Well, that\’s interesting Joe

Have to admit, I didn\’t know this:

For example, while GDP is supposed to measure the value of output of goods and services, in one key sector – government – we typically have no way of doing it, so we often measure the output simply by the inputs. If government spends more – even if inefficiently – output goes up. In the last 60 years, the share of government output in GDP has increased from 21.4% to 38.6% in the US, from 27.6% to 52.7% in France, from 34.2% to 47.6% in the UK, and from 30.4% to 44.0% in Germany. So what was a relatively minor problem has now become a major one.

This does put something of a dent in the Keynesian prescription of course.

For we\’ve no way of measuring then whether government spending does indeed increase GDP, for we\’re simply assuming that higher government spending does increase GDP.

That is a Nobel Prize winner in economics writing there too, so we\’ve at least got to take the idea seriously (even if not immediately assume that it is true: wrthy of study necessarily, but not necessarily true perhaps).

In fact, buried in that (\”even if inefficiently\”), the methods we use to calculate GDP say that even if government spending is making us poorer (which spending less efficient than private sector spending of the same cash would be) then we record it as making us richer.

It\’s going to be interesting what they say about new methods of measuring true growth and increases in wealth, isn\’t it?

12 thoughts on “Well, that\’s interesting Joe”

  1. That problem is at the beginning of the OU Economic degree course which I obtained from a car boot sale and read recently, well bits anyway.Its a double counting problem isn`t it ?
    Incidentally you recently gave a figure of 8,000,000 for public sector workers , That Jackie Ashley gives a figure of 6,000,000 in the Guardian today in her offering about shoring up the core vote by attacking the middleclass families with children .If the working population is 29 mio then she says 20% while you are above 27%

    Who is right and can it be settled by naked mud wrestling ?

    Tim adds: Me wrong, working from memory.

  2. ..and the wrestling ? She also alludes to others dependent on Public Contracts so you may well be close to the truth .
    Given that allegedly the GE will be decided by 800,000 swing votes 6-8 mio bought and paid for unionised and almost 100 % paying for the Labour Party we may be getting clause four back any time soon

  3. “In fact, buried in that (”even if inefficiently”), the methods we use to calculate GDP say that even if government spending is making us poorer (which spending less efficient than private sector spending of the same cash would be) then we record it as making us richer.”

    This isn’t right. If consumer spending has been taxed £10bn, and so is £10bn lower, and the government spending is really only worth £8bn, then GDP will have fallen.

    Tim adds: “This isn’t right. If consumer spending has been taxed £10bn, and so is £10bn lower, and the government spending is really only worth £8bn, then GDP will have fallen.”

    You’ve missed what Stiglitz is saying. Because we measure the impact of govt spending by inputs, not outputs, we measure the contribution of govt spending in your example as being £10 billion. Not the £ 8 billion that it is in reality.

    So recorded GDP rises (or stays static) while actual value added falls. That’s very much his (and my) point.

  4. And those increases are post WWI and WWII – including Thatcher! What was it at the turn of the century? About 5 – 8%?

  5. I have a suspicion that this issue is pretty much barking up a tree.

    The usually quoted number is government expenditure as a proportion of total GDP (GSpgdp), and total GDP is defined as government expenditure (GS) plus non-government output (NO). Thus (as a proportion rather than a percentage) GSpgdp = GS/(GS+NO).

    We can define a new measure, government spend as a proportion of non-government output (GSpno = GS/NO) which may well be more to our liking as a measure of government ‘interference’ in the economy.

    However, this new measure can be defined, totally unambiguously by algebraic manipulation, in terms of the old measure of government spend as a proportion of GDP. The relation is GSpno = GSpgdp/(1-GSpgdp).

    A few examples are as follows (and Tim, please improve the layout if the table comes out badly):

    GSpgdp GSpno
    —— —–
    0% 0%
    25% 33%
    33% 50%
    50% 100%
    67% 200%
    75% 300%
    100% Infinite

    Thus, I feel that both measures can be viewed as equally useful, and it is only the extent of our disapproval (or approval) that matters, with different and non-linear scaling of percentage to (dis)approval for the two different measures.

    Best regards

  6. @ Newmania. The correct figure is in fact 8 million taxpayer-funded jobs, and that is what the International Labour Organisation say.

    The 6 million excludes people working in private companies whose entire income is from the state (like catering or cleaning in NHS, schools and prisons) and for some reason excludes GPs and university lecturers, plus loads of other categories like fakecharities, publicly subsidised railways etc.

  7. Following on from my comment @6 above, there is more to be said when talking about measures other than the proportion of GDP etc spent by government.

    In comparing overall economic activity from year to year, the absolute value of GDP is important; however, it does suffer from some (or a lot of) obscuration by inflation. Existing and commonly measured indexes of inflation, such as RPI and CPI, are a lot of help on this. There is, so I understand, also a GDP-specific index called the GDP deflator, of which more can be found in Wikipedia at http://en.wikipedia.org/wiki/GDP_deflator

    I’d also comment again (as I did some time ago) that I find it very strange that governments, the UN and other international institutions have been so keen on moving from RPI to CPI, seeing as their favoured new index excludes housing: surely the biggest expenditure for just about everyone, and one very often subject to increase above that of CPI.

    Governments seem to love measuring their economic performance by GDP growth, year on year. However, this is a poor measure on two counts (at least). Firstly, they rarely include correction for inflation. Secondly, they do not usually normalise for population changes, thus (perhaps) encouraging a very relaxed attitude towards immigration.

    It would be far better if economic growth were judged (entirely or also) on GDP per head of population and after correction for inflation.

    Where comparisons are made between nations, either in terms of absolute rankings or in terms of growth, correction should also be made for currency fluctuations, especially where these are large and before the effect on inflation has had time to work through the system.

    On these points, the difficulty that strikes me is that better measures (including indexed corrections) are not used, rather than that they are not available.

    Best regards

  8. GDP is a measure of the financial worth of the economy, no more and no less – it says nothing about the real value or utility or goodness produced by the economy, if the govt spends X, then X is the financial worth of what the govt spent regarless of whether it produced any goodness or value or whatever, same in the private sector. If we want to measure the goodness, value, utility of what we make then we really do enter a hornets nest – in the private sector it must be the case that the goodness exceeds, and generally FAR EXCEEDS the GDP value. Trivially my next meal is “worth” everything I’ve got or ever will have – my entire lifes earnings – if I must then I will give all my money and hock all my future earnings for my next meal. I charge my mobile phone with 0.001 p worth of electricity but I would pay much more to charge it if I had to – the value of that electricity far exceeds the financial cost. Indeed everything I buy has value to me in excess of the financial cost (else I would not buy it).
    This sort of reasoning is generally also true of what the govt spends, they may not be efficient but some at least of what they spend of my money benefits me (or others) in excess of what it costs.
    This value mutiplier can be awesome – suppose I eat 1000 meals per year, each worth everything I will ever earn plus everything I have, suppose I am worth 200,000 (house,car etc) and I earn 40,000 and I have another 20 years of work in me, then each year my food is worth 1000 * (200,000 + 20(40,000)) = 1,000,000,000 yet appears in GDP as say 3,000.
    This seems ridiculous but the logic is good, it only goes to show that GDP should be used with caution.
    On the other hand, this GDP measure is real hard currency – it really is the real thing, foreigners will cross continents to come and clean your toilet for it, toil in factories for all their life for it, soldiers will march for it, expensive Western engineers will build you ICBMs for it, farmers will grow food for it, which only goes to show that IT IS REAL STUFF.

    GDP is a crap/great way to measure the nations output.

  9. Johnny, forgive me but while I understand that “everything I buy has value to me in excess of the financial cost (else I would not buy it)”, I don’t understand why “my next meal is “worth” everything I’ve got or ever will have”. Would you please take the time to explain? Genuine question.

  10. @uklibery – yes, you’ll give everything you’ve got and every will have rather than starve. The example is silly and extreme but its to make a point.

    Perhaps it would be better to say that “my food over the next 5 days is worth everything I’ve got or ever will have”, which reduces the annual value of my food fifteenfold to about 70,000,000 GBP, but a little poetic licence is allowed, hence “next meal”.

    In fact, here in the overfed West, many of us would be better off if we forego our next meal, but we are all dead if we go without for 5 days (some starve in 3 days, others can survive a couple of weeks, buts lets not get pernickity).

  11. No, I haven’t missed the point, although my example wasn’t brilliant. I think you are under the impression that increasing govermnent spending by $10bn increases GDP by $10bn (statistically) but you have to look at what has been reduced by the methods used to fund that increase in GDP. So it’s not that the government can simply increase GDP to the level it wants.

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