Is government spending an irrelevent component of economic activity?

I've been thinking about the composition of GDP recently, and a common strategy for Austrians looking for a better measure is to subtract government spending. The classic example is Murray Rothbard's "Private Product Remaining", and I believe the citation is:

Rothbard, M.N., 1963. America's Great Depression, Kansas City: Sheed and Ward, pp. 224-26, and 296-304

First up a confession: I've not read the original text. My understanding is that this is a fairly simple measure, and involves subtracting income deriving from government sources from GNP. Regular readers might be reminded of my ideas for constitutional reforms, where I suggesting restricting the ballot from public sector workers. The comments section contained a lot of valid criticisms of that idea, not only in terms of the concept, but also it's practicality. Disentangling the state is very tricky and simply emitting "G" from GDP seems too simplistic. But I'm not convinced that it's theoretically valid either.

One rationale is the desire to separate production from transfer payments. But this means that you either claim all government spending is a form of transfer payment (which seems extreme), or acknowledge that obvious transfer payments (such as unemployment benefits) are already taken out of G.

The next claim is that since government spending must derive from taxation (or I suppose future tax obligations) it has already been produced. My problem here is that this argument tends to refer to an infinite time horizon (i.e. spending on hospital in Year t arises from output already created in t-x). But GDP is calculated over 1 year.

The most compelling reason stems from the "calculation problem" and suggests that since government spending fails to meet a market test there's no rationale to determine whether it's genuine production for the sake of want-satisfaction. This seems to expose an asymmetry of argument, with the implicit assumption being that non-government spending does make the market test. But we don't have genuinely free markets for anything. The calculation problem doesn't mean that "private" spending is socially beneficial and "public" spending is socially detrimental, it means that the larger the size of the state, the harder it becomes to infer consumer satisfaction from economic activity. Consider Tyler Cowen:

“Without having access to market prices to evaluate the opportunity costs of resource use, socialist planners could not tell which outputs should be produced or how to produce them. When it comes to economic value, the socialist planner is literally like the blind man groping in the dark”

Cowen, Tyler (1995) “A Review of G.C. Archibald’s information, Incentives, and the Economics of control” Journal of International and Comparative Economics 4:243-249

We can infer that decisions being made "in the dark" will be worse than those in the light, but the main point is that we can't tell. The argument for privatising the NHS is not because I know that nurses are social parasites, it's that we don't know what their marginal productivity is. It's quite possible that under a socialised system they receive less than their market wage. I don't know.

Given that all free-marketeers would expect healthcare and education to exist even if they were open to free markets, it's reasonable to infer that some government spending is socially productive. Given that most lawyers wouldn't exist if the economy was more liberal, it's reasonable to believe that a lot of "private" spending is in fact rent-seeking.

Finally, let's remember that GDP is deliberately about capturing economic activity. It isn't a measure of economic growth. It certainly isn't a measure of economic well-being. This is why the public debate is so juvenile - politicians claim that they want to promote "growth", but we let them use "activity" as a proxy. And government spending is a component of activity. Hence a fiscal stimulus works! But this is a criticism of the misuse of GDP figures, not a problem with the concept - properly understood - itself.

The real meat of the Austrian justification for PPR is based on libertarian, not economic reasoning. If you believe that tax is theft, then indeed it seems appropriate to count government spending as categorically different to voluntary spending.

In a 1987 article Robert Batemarco attempted to calculate PPR for the US economy. His justification is as follows:

Because government output is, with few exceptions, not sold on the market, one cannot accurately measure its value. Furthermore, the fact that such output must be financed coercively (through taxation) creates at least a presumption that those unwilling to pay for such output do not place any value on it

If you take something like healthcare, it seems bizarre that purely because we live in a socialised system, we should presume that people place no value on cancer treatment.

More recently Tom Woods has alluded to PPR (.pdf):

If economists want an idea of the American standard of living today, therefore, or if historians want to uncover its fluctuations over time, both groups are therefore much better served by calculating PPR per capita rather than following the Department of Commerce and its figures for per capita GDP

He says that "The argument that government services, even if coercively funded, may still possess some value, is both raised and answered in Batemarco (1987)". But I'm not satisfied by Batemarco's treatment of this issue. He basically makes two points. One is that he presents the following items of survey evidence:

• Lipset and Schneider cite the median response of people asked what percentage of their tax money is wasted by the federal government to be 48 percent
• David Boaz estimates that at least 35 percent of 1982 federal expenditures are of no value to anyone except the special interests which got them enacted in the first place
• The Grace Commission...  was able to find one-third of taxes to be "consumed by waste and
  inefficiency."

The second point is his argument that even if government spending is socially useful, it's an intermediate good (and therefore should be stripped out of GDP for risk of double-counting). That's an interesting point, because maybe intermediate goods should be counted?

The purpose of the PPR seems to be to counteract the notion that living standards have been steadily rising. Indeed the fact that the PPR suggests that "the standard of living for workers in the private sector has been at a standstill since 1964" is evidence for Batemarco that it fits with intuition (although he also offers the possibility that living standards have risen but only because of underground activity).

But again, this strikes me as a libertarian means to strip out government spending on philosophical grounds, to demonstrate that "official" figures overstate the productive capabilities of an economy.

I buy the necessity to disentangle public and private spending, and we all need to see through the fog created by governments that use recessions to become the driver of an economy. I buy Robert Higg's work showing that the recovery after the Great Depression occurred when the private sector rebounded, and that this is what drives economic growth. But I think it's important to challenge those who take good arguments slightly too far.

Comments

[Quinn]

An excellent, open minded article. Your final sentence in particular is sound advice for anyone examining the arguments of their "own side".

Sadly, far too much UK-based libertarian thinking on the internet seems to be more along the lines of "questionable arguments taken way too far", so it's good to read such a well thought out and reasoned piece.

[Retro Jordans]

Very cool article.

[402300572]

http://www.coachfactoryoutletstoreonlinez.net

[http://www.spunka.se/omspunks.asp?p=4]

But while in the face of Benihana's programs to difficulty much more inventory, the 3rd wife and previous Pass up Tokyo is putting the family feud apart to aid wage the bigger war.
http://www.spunka.se/omspunks.asp?p=4 http://www.spunka.se/omspunks.asp?p=4

[http://www.stuteriveterinarerna.se/sendmeil.asp?p=94]

Codes confrontations: An improved way with the metropolis? 1Allen Lessels on Motor Sports activities: Daugherty's speedy break to NASCAR 0Another Watch Marc Brown: Northern Go will decreased electric fees for Granite Staters 0Fishy consulting: A giant deal for an insider 0Vote raises guard's hope for pardon 0Sen. Shaheen's daughter: I am aware the NH voting procedures 1In NH, no would like to be at demo of accused Boston Marathon bomber 0Nolan leads Fisher Cats past Reading 0Patriots Dennard in challenges all over again 0KanCare circumstance professionals have conflict of interest
http://www.stuteriveterinarerna.se/sendmeil.asp?p=94 http://www.stuteriveterinarerna.se/sendmeil.asp?p=94