From my first class in national income accounting, I’ve had grave doubts about how government spending has been part of the Gross Domestic Product numbers. The decision to do that came in 1934, about the time that most governments in the world were trying to cure the Great Depression by spending money and running deficits.
Two years later, John Maynard Keynes, the world’s most respected economist, said that this is exactly the right thing to do. It does not matter where the demand comes from, whether consumers, producers, or government. All that matters is that there is demand and the money to pay for it, even if it has to be printed.
That began a very long process in which government data collectors mixed together private production and government spending. They had models to prove that this was justified. What they did not have all along was logic.
The principle is undeniable that governments have no resources of their own. Everything they have is taken from wealth created by the private sector. They get that through taxation, fees, inflation, and in any other way it can. The revenue comes always at the expense of the private sector and wealth creation.
We can argue about what the government should and should not do and all the ways, if any, that government makes our lives better because what it does is necessary and not otherwise obtainable. What is undeniable, however, is that the resources governments have come at the expense of private production.
One might suppose that good national or domestic calculations on output should take that into account. Certainly, government spending should not be considered part of output. It makes far more sense to subtract government spending from output.
But back in 1934, the sudden popularity of the “new economics” made it seem otherwise. The masterwork that seemed to justify this was Keynes’s own 1936 treatise called “The General Theory of Employment, Interest and Money.” I’ve never read a more impenetrable, convoluted, circuitous book replete with word inventions, catawampus casualties, and crazier conclusions (that government should manage all investment).
Given the times, which were nuts, that the book took hold, and so did his model for understanding macroeconomic management. Economists took the text and hammered it into something vaguely comprehensible along with a whole series of little postulates.
Then the Second World War came. National income accounting was deployed to measure the impact of all the spending, conscription, rationing, and bombing. Lo and behold, all the data said that the economy grew like crazy during that period.
This is where matters became very confusing. People were of course miserable and poor during the war. But economists were saying, based on the data, that the war had ended the Great Depression. That line stuck, for decades and decades, until a handful of historians took a second look and realized that the conclusion was purely a statistical artifact.
Rothbard wrote: “Since governmental services are not tested on the free market, there is no possible way of measuring government’s alleged ‘productive contribution.’... Furthermore, the government’s tax revenue and deficit revenue are both burdens imposed on production, and the nature of this burden should be recognized. Since government activities are more likely to be depredations upon, rather than contributions to, production, it is more accurate to make the opposite assumption: namely, that government contributes nothing to the national product and its activities sap the national product and channel it into unproductive uses.”
It’s remarkable to think how long this one idea has germinated for it to become reality. And yet, the new Secretary of Commerce Howard Lutnick said Sunday that government spending could be separated from gross domestic product reports in future releases.
Please indulge me in a moment of extreme economic nerdiness: THIS IS GLORIOUS MUSIC TO MY EARS!!!
Why is it unthinkable? Because it’s been done the other way for 100 years. Yes, 100 years of wrong. This is how it came to be that the economy was said to be doing great during WWII and also, as it turns out, during the so-called Biden recovery that no one in their regular lives could tell was happening.
When the data comes to be revised—finally after a century of error—let’s hope we get also a methodology so that others can apply it backwards in time all the way back to the 1930s and before. It could be very revealing, particularly of the postwar period.
How much prosperity did we really experience since 2020? We have every reason to believe it is much less than we’ve been told. For that matter, what about the 1990s and the 1960s? We would like to know.
Economists have known for decades that something needed to be done to patch up these failed and anachronistic models that tell us if we are rich or poor, growing or shrinking, in recovery or recession. But it takes a bold and learned administration to bite the bullet and make it so. That is precisely what Trump is doing.
Are there political motives? Maybe, but it hardly matters. We have long needed this done regardless. We deserve the truth here as in all areas.
From the 1950s to the 1980s, every economics textbook predicted that the Soviet GDP would eventually outpace the U.S. one. How in the world could they have said this? Precisely because the Soviets included government spending as productivity. Never mind that the tanks didn’t work, the coats fell apart, the shoes were trash, and the grain harvest was never what the industry claimed. Economists trust numbers and that’s what they went with.
It’s fine to trust the numbers but we need to be more critically minded to examine their source too. Surely we learned that during the pandemic. This applies in public health, climate change, or economics too. The fibs favoring government have gone on too long. We need to know the fullness of the truth, even if it makes leaders look bad.
I’m thrilled about this change, and I hope the Trump administration follows through. They could keep existing GDP and simply add another statistic, GDP-G. It’s not complicated. There is nothing to fear from knowing.
