GDP is an inadequate measure of economic health. Here’s a superior alternative.

Why GDP is a Misleading Statistic for Measuring Economic Strength

People supporting ⁢Joe Biden were excited ​that the GDP for the second quarter came in higher than expected, at 2.4%. But here’s the problem:‍ GDP is a bad stat.

The ​reason ‌it’s​ a bad stat ⁣is that it measures the amount of user consumption. You pay a‌ price at the store to buy a product; that goes⁢ into GDP. The government spends a truckload of money; ‌that goes into ‌GDP.

If you buy a bunch of hamburgers, the economy ‌is doing well, according to GDP.‌ If you buy⁤ fewer hamburgers,⁤ the economy is‍ doing poorly. If the government spends‍ unprecedented amounts of⁢ money, that means the economy is doing ⁣well because it gets counted in the GDP.

But ⁢GDP ⁢is a Keynesian‌ model of how the economy works. It assumes ​that the more consumption there is,‌ the better the economy is doing. In​ this view, government spending⁤ supposedly drives the economy rather than business investment, technology, and entrepreneurship.

A Better Statistic: Gross Output

A better statistic to measure the economy ​is gross output, which measures the production side of the economy by measuring the‍ amount of business ⁣investment we make.

Instead of looking at the product you buy at the store, gross output looks at the products purchased ⁤all the way along the chain. If you’re buying⁢ a chair, ⁣it looks at who paid‌ for the wood, who paid for them to be turned into planks of wood,‍ who paid for the screws and the planks and ‍put them⁢ together, and who paid for the ‍varnish.

Research published in 1990 shows‌ gross output does a better job of ‌measuring total economic activity than GDP. Government‌ spending is not a giant chunk of gross⁢ output; it is a ⁣giant chunk of⁣ GDP.

The Keynesian demand-siders suggest that because you spend money, someone makes a product for⁣ you. Supply-siders say that the reality‍ is effectively the reverse: entrepreneurs generate better innovative products and that makes people want to buy them.

The supply-side economics perspective is‌ more accurate and it supports a free market view of the economy ‌— that ‌when people are allowed‍ to ​keep their own ​money, they produce new and ‌better services.

What a ‍consumer-based economy cannot do is ⁣create new ⁣products. It ‍is‌ the supply-sider who creates new product.

This​ is why you see a gap between how Democrats talk about the economy and how Republicans talk about the‌ economy.

Conservatives talk about the value of the entrepreneur.‌ You see a product on ‌the shelf⁣ and then you want‍ to buy⁢ it. Who made⁢ that product? It wasn’t you. ‍Leftists, on the other hand, push the idea‍ that it’s somehow the reverse: consumers ⁣magically‌ create the products through their unrealized demand.

GDP tends to measure‍ economic strength​ by who’s buying the phone, as opposed to measuring economic strength by who invested in the phone, who’s putting money into the phone,⁤ who’s creating ⁤ the phone.

Why Gross Output Matters

Here’s why this is important.

When you look at​ GDP right now, the ⁣economy’s​ going well. But ​if ​you look ⁣at gross output, it’s ⁤not. Business ⁢spending has dropped 9%‍ in real ‌terms over the past two quarters.

So when people ⁢give you​ happy talk about the economy and cite GDP, check the gross output number.

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