Gross Output: Is This a Useful Measure?

Is there reason to be enthused? Unfortunately I've lost track of a recent blog post which praised gross output as a "better" measure, only to reminded of it when a commenter asked Scott Sumner how he felt about gross output. Scott's reply: "Gross output measures the same output multiple times. Why would you do that?" Afterwards I did a quick online search and was surprised to find little on the subject. Although as a measure, it has been around for decades and is now being published quarterly by the Bureau of Economic Analysis. This WSJ article from April, calls the gross output measure the "make" economy, which includes

...total sales from the production of raw materials through intermediate producers to final wholesale and retail trade. Valued at more than $30 trillion at the end of 2013, it's almost twice the size of gross domestic product, and far more volatile.

Some readers may want to know: given my emphasis on supply side factors, why would I have issues with this measure? My concern is that the measure could potentially be used to mislead, rather than inform. Why so? Complaints regarding GDP in the WSJ article just didn't hold water: in particular the grumbling that GDP overemphasized consumer spending and government activity.

For one thing, consumers are everybody - that is, GDP is total spending activity on the part of everyone. The fact that GDI is a close substitute for GDP figures, means total spending capacity is more on target than Mark Skousen implied in his article. I would not want to see gross output figures used to obstruct total spending levels, particularly if central bankers become too tempted to subtract from total spending in hopes populations will never notice. And indeed, an emphasis on gross output could be another convoluted means for taking the eye off the ball - as if the Fed didn't have enough means already.

There is no need to pretend that gross output can somehow fill in for either services, government activity or even the missing output of the Great Recession. Let's hope this measure does not become an austerity tool, for instance. In the WSJ article, Mark Skousen referred to GDP as "a country's standard of living and economic growth", but that is only true up to a point.

After all, the most beneficial aspect of GDP is monetary: it provides a snapshot of monetary flows at particular moments in time. This is vitally important, because all economic activity is dependent on the timely nature of monetary provision. As such, GDP measures exist to represent the money which central bankers need to have available for the public at any given time, so that all can follow through on recent economic commitments and obligations to one another.

Unfortunately, there is a tendency on both the left and the right to downplay the inherently practical nature of GDP, and the basic monetary function it is capable of providing. To be sure, there are many aspects of monetary policy which can be difficult for the layperson to follow. But the usefulness of GDP, should not have to be one of them.