The incoherence of Team Trump’s plan to change GDP measurements

If there is anything that all governments watch carefully, it is GDP growth. Without substantive and ongoing increases in what GDP measures — the total monetary value of all final goods and services produced in the economy over a specific time period — societies are in big trouble. That’s one reason why recessions usually result in electoral death for whoever holds office at the time.

To accurately estimate total growth in an economy, everything that contributes to GDP must be measured. That presently includes consumer spending, private domestic investment, net exports, and, lastly, government consumption and spending.

Now, however, Trump officials ranging from Elon Musk to Howard Lutnick are stating that we should consider excluding the latter category. Both argue that true GDP is really about private sector-driven growth — not the wasteful inefficient spending that characterizes the public sector.

That public sector spending is highly inefficient and tends to crowd out private sector investment is, to my mind, not in dispute. Markets are far more proficient at allocating capital and labor in more productive ways. All other things being equal, we want the public sector to be a small component of the total economy if we want economic growth to be more than merely mediocre.

These, however, are not reasonable grounds for subtracting government spending from the GDP calculation. Inefficient as it may be, public sector spending does add to economic growth, and the whole point of calculating GDP is to know the economy’s total growth over a set time-period.

When the state spends money on what economists call “public goods” (national defense, infrastructure needs, a legal system, etc.), it generates some economic activity. Granted, what truly counts as a public good is debated. Governments of all parties also have a bad habit of labelling their pet endeavors as public goods. Nor is there doubting how wasteful the process of raising and spending money on public goods can be. Governments routinely build new infrastructure that is years behind schedule and widely exceeds allocated budgets.

But what is not in doubt is that some level of economic value is being created by such public spending. It is likely less valuable than what might otherwise be generated by the private sector. But we do want to know what it is as a proportion of total GDP. Hence, we need to include it in that calculus. Taking it out of the calculation would suggest that government spending somehow doesn’t count as part of the economy, which, whether we like it or not, it unquestionably does.

Another reason we want to include state spending in the GDP calculation is that it helps us holds governments accountable. Let’s say that government spending during peace time as a proportion of GDP is steadily increasing over a given business cycle. This tells us that more and more wealth is consumed and invested by the public sector in ways that are, generally speaking, far less efficient than markets.

But it also suggests that the private sector isn’t performing as well as it should, and that the government is seeking to make up the difference. This, however, will cause some people to start asking questions about why the private sector is tanking, and which government policies — like excessive regulation, mistaken monetary policy, punitive tax-rates, etc — are contributing to that poor private sector performance.

I’m all in favor of reducing government spending as a proportion of total GDP and focusing state spending on that small number of things that actually count as true public goods. Cleaning out the waste that characterizes the public sector, feeds government vanity projects, and facilitates cronyism is always a good thing. More people also need to grasp the effects of crowding out private sector investment.

None of this, however, requires us to rethink how we calculate GDP. Fixing real economic problems is what’s important. Fiddling with measurements is a serious distraction from that.