Government takes money from the actual producers of value and then spends it unwisely. They lower effective GDP and then make it harder for the producers to recoup the loss.
This is functionally the same as saying your household is magically richer by giving your kids an allowance.
And yes, I know it’s an accounting principle that makes government spending be recorded as a positive value. But that doesn’t mean it’s the actual value.
Thanks for this article Peter. I’ve been saying this for years. “Government spending is just overhead”. Finally, someone is going to make the accounting make sense.
I'm currently writing about income on my substack. What I do is look at what happens if we don't convert all assets and liabilities to a unit of account, but instead treat each type of thing as one dimension of an enormous vector. (It turns out that David Ellerman did the maths for this a number of years ago). When you do this, you find that the spending all cancels out in the measure of GDP, and we're just left with the goods and services produced.
If the government pays X to its employee E to provide service S for person A:
Government is generally a drag on the economy. The obvious exception, and there are not many, would be something like defense spending, which employs many people and produces all sorts of weapons and tools of war. Government is self-promoting, attempting to make the public believe it is worthwhile and productive. Government plays loose with statistics, such as reporting good employment numbers, when one third or more of those statistics are government (useless) hires, a drag on the economy. Government may be an employers, but it produces nothing of value.
You are aware that GDP is a measure of value-added? That means the intermediate stage of production gets deducted. That could be done for government too, but the problem is that the government usually doesn't sell its services at a market price (or any price at all). Thus, the intermediate cost (wages and materials) goes into GDP. Now you can make the point (like Friedman did, and with which I have a lot of sympathy) that a good and increasing chunk of government output is a negative value-added, but that is not true for all (e.g., defense, policing, air traffic control, enforcement of a common market, etc).
More importantly, national income accounting is an internally consistent framework and looks at macroeconomic income flows in 3 ways: GDP measured from the expenditure side (what are final purchases?), GDP from the production side (what is the value-added produced?), and National Income (what is being earned in a given year from wages, transfers, profits). In theory, they are identical, and in practice very close. So what are we supposed to do here, if we exclude government from the first two? Not count government wages and transfers (e.g. social security)? And then presumably, we also need to subtract them from consumption and production in the expenditure and value added accounts? Where would this end?
It is always easy to criticize, but when putting down a complex system like the National Income Accounts that has been invaluable for almost a century the world over, it takes a bit more, importantly mapping out a superior alternative.
I can understand that a tech bro like Elon, or a Wall Street guy like Lutnick don't understand the intricacies, but I would expect more from an economist (especially a macroeconomic).
This is the only newsletter I read without fail. AND the only one where I read the comments. It's great having a place where an bunch of level-headed smart people hang out (me excluded).
Many excellent points. Technically sending out SS checks and paying medicare are government expenses yet produce nothing until you consider what that money does and where it goes. It goes to consumers who spend and it is gobbled up by the medical mafia which is nearly 19% of the economy.
Government honchos love to spend money because they think they are buying votes and popularity. I trust no government statistics which in fact this morning said that employment grew by 150K last month. So where is the downturn?
Yet we are hearing of all the nasty things going on if you are not part of the top 20%. Like the housing market crumbling, credit card debt rising, delinquent auto loans rising, etc.
Yes, the government does make the majority poor as it shifts tax collections into the pockets of millions of thieves and grifters around the world. This is why government is never the solution for society to live free and content. It can never be for the people.
If it didn’t it would reveal the true fact that we are a declining nation surviving on our Reserve currency status which is about to dramatically change. Gold and silver anyone?
In the US GDP comprises inter alia 25% Government. Whilst not as high as socialist Europe, that's still far too high. And I have also been writing that reducing the size of Government and its spending will result in a recession which, indeed, Democrats will blame on Trump.
This isn't rocket science except to the majority of the US population and I have been critical that the Trump administration has been remiss in not explaining this in simple terms and further noting that the excesses and waste of the Biden administration is responsible for the coming recession, with or without productive cuts in the size of Government.
Reminds me of the CPI...a bogus indicator of inflation since they don't include food and energy prices and their basket of goods doesn't accurately represent people from one place to the next. If inflation doesn't include the actual inflation of the money supply then what the hell are we talking about. Prices in crease, they don't inflate. The supply of something inflates or deflates.
It’s actually worse than that.
Government takes money from the actual producers of value and then spends it unwisely. They lower effective GDP and then make it harder for the producers to recoup the loss.
This is functionally the same as saying your household is magically richer by giving your kids an allowance.
And yes, I know it’s an accounting principle that makes government spending be recorded as a positive value. But that doesn’t mean it’s the actual value.
Excellent comment!
This is a perfect example of why a DOGE is needed, to offset the funny money and "creative" accounting politicians luv to use in defrauding Americans.
Thanks for this article Peter. I’ve been saying this for years. “Government spending is just overhead”. Finally, someone is going to make the accounting make sense.
I'm currently writing about income on my substack. What I do is look at what happens if we don't convert all assets and liabilities to a unit of account, but instead treat each type of thing as one dimension of an enormous vector. (It turns out that David Ellerman did the maths for this a number of years ago). When you do this, you find that the spending all cancels out in the measure of GDP, and we're just left with the goods and services produced.
If the government pays X to its employee E to provide service S for person A:
A's income is S,
E's income is X
Gov's income is -X
GDP = Total income = S + X - X = S
www.economics21st.com/p/income-2
(I haven't explicitly mentioned government in the series yet: that'll be part 3 or 4).
Government is generally a drag on the economy. The obvious exception, and there are not many, would be something like defense spending, which employs many people and produces all sorts of weapons and tools of war. Government is self-promoting, attempting to make the public believe it is worthwhile and productive. Government plays loose with statistics, such as reporting good employment numbers, when one third or more of those statistics are government (useless) hires, a drag on the economy. Government may be an employers, but it produces nothing of value.
Oh man, where to begin?
You are aware that GDP is a measure of value-added? That means the intermediate stage of production gets deducted. That could be done for government too, but the problem is that the government usually doesn't sell its services at a market price (or any price at all). Thus, the intermediate cost (wages and materials) goes into GDP. Now you can make the point (like Friedman did, and with which I have a lot of sympathy) that a good and increasing chunk of government output is a negative value-added, but that is not true for all (e.g., defense, policing, air traffic control, enforcement of a common market, etc).
More importantly, national income accounting is an internally consistent framework and looks at macroeconomic income flows in 3 ways: GDP measured from the expenditure side (what are final purchases?), GDP from the production side (what is the value-added produced?), and National Income (what is being earned in a given year from wages, transfers, profits). In theory, they are identical, and in practice very close. So what are we supposed to do here, if we exclude government from the first two? Not count government wages and transfers (e.g. social security)? And then presumably, we also need to subtract them from consumption and production in the expenditure and value added accounts? Where would this end?
It is always easy to criticize, but when putting down a complex system like the National Income Accounts that has been invaluable for almost a century the world over, it takes a bit more, importantly mapping out a superior alternative.
I can understand that a tech bro like Elon, or a Wall Street guy like Lutnick don't understand the intricacies, but I would expect more from an economist (especially a macroeconomic).
Peace out!
Keynes is turning in his grave
This is the only newsletter I read without fail. AND the only one where I read the comments. It's great having a place where an bunch of level-headed smart people hang out (me excluded).
Many excellent points. Technically sending out SS checks and paying medicare are government expenses yet produce nothing until you consider what that money does and where it goes. It goes to consumers who spend and it is gobbled up by the medical mafia which is nearly 19% of the economy.
Government honchos love to spend money because they think they are buying votes and popularity. I trust no government statistics which in fact this morning said that employment grew by 150K last month. So where is the downturn?
Yet we are hearing of all the nasty things going on if you are not part of the top 20%. Like the housing market crumbling, credit card debt rising, delinquent auto loans rising, etc.
Yes, the government does make the majority poor as it shifts tax collections into the pockets of millions of thieves and grifters around the world. This is why government is never the solution for society to live free and content. It can never be for the people.
Damn, it’s all so corrupt, so conniving, so phony and fraudulent.
No
only productive government spending should be part of GDP.
If it didn’t it would reveal the true fact that we are a declining nation surviving on our Reserve currency status which is about to dramatically change. Gold and silver anyone?
In the US GDP comprises inter alia 25% Government. Whilst not as high as socialist Europe, that's still far too high. And I have also been writing that reducing the size of Government and its spending will result in a recession which, indeed, Democrats will blame on Trump.
This isn't rocket science except to the majority of the US population and I have been critical that the Trump administration has been remiss in not explaining this in simple terms and further noting that the excesses and waste of the Biden administration is responsible for the coming recession, with or without productive cuts in the size of Government.
We should exclude retail sales, too. Most of it involves imported products--a double whammy of America.
Reminds me of the CPI...a bogus indicator of inflation since they don't include food and energy prices and their basket of goods doesn't accurately represent people from one place to the next. If inflation doesn't include the actual inflation of the money supply then what the hell are we talking about. Prices in crease, they don't inflate. The supply of something inflates or deflates.