As George Mason University’s Garett Jones rightfully notes government spending raises GDP “by definition.” That, however, doesn’t mean that the GDP boost induced by government hiring, for instance, is real or more productive than private hiring. For private hiring to boost GDP, something valuable has to be produced: Not so for government. As he explains:
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.
The reverse is true. Reduction in government spending may cause a temporary shrinkage of GDP, but it doesn’t always mean that something valuable has been destroyed.
Friday, March 22, 2013
An interesting technical note on the calculation of GDP: