Can you take government spending out of GDP?

0:01NPR

0:11This is The Indicator from Planet Money. I'm Waylon Wong. And I'm Paddy Hirsch. The big mama of economic indices, gross domestic product, is under attack again. This time, from within. Have I seen this movie before? Probably. And GDP has always come in for criticism from people with a whole range of nits to pick about what goes into the data and what's left out. But those criticisms usually come from non-governmental agencies and institutions. Last week, the attack on U.S. GDP came from the man whose own agency generates that number each month, Commerce Secretary Howard Lutnick. You know, the Commerce Department runs the statistics of GDP.

0:51You know, the governments historically have messed with GDP. They count government spending as part of GDP. So I'm going to separate those two and make it transparent. On today's show, we'll look at why government spending is part of GDP in the U.S. We'll speculate on why the Commerce Secretary might want to take it out and what it could mean if he does. That's coming up after the break.

1:19All good indicator listeners know what gross domestic product is, right? The total value of all goods and services produced in a given period. That, Alison Schrager says, includes goods and services provided by or paid for by the government. GDP is just GDP. It's just like, how big is the economy? It's not that hard. And you can't take the government part out of it because the government is a significant part of that. Allison is a senior fellow at the conservative think tank, the Manhattan Institute. She says government accounts for nearly a quarter of the U.S. economy. Federal government spending made up 23 percent of GDP in 2022.

1:55And around three million people work for the feds. They buy a lot of stuff. They pay their people a significant amount of money. They tax. They transfer. They do all of these things. It is part of our economy. We can't just ignore it. So why does the Commerce Secretary, Howard Lutnick, want to cut government spending out of the GDP calculations? Well, here he is in an interview on Fox News last week. If the government buys a tank, that's GDP. But paying a thousand people to think about buying a tank is not GDP. Not so fast, says Betsy Stevenson. She's a professor of economics and public policy at the University of Michigan.

2:33Back in the day, she was one of President Obama's Council of Economic Advisors. So basically what he's saying is people who are talking about building a tank, maybe they're debating whether it's going to be built safely. Maybe they're debating whether it's going to be built in the most cost-efficient way. Should none of that matter? Well, in hard luck, Nick's eyes, apparently not. He says the services provided by the people who sit around talking about buying tanks, as opposed to actually making them, are too often... Well, here's the rest of what he had to say about that. That is wasted inefficiency, wasted money, and cutting that while it shows in GDP.

3:18We're going to get rid of that. But Nick is essentially talking about productivity here. He's saying that many, if not all, of these non-tank-making government employees are not productive, that they are a drain on the government purse. And who knows? Maybe he's right. The thing is that GDP doesn't care about productivity or waste or inefficiency. All it cares about is whether or not you got paid. Whether you actually built a tank or just consulted about the bounciness of the main gunner's seat cushions, if the government wrote you a check, Alison says, you are part of GDP. We can make value judgments about how people are spending money and where we want economic activity to come from, but that is not the role of GDP.

4:01It is just simply a measure of economic activity in the economy. And that's it. But a lot of people have a lot of problems with GDP. Some people complain that it excludes certain data points like activity in the underground economy, or it fails to reflect non-material elements of an economy like inequity or even happiness. Nonsense. Oh, Patty, now you've got it in for happiness. You're a mean one, Mr. Grinch. Neither Allison nor Betsy believe that it's a perfect number. Like any big old data point, it could always be improved, but not by taking government spending out of it altogether. Still, if there's one complaint about GDP that might support the argument for stripping government spending out of the calculation, it's government's insulation from the discipline of the market.

4:50Betsy points out that while private sector services are, for the most part, clearly and transparently priced by the market, public sector services often aren't. We don't have easy ways of figuring out how to value things aside from prices. That's why it becomes tricky with government because we don't have market prices. We just have what the government's choosing to pay people. And it's that government decision, not always driven by the market, that can rile up critics. the lack of transparency, the possibility of graft and overpayment and bloat that could skew the data and throw off the GDP number.

5:27Betsy, though, doesn't buy it. There's no merit to that argument because you can actually look at GDP without the government sector in it. So it's not skewing our data. It's trickier when there's not market forces. but I think it's kind of silly and arbitrary to say when the government does something, we shouldn't put it in and count it as having any value. OK, but still, if government spending isn't market-driven for the most part, and it does make up nearly a quarter of GDP, then isn't that in itself a good reason to at least break it out of the data? I mean, that's what Lutnick seemed to be advocating for when he talked about a need for transparency.

6:04Well, yes, transparency, sure. But this kind of mystifies Alison Schrager because she says that breakout, that transparency, it already exists. There's no secrets here. You can go to the Bureau of Economic Analysis website and they have a million documents on this and you can really break it down as finely as you want. It's true. I went to the Bureau of Economic Analysis website and with just a quick glance, I could see how much got spent every quarter on everything from national defense to interest payments. The details are pretty gory, Alison says, and just the kind of thing, actually, that a true anti-waste crusader would find it pretty useful to dig into.

6:42Certainly not something you'd want to strip out of your government calculation. If you're really interested in having a more efficient government, in cutting government spending, you know, GDP is your friend because it helps you understand who's contributing to the value of the economy. And you can use it to make value judgments, but don't hate on the statistic. Lutnik's statement, you know, kind of hating on GDP in its current form, comes in the context of the wider effort to reform government and make it more efficient. This is an effort that governments dating back before the Reagan administration have made, by the way.

7:16It's just that now it's been stoked to fever pitch by the Department of Government Efficiency. Oh, doge. Yeah, Alison doesn't think that stripping government spending out of GDP is going to help with that effort. But that doesn't mean that she's against the principle of examining how government money is spent. Quite the opposite, in fact. There is a valid debate of how much of our economy should come from government. And we're having that debate now. And we should have that debate fairly regularly. Betsy agrees with this wholeheartedly. I think this question of what is the government spending, each dollar of government spending, what kind of value are we getting out of it?

7:53I'd love to see us ask that question every single day. Well, Betsy may well see her wish granted the way that Doge is rolling right now. But that's another story for another day. This episode was produced by Indio Carreras with engineering by Sina Lafredo. It was fact-checked by Sierra Juarez. Kate Kincannon is our show's editor, and The Indicator is a production of NPR.