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.
READER COMMENTS
Thaomas
Apr 23 2019 at 11:50am
I do not see why that would be an argument one way or the other. The number for private consumption would be the same. And surely GDP recorded as generated in government IS available for reallocation to private consumption and investment (possibly not dollar for dollar, but that’s a different issue) and so seems worthy of measurement.
Andrew_FL
Apr 23 2019 at 4:03pm
War time government spending actually displaced private *investment* spending much more than *consumer* spending.
Thaomas
Apr 23 2019 at 6:32pm
In fact consumption was not displaced. https://fred.stlouisfed.org/graph/?id=PCECCA,GDPCA,GPDIC1,
Pierre Lemieux
Apr 23 2019 at 9:34pm
One cannot say that private consumption was not displaced by simply observing that it did not drop or even that it increased. Resources used by government (especially labor, but also steel, food, etc.) could have been used to produce consumption goods (or investment goods, of course). (Thinking of the baby boomers, they could also have been used to house and feed babies.) Indeed, consumption increased much faster before and after the war. According to the data you usefully provided, real private consumption expenditures increased by slightly more than 1% a year between 1941 and 1944, compared to 5.4% per year between 1933 and 1941 and 4.5% per year between 1944 and 1952.
Thaomas
Apr 24 2019 at 7:29pm
Of course in an opportunity cost sense private consumption was displaced, but I don’t see how that would show up in national accounts in such a way to make the failure to include government expenditures in GDP a useful way to disguise this opportunity cost.
Jon Murphy
Apr 25 2019 at 11:45am
Thaomas-
With the decline in private consumption not being offset with a rise in government spending, it would be stark. GDP wouldn’t have risen as much.
Pierre Lemieux
Apr 28 2019 at 9:26pm
I think Jon makes the point.
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