Government Hiring: Raising GDP by Definition
By Garett Jones
GDP, Gross Domestic Product. The number gets a lot of attention, deservedly. You’d be foolish to use it as your sole economic statistic but you’d be just as foolish to ignore it and go with your gut.
Today I’d like to draw attention to one of the peculiarities of GDP. For your consideration:
Scenario 1. Tomorrow, ExxonMobil spontaneously hires an unemployed petroleum engineer for $100K per year. She spends a year looking for new oil, finds nothing.
Scenario 2. Tomorrow, the federal government spontaneously hires an unemployed petroleum engineer for the same $100K. She spends a year looking for new oil, finds nothing.
So, how do these two alternative scenarios impact the official GDP figures?
Scenario 1 has zero impact on GDP: No oil to sell=no extra consumer purchases=no extra GDP. As the Bureau of Economic Analysis says, “Personal consumption expenditures…is goods and services purchased by persons…”Scenario 2 raises GDP by $100K. As BEA says, “Government consumption expenditures…consists of…compensation of employees…”
Hiring a worker who (through no fault of her own) accomplishes absolutely nothing raises GDP if the government does the hiring. Hiring a worker who (through no fault of her own) accomplishes absolutely nothing does nothing to GDP if the private sector does the hiring.
Why? Because GDP counts government salaries as “government expenditures” as soon as the government hires a person. But the “consumption” and “investment” parts of GDP only count genuine purchases by the private sector (leaving the oddities of imputed spending for the coda below).
So if a private sector product spends years in the incubator, burning through thousands of person-hours of work and millions of dollars of salary–but never sees the light of day–then the product never shows up in GDP. But if the government had hired those same workers who worked just as long on a similarly fruitless project, their labor would give a big boost to GDP.
Government hiring creates GDP by definition. Private hiring only creates GDP if the worker actually creates a product.
Coda: I’m not making an argument for changing the BEA’s rules to include private sector R&D or even investment in organizational capital in GDP. Whenever possible, let’s keep GDP as a measure of genuine arms-length, market-test-passing purchases of goods and services. GDP already includes a lot of imputed consumer spending, as Michael Mandel reminds us; we don’t need to add imputed spending to the investment side as well.