Government Expenditures in GDP
When three economists meet to eat seafood on the Maine coast, chances are that they will talk about economics, or—what is the same—use economic theory to discuss topics ranging from religion and sex (why are some religions more anti-sex than others?) to the inclusion of government expenditures (on goods and services) in GDP.
This is naturally what happened when, yesterday, I met Germain Belzile (HEC-Montréal and Montréal Economic Institute) and Vincent Geloso (who is moving from Bates College in Maine to King’s University College in Ontario). The GDP issue reminded me of what I had read in Diane Coyle’s book, GDP: A Brief but Affectionate History (Princeton University Press, 2014).
Many economists were opposed to adding government expenditures to private production in the concept of GDP, including Simon Kuznets himself who was among the main developers of the national accounts methodology. But Coyle suggests that there was a propaganda motivation under the victory of the other side. Coyle writes (pp. 16-17):
In the policy tussle in Washington, Kuznets lost and wartime realpolitik won. … Subtracting defense spending from the older conception of national income would have wrongly given the impression that the war effort was going to involve a huge sacrifice in private consumer spending. … The pattern of growth before and after 1945 would have looked very different if government spending had been disregarded as before in the definition of total economic activity.
By “wrongly,” Coyle means “correctly,” that is, it would have annoyingly contradicted government propagandists. As often if not as usual, it seems, politics was about manipulating collective choices.
Incidentally, I reviewed Coyle’s book in a Regulation essay, “What You Always Wanted to Know about GDP But Were Afraid to Ask.” I mentioned this issue but only cryptically referred to the interest of the state in including its expenditures in GDP.