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.