Forbes likes the idea of measuring Gross Ouput

Steve Forbes explains in the latest issue of Forbes magazine why he is looking forward to the compilation of an economic statistic known as Gross Output.

This month a new way to measure the economy will be released, which, as time passes, will have a profound and manifestly positive impact on economic policy and politics.

The statistic is called Gross Output and will be issued by the Bureau of Economic Analysis (housed within the Commerce Department), which also issues GDP numbers. Both will be released on a quarterly basis.

Why is GO such a big deal? Because it measures the economy in a far more comprehensive and accurate manner. GDP represents the value of all final products and services. It ignores all the steps that go into the making of these things. It’s sort of like looking at a carton of milk and paying no heed to everything that goes into creating that milk and getting the carton onto the store shelf.

GDP thus gives a distorted picture of the economy. How many times do we read that consumption represents 70% of the economy and therefore it’s important to “stimulate demand” by increasing government spending?

In figuring GDP, government spending is said to represent 20% of the economy, investment a measly 13%. (Incredibly, imports are counted as a negative for the economy and subtract 3% from GDP. Protectionists love this absurdity.)

GO counts all the intermediate steps in the making of products and services. The results are stunning: Consumption is 40% of the economy, not 70%; government outlays are down to 9%; and business spending soars to 50%.

This new statistic will also better reflect the volatility in the ups and downs of economic activity. The 2007–09 recession was deeper than GDP figures reflected, the recovery somewhat better.

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