What if the U.S. just deleted government spending from GDP?
What if the U.S. just deleted government spending from GDP?
On Sunday, Commerce Secretary Howard Lutnick was asked whether the spending cuts from Elon Musk’s Department of Government Efficiency could cause an economic downturn. Lutnick had a simple, but sideways answer: Why not cut government spending from gross domestic product reports?
The argument from the Donald Trump administration is that including government spending can inflate GDP numbers. So, can it?
I feel like every economist I called for this story had some version of the same answer when I asked: What if we just deleted government spending from U.S. GDP?
“It would be more likely like a publicity stunt,” said Guido Lorenzoni, professor of economics at the University of Chicago.
“It’s completely goofy to take it out,” said Wendy Edelberg, director of the Hamilton Project.
“I laugh because it would be something insane to do,” said Gian Luca Clementi, professor of economics at New York University.
Government spending is a key component of GDP for countries across the globe, said Lorenzoni. “These are, like, internationally agreed accounting standards” set by the International Monetary Fund, “something that, you know, goes back 80 years or more.”
Eighty-plus years of standards that help us measure international economies against one another, and our economy against itself over time. Government spending is a part of that because it is a substantial chunk of the U.S. economy.
“So it’s everything from buying pencils to paying federal salaries to building tanks,” said Wendy Edelberg.
She said untangling those federal transactions from GDP doesn’t make sense because they are inherently tangled up with private businesses and consumers. And though measuring the dollar value of a product like a tank is easier than measuring the value of, say, a federal worker analyzing the need for a tank, those kinds of services are relevant.
“For sure you want to think about what federal spending is doing to demand,” said Edelberg, along with whether the economy can meet that demand and how prices react.
Besides the element of accurately measuring the economy, there’s the element of trust. Withholding tried and true data is a tactic by governments like China or Argentina, Clementi said. “Countries from the developing world where routinely they do these types of things” — fudging the numbers to make the economy appear better than it is.
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