsequent lockdown would affect the economy, but also in looking at various industries in terms of order of magnitude of their respective slice of GO as opposed to GDP. The lockdown was focused on sectors which were skewed towards final stage consumption, such as retail, entertainment, and travel. Seeing that the shutdown was disproportionately skewed towards the world of GDP, as opposed to the phases before, showed how the economy would be more resilient in bouncing back then many anticipated.
That has been proven out in the latest GO/GDP data in which we see that GO fell slightly less than GDP,when in past recessions it fell far more.
This means that the supply chain was more resilient than the demand step, which is exactly what we would logically expect to happen. Large swaths of consumption became illegal. This is good news for the economy because it means supply chains did not collapse. Consumer demand didn’t collapse either – it was just temporarily suppressed. GDP has its place, but honestly in our analysis, its main place is to be subtracted from GO so we can isolate the production process. Its best use is to be taken out of the broader metric.
What’s left is a high volatility, high signal metric which tells us much more than the flatline of consumer spending. As my friend George Gilder has said (following the great mathematician Claude Shannon), information is ‘surprise’. GDP hides too much of the surprise under the signal-suppressing flat line of spending that Milton Friedman described as ‘the Permanent Income Hypothesis’. GO less GDP frees the signal and lets us hear the wisdom of crowds, specifically the crowds of supply managers spread out over the globe with skin in the game.
As a citizen, I hope GO is widely adopted. But as an entrepreneur, I hope my competitors never hear of it.
In the next article in the series, we’ll take a deep dive into the data, which shows how this recession is a recession like none other we’ve seen.
Originally published on Townhall Finance.
Jerry Bowyer is a Forbes contributor, contributing editor of AffluentInvestor.com, and Senior Fellow in Business Economics at The Center for Cultural Leadership.
Jerry has compiled an impressive record as a leading thinker in finance and economics. He worked as an auditor and a tax consultant with Arthur Anderson, as Vice President of the Beechwood Company which is the family office associated with Federated Investors, and has consulted in various privatization efforts for Allegheny County, Pennsylvania. He founded the influential economic think tank, the Allegheny Institute, and has lectured extensively at universities, businesses and civic groups.
Jerry has been a member of three investment committees, among which is Benchmark Financial, Pittsburgh’s largest financial services firm. Jerry had been a regular commentator on Fox Business News and Fox News. He was formerly a CNBC Contributor, has guest-hosted “The Kudlow Report”, and has written for CNBC.com, National Review Online, and The Wall Street Journal, as well as many other publications. He is the author of The Bush Boom and more recently The Free Market Capitalist’s Survival Guide, published by HarperCollins. Jerry is the President of Bowyer Research.
Jerry consulted extensively with the Bush White House on matters pertaining to the recent economic crisis. He has been quoted in the New York Times, The Wall Street Journal, Forbes Magazine, The International Herald Tribune and various local newspapers. He has been a contributing editor of National Review Online, The New York Sun and Townhall Magazine. Jerry has hosted daily radio and TV programs and was one of the founding members of WQED’s On-Q Friday Roundtable. He has guest-hosted the Bill Bennett radio program as well as radio programs in Chicago, Dallas and Los Angeles.
Jerry is the former host of WorldView, a nationally syndicated Sunday-morning political talk show created on the model of Meet The Press. On WorldView, Jerry interviewed distinguished guests including the Vice President, Treasury Secretary, HUD Secretary, former Secretary of Sate Condoleezza Rice, former Presidential Advisor Carl Rove, former Attorney General Edwin Meese and publisher Steve Forbes.
Jerry has taught social ethics at Ottawa Theological Hall, public policy at Saint Vincent’s College, and guest lectured at Carnegie Mellon’s graduate Heinz School of Public Policy. In 1997 Jerry gave the commencement address at his alma mater, Robert Morris University. He was the youngest speaker in the history of the school, and the school received more requests for transcripts of Jerry’s speech than at any other time in its 120-year history.
Jerry lives in Pennsylvania with his wife, Susan, and the youngest three of their seven children.
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