Ep. 1762 No, Consumer Spending Isn't What Drives the Economy

the tom wood show episode 1762 prepare to set fire to the index card of allowable opinion your daily dose of liberty education starts here the tom woods show folks if you're like me when you criticize the federal reserve you get all these lackey style responses why the fed has made the economy more stable you don't want to go back to the 19th century do you all kinds of arguments like that well you can blow those and others out of the water with my free ebook our enemy the fed grab it at ourenemythefed.com hi everybody tom woods here before i bring on our guest for today i want to mention something that the kind of person who would listen to this episode might be interested in and i thought you might want to know about it last year i promoted a really really successful documentary mini series that's now been updated for 2020 and it's called money revealed and it features several well-known very successful libertarians like john mackey i would think most listeners of this podcast would be familiar with john mackey the ceo of whole foods and you would also know that he's a libertarian but also patrick byrne former ceo of overstock.com robert kiyosaki author of the book rich dad poor dad even g edward griffin author of the creature from jekyll island a whole bunch of people not all libertarians but well they certainly seem libertarian leaning to me and some of them are indeed libertarians anyway the idea is it's a nine episode series and in these episodes each of these people they talk about how they became successful what they did and then once they became successful what did they do with the money because that is a question people ask a lot what do i do with my money i just put it in the bank and let it earn a negligible amount of interest what do i do with it at the same time i don't want to lose it so what do i do with my money they answer those sorts of questions as well i just got rave reviews about this series last year so i thought you might want to know about it but the sooner you sign up to watch it the better because if you sign up in advance to watch it you don't have to pay to watch it but if you wait they're going to make you buy the whole series so if you want to see the thing free then go sign up right now like before you do anything else because i guarantee you you're going to thank me for this tomwoods.com money revealed is a quick way to get there and sign up to watch the entire series for free tomwoods.com money revealed all right talking today to mark skousen who is the author of many books he is the publisher for 40 years now as of 2020 of the investment newsletter forecasts and strategies and he's very well known as the creator and host of freedom fest which is held every july in las vegas and we're going to talk today about a number of relevant things but in particular we're going to be talking about a concept that everybody's got to grasp if you want to have a real understanding of the economy you can't just look at gdp because of what that leaves out a lot of people will say to you that the consumer is at the center of the economy and the entire economy they think is consumers handing money to retail stores that's what the economy is and because of that they have really really bad destructive policy ideas because they think anything that encourages consumers to go out and give green pieces of paper to clerks at retail stores is what the economy needs the economy is actually a little bit more sophisticated than that as it turns out and that sophistication is captured much better in something called gross output which is a concept and a statistical aid for us that mark skousen has been advocating for many years so mark welcome back to the show nice to uh be back on your podcast uh you're spreading the word bigger and bigger groups all the time it's fantastic thank you thank you i was very glad to have you over at my house uh some time ago a week and a half ago or so uh by the time this airs and um i want to talk about a couple things in particular one that's been associated with your name for quite some time and a recent development relating to it and that is the concept of gross output now listen folks you stay tuned to this episode don't think it's technical economics and therefore it's not for you no it is for you because this is how you understand what's really happening in the economy as opposed to the superficial view you might get from let's just say other more frequently used figures so let's start off with gross output i think i like steve forbes's analogy right where he compares gdp to an x-ray and the gross output figure to a cat scan yeah i like that as well he has a it's just a colorful metaphor another fellow of mine uh a friend of mine who's a private economist his name is jerry bauer uh he makes a comparison gdp is the flat land and gross output is the sphere so you get that three-dimensional look i i prefer something that financial economists and the financial media understand really well and that is in financial statements we have a top line and a bottom line the top line is sales and revenue and the bottom line is profits are net income and no analyst on wall street would be worth assault if he didn't look at both because you can't have profits over the long term without revenue and revenue is never sufficient to guarantee profits so you need to look at both and see which direction they're headed and it turns out that economists have only looked at the bottom line for years with gdp gdp measures spending at the final stage that is the consumer stage where business and consumers and government are buying finished goods and services that's what gdp measures and it's about 21 trillion dollars but what they leave out is the entire supply chain the goods in process the intermediate goods from the earliest stage you could use the example of uh producing a starbucks coffee you just gdp just measures the value of the final cup of coffee that you're drinking but it does not measure at all the coffee beans the crushing the movement of the production process to the finished good all of that is left out the supply chain is completely left out of gdp so it creates a a lot of misunderstandings and one of the major misunderstandings is that since consumer spending as a percent of gdp is like 70 percent of gdp so everybody goes to this conclusion that consumer spending is the big elephant in the room that that's what drives the economy and if consumers don't spend then we're in terrible trouble and they kind of ignore the business sector and what's happening the supply chain so what gross output does because it measures spending at all stages of production and includes the supply chain then you get a much broader balanced picture and you see that business spending is actually larger than consumer spending it's almost double what consumer spending is so you get a very different picture of the economy and you start focusing now on on what business is doing rather than what the consumer is doing so that's kind of the bottom line of this gross output statistic which i've been arguing uh that we need to add this top line to national income accounting ever since i wrote my book the structure of production which is an austrian theme since 1990 one thing that impressed me is uh that somebody now whose name i've forgotten who comments on stuff like this made what is more or less the standard observation that uh consumer spending drives the economy you hear this over and over the consumer is key and you very patiently wrote and said well i think you're under a misconception here and then you explain the concept of gross output and he realized he had been in error and adopted your view and i thought i just can't believe that in this day and age there's anybody left like this who looks at the data or looks at the arguments and says you know what maybe i was i was in error and i will adopt this correct view so uh congratulations i mean unfortunately i'm so upset by everything going on in the world these days that i'm just downright nasty to people i really have to keep an eye on that and be more like mark skousen because you really attracted someone through honey rather than through vinegar on that one uh yeah and the the person who wrote that he was a he's a macro economist with the oxford club he uh matthew benjamin is his name and it was very comforting to see that there's someone who was listening to a rational argument that i made that consumer spending is not the key factor and the key factor is what is business business spending is much larger it's like 60. it's like two-thirds of the economy while uh consumer spending is really about a third of the economy and actually when you look at the employment factors about 80 percent of people who are employed are in the intermediate supply side stages of the economy working in manufacturing and resources in wholesale rather than the retail markets retail sales represent only about 20 of employment so when you realize there's a lot of these another factor which i'll mention is the 10 leading indicators that the conference board puts out almost every one of them are in the earlier stages of production in manufacturing in the stock market and financing and and that sort of thing and consumer confidence is one of the leading indicators but it's only one out of ten so uh it does give you a sense that things are not what they seem and the big problem the real reason why my friend matthew benjamin made this mistake is because we just had gdp that was the only measure of the economy that anybody cares about and we say that represents total economic output of the economy people are very loose with these terms but if they've ever taken a class in econ 101 they know that gdp deliberately leaves out all the intermediate stages and and just focuses on the final output the final goods and services the finished products that people use and it ignores all this business spending it's like going into the grocery store and only noticing the goods that are there that you buy and you forget about what's in the back room and the trucking and the shipping and the transportation and the manufacturing and the production process all the way back to the earliest stages that's totally ignored and we can't ignore that to have a proper view of proper balance in the economy what's been going on with the release of this statistic recently that has caused you to be commenting on it further i've had three wall street journal articles on this to get the word out it's been a very slow process as i mentioned i i suggested this idea of a top line in national income accounting gross output in my book the structure production which is kind of my magnum opus on this subject which i wrote in 1990 and published by nyu press and then i would needle from time to time the bureau of economic analysis the bea which is part of the commerce department i said you know you really need to have this top line in there because you're mis people are mis understanding what gdp is and the fact that they've left out the supply chain and all the factors causing people to misunderstand that consumer spending drives the economy and rather that it's business and if you look at economic growth statistics all of that shows that consumer spending is the effect not the cause of prosperity and technology and uh entrepreneurship and savings and investment that's what drives the higher economic growth and a higher standard of living so finally in april never forget this in actually december of 2013 steve landefeld who was the director of the bea he emailed me and he says well you'll be happy to know after all these years we've decided to start releasing on a quarterly basis just like gdp uh we're going to release joe gross output so i got my first wall street journal editorial and forbes magazine a wall street journal everybody was writing uh including articles that i'd written about this subject and so i got a considerable publicity i've been on cnbc with larry kudlow who's a big fan of rick santelli both of them like this idea of gross output a lot but it still is an upward battle because if you go to the bea website at bea.gov you can look on the opening pages and you cannot find gross output anywhere it's not listed and in fact when the press release comes out they list it under gdp by industry so people i get emails all the time saying where is this gross output statistic so i really had to pressure the bea to be more forthright so i i think i've won the battle about halfway there uh it's still not being accepted by the media one of the positive developments is that they're now releasing go and gdp at the same time but they're not really linking it together as top line bottom line which is what i would like them to do so that the media will pay attention now to gross output because right now it's just they just don't pay attention to it well how can it shed light on what's really going on in the economy i understand the value of it i i understand that the the old view of the consumer being the the story we need to tell is incomplete and that i do want to know what businesses are spending money on on non-consumer goods but is there any way that that can help in our analysis of where we are in the economy yeah and that's where the second part of geo is really valuable the supply chain tells us so much more about what's happening in the economy and for example in 2008 during the financial crisis the supply chain collapsed i mean it dropped like five times faster than gdp and so that was that really reflected how deep and how bad this recession was and why it required all this massive intervention by the fed to keep humpty dumpty put humpty dumpty back together again and then the congress got involved with tarp and so forth so if you looked at nominal gdp it only fell about like two percent during the financial crisis of 2008 so it doesn't look like it's a serious problem but when you look at go dropping 10 15 you say oh my gosh this is this is really serious uh so that's number one and and by the way one of the interesting things that we just looked at and one reason i wrote this wall street journal article on october 3rd is that this time it was different uh this time uh gross output fell about the same as gdp they both fell about eight percent in the second quarter so you didn't get this collapse super collapse in the supply chain like you had in 2008 so it's a bit more optimistic i think in our analysis and that reflect in fact so the final thing i say about this tom is that gross output is a leading indicator the supply chain is a leading indicator because it is saying where we're headed business confidence what is being produced in down the supply chain will end up on what they think is going to happen to consumers so a lot of my private investors are saying gross output is a leading indicator it tells you what gdp will do in the next quarter about three months down the road so for all these reasons uh geo is a valuable new statistic that i'm hoping bea will start releasing uh much sooner because they've had these delays and and i'm not sure they they're rather quiet why it's so difficult to get this gross output statistic out at the same time as gdp when they do their first estimate which is coming out in the end of october uh but it's it's just taking them a while so my my hope is that they will recognize g.o as the top line and release it at the same time as gdp and put it on the front page just like publicly traded companies put on their when they release their financial statement they release the top line and bottom line sales and profits at the same time we need to do the same thing with national income accounting and then i will say i've achieved my goal and it's 20 years and counting but we're coming closer and closer to everyone realizing go and gdp is a great way and by the way it's getting into the textbooks as well so it's it's a it's a long hard process there's the old saying that science progresses one funeral at a time and i'm hoping that that uh in my lifetime i'll be able to see this goal achieved now let's bring this up to the present day in what way can this concept help us make sense of exactly what's happening in the economy right now obviously you have commentators because we're in a very i hate to use the word unprecedented because it's so overused but really economically this is an unprecedented situation because i outside of wartime i can't think of cases where huge sectors of the economy have been shut down or restricted in this way and everybody's trying to understand what what the numbers mean and what's happening what kind of light if any can geo shed on that i think it's really important that geo now again understand that we just really they just released second quarter go so while we don't know what's happening in the third quarter which was just finished we'll know what we see with gdp if you look at gdp now that's put out by the atlanta fed it shows a dramatic recovery about equal to the collapse and that suggests to me that this was all artificial that the lockdown was artificial that it was unnecessary and that we can recover and yes restaurants and entertainment and travel and all this sort of thing has collapsed but they can come back just as fast and the the gross output statistic i think is going to say that because in the second quarter like i said the supply chain did not collapse as four three or four times faster than gdp which is what it did in 2008 that gives me a sense of optimism that it's going to be fairly easy to turn this around and get a v-shaped recovery in the economy now as long as they keep imposing these lockdown restrictions on travel and leisure and sporting events and and concerts entertainment and restaurants and education as well rather than getting back to what it used to be like then we're we're going to have a a u-shaped recovery rather than a v-shaped recovery is the way i'll look at it hey everybody let's take a quick break to thank our sponsor policy genius and that means we need to talk about something you know you need to take care of you know you've been meaning to do it but maybe you haven't yet and it is urgent that of course is life insurance it's halloween this month policy genius wants to mark the occasion by making life insurance less scary right now you could save 50 or more by using policy genius to compare life insurance first head to policygenius.com and in minutes you'll be working out how much coverage you need and comparing quotes from top insurers to find your best price as a matter of fact policy genius will be comparing policies that start at as little as a dollar a day you might even be able to skip the in-person medical exam and the best part is policy genius works for you not the insurance company so if you hit any speed bumps during the application process they will take care of everything and that's the kind of service that's earned policy genius a five-star rating across over 1600 reviews on trustpilot and google so if you need life insurance and you do head to policygenius.com right now to get started you can save 50 or more by comparing quotes policy genius when it comes to insurance it's nice to get it right now i want to go back in time a bit because of something you sent me and i was not aware of i was aware of of course black monday october 19th i guess 1987. when there was a a stock market crash a very severe one and apparently you and you have not done this in the 33 years since but three weeks beforehand you sent out a notice to your newsletter subscribers talk about that yeah before i do let me just mention going back to gross output i do have a website that people can go to called grossoutput.com which will give everybody the latest press releases my wall street journal articles and so forth on that subject on the uh black monday crash of uh october 19th 1987 it's a you know it's something that is in the distant past for most people uh but for me it was very telling because i celebrated my 40th birthday on that day so uh every time october 19th comes up uh people send me email and refer to me as the crash baby and i did actually six weeks not three but six weeks prior to the crash i did send out an alert to all my subscribers to sell all stocks now i have not done this before or since for a couple of reasons uh one is that i found it panicked people so much that they never got back in even though the the bottom was achieved in the stock market the very next day uh the market recovered now uh subsequent to that time uh when you have sell-offs like that we've had nothing since there that is equivalent to a 22 decline that would be like a 6 000 drop in the dow and so i have argued that for a number of reasons a sell all get out of everything makes doesn't make sense number one reason is when people do that they have a hard time getting back in i know people who never got back in the stock market after that and never got back into the market after the 2000 uh collapse in the nasdaq stocks or the 2008 when the stock market fell 55 people get so rattled uh by this that they never get back in and so they miss out on the bull markets and we've had primarily bull markets not bear markets since the 87 crash the second thing is the government is is extremely fast in responding to these crashes and these bear markets when the economy is tanking they engage in rapid aggressive anti-inflation monetary and fiscal policies and they're spending money just like now spending money like crazy running deficits the fed lowering interest rates to zero buying up all kinds of assets and when they're doing that the crash is avoided and you you can get a five percent decline in a day but you're not going to get 22 because the government's too willing to intervene so there those are the reasons why i mean they haven't outlawed bear markets we aren't going to have bear markets but i think 22 percent decline in one day is highly unlikely anymore i'm just thinking though so in other words looking back at 1987 do you think you did the well apart from the the problem of spooking people do you think that was the correct call strategically well actually looking back uh of course i was somewhat young as far as and inexperienced i had been writing my newsletter since 1980 so this was in my eighth year i'm now in my 40th year and looking back on this it probably was a mistake because uh if if i had held people's hand during the crisis and said listen this was just a short-term unexpected crash due to computer generated trades and ex you know irrational exuberance if you will to use alan greenspan's term um we would have been fine we should have stayed in it so it was an important lesson for me and especially since it took me a like a year before i got back in so even as an investment advisor yes i can say i called to crash but equally i could say but i failed in getting people back in at the bottom so my attitude has really changed i've become more uh conservative if you will i never give a sell signal for everything we use stop orders and stuff like that to to build a cash position but we never give an all-out sell signal because i found that it's too disruptive to people's psyche and their psychology because once you get into a large cash position then you're constantly worried well am i missing out on something when do i get back in it's just difficult to manage a portfolio where you're 100 in or 100 out some people try to do it but i think it's a a i don't think people feel comfortable with that strategy i feel like given that the uh election is coming up in less than two weeks now it would be wrong of me to have you on and not say well as a matter of fact when this airs it'll be a week from tomorrow and not ask you for your assessment of trump in terms of the economy now i think of all the presidents we've had in our lifetimes he's the trickiest one to assess because i think he's the least ideological in some ways i mean maybe i'm looking at this superficially but what overall would you say if you had to summarize it well if it wasn't for this pandemic or so-called pandemic of 2020 he would be re-elected probably in a landslide because it's all about the economy as bill clinton pointed out and the economy was doing really well unemployment at extremely low levels unemployment among blacks and minorities at the lowest level in 30 or 40 years a largely a deregulatory environment the tax cuts were very beneficial uh especially for business with the corporate tax rate down to 21 inviting lots of businesses to return to america uh i think overall it was a real i'd give them a very high grade you just kind of ignore the twitters and this undiplomatic and unpresidential statements that trump makes i think if you just look at policies and kind of ignore his rhetoric it all made sense now i'm not a fan of his fair trade protectionist views but i do think it was uh valuable to go after china for intellectual property rights violations but you know to say nafta was the worst trade deal ever it's just nonsense uh it was all the evidence is overwhelming that it was beneficial to both sides uh so i i think that's a checkered uh record but you know 2020 no president has ever won reelection in the midst of a great recession i mean we're still facing some real serious problems due to this lockdown so i'm i'm in the camp that thinks uh it's it's more against trump than than pro biden look it's possible that he pulls a rabbit out of the hat like he did in 2016 wins reelection but there's a lot of republicans who aren't going to vote for him this time that said they were going to vote that voted for him in 2016. election betting odds are predicting uh so does it six over 60 percent chance that biden wins and only 30 some percent for trump however recall that in 2016 the election betting odds had 80 80 percent chance that that uh hillary clinton would win and only 20 chance that trump would win and trump ended up winning so we have to look at the ballot we have to look at the voting in the battleground states and there it's still fairly close but i i uh i was skeptical of trump winning in 2016 and i'm i'm even more skeptical that he'll win in 2020. the biggest fear that we all have is that the democrats will sweep and take over all three branches of government and if that's the case that's when they pushed through the bad agenda when obama had control of both houses and was the president what did he do he passed obamacare he passed dodd-frank and both of these are disastrous as far as regulatory control of the government and healthcare so if the democrats get in together they're going to push through tax increases uh he's no friend of investors he wants to eliminate the long-term capital gains rate meaning that the rate will go from 23.9 percent to over 40 percent maybe even 50 percent i mean he has to get all of this stuff through congress but uh it still sounds to me like a disaster if if in fact the democrats end up controlling everything and that will change our portfolio i mean even this year we've had to focus on gold and silver and technology stocks and play down our our income stocks because they still haven't recovered well we're just going to have to see of course we're going to see pretty darn soon exactly what happens i think if maybe it's hard to know because i might what i keep saying and have been saying for at least a couple of years that trump you know he barely won several of the key states he barely won by razor thin margin so it was going to be difficult to pull that off a second time anyway but he's now you know he's got every possible power center against him but the key thing is i don't think he's done enough to build beyond his base during the four years and i think he needed to do that in order to have any chance to win and so i'm not saying it's impossible for him to win because you never know with this guy but i don't think he's succeeded in doing that and moreover i think if he had had a clearer and frankly more combative position on reopening the country where he armed himself not just with a lot of tweets but with 10 scott atlases and sent them all over the country and and did media blitzes and did press conferences with them to make clear that there's perfectly respectable scientific opinion that says faux she's full of it you know i i think then he would be in better condition yeah i agree with you and and things have changed since 2016 we are in recession people don't like this kind of uncertainty uh they're not sure about the leadership that that trump has had you also have this mail order mail-in voting it's like a third of the people have already voted and that's after seeing the first presidential debate where trump was embarrassingly i mean he didn't smile he was insulting people right and left he may have had the virus even at that point but uh you you do have that problem with the mail order and you also have a lot of republicans you know he keeps insulting his own his own uh senators and and congressmen and stuff and i i just have some real problems with that kind of approach so we are going to have i know there's a number of people are going to have events right after the election we're having one in person as a matter of fact on november 6th and 7th in las vegas if people are interested in joining us for that if they go to freedomfest.com they can get some details on that meeting it's going to be a private meeting it's going to be off the record so and john fund is going to be one of our speakers so it'll be pretty interesting okay absolutely so we'll encourage people to check that out is that wall street journal article uh the one that you sent me the most recent one is that viewable without a subscription uh yes and people can can read that if they go to grossoutput.com i just reprinted the entire article because otherwise you have to subscribe in order to read it all right i'll make sure and link to that at tomwoods.com 1762 our show notes page for today all right well again congratulations on the the triumph of gross output and you know if for people who are paying attention it will help them understand better what's going on and not be tied up with this very superficial view that it's just dollars leaving the consumers hands and going into retail shops that account for everything so very very important so thanks for your time mark and i look forward to seeing you again soon all right tom thank you all right folks that's our episode for today don't forget tomwoods.com money revealed is how you can watch that excellent excellent series there were multiple threads in my private group of people discussing it called money revealed featuring as i say some familiar faces that you're going to enjoy hearing from so check that out tomwoods.com money revealed do it quickly so you can watch the whole thing without having to pay a cent all right thanks everybody see you tomorrow become a smarter libertarian in just 30 minutes a day visit tomwoods.com to subscribe to the show for free and we'll see you next time [Music] like the sound of the tom wood show my audio production is provided by pods worth media check them out at podsworth.com

Channel: TomWoodsTV

Views: 3,670

Rating: 4.9148936 out of 5

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Id: uXh7W2HhZzg

Length: 36min 24sec (2184 seconds)

Published: Tue Oct 27 2020