Why government spending counts in GDP

What they're saying: "You know that governments historically have messed with GDP," Commerce Secretary Howard Lutnick said Sunday on Fox News Channel's "Sunday Morning Futures."

• "They count government spending as part of GDP. So I'm going to separate those two and make it transparent," he said.
• "A more accurate measure of GDP would exclude government spending," Elon Musk wrote on X on Friday. "Otherwise, you can scale GDP artificially high by spending money on things that don't make people's lives better."

State of play: GDP aims to capture the value of all economic output produced in a given time period within U.S. borders. The formula for that tally, which you may recall from introductory economics, is that GDP = consumption + investment + government spending + net exports.

• So why is government spending included in that formula? Because otherwise GDP would not fully capture the value of goods and services produced.
• When the government buys a fighter jet, or builds a road, or educates a child, it reflects the production of goods and services. So if you exclude government spending from GDP, you aren't getting a full picture of U.S. output.

Zoom in: It is true, however, that government spending is counted in GDP by simply adding in the dollars spent, without any real test of how efficiently or productively the money was used.

• "If the government buys a tank, that's GDP," Lutnick said in the TV appearance. "But paying 1,000 people to think about buying a tank is not GDP. That is wasted inefficiency, wasted money. And cutting that, while it shows in GDP, we're going to get rid of that."
• It's true, as Musk and Lutnick suggest, that if the government hired a bunch of people to twiddle their thumbs all day, it would show up as higher GDP while not making anyone better off, save perhaps the thumb-twiddlers.

Of note: The Bureau of Economic Analysis — which Lutnick now oversees — acknowledges these limitations.

• "Difficult conceptual and practical problems arise in measuring the output of governments, primarily because most of this output is not sold in the marketplace," reads the bureau's handbook for GDP and related data.
• "If possible, it would be preferable to measure actual changes in the quantity or volume of the services provided, thus allowing for changes in productivity," the document notes.

Zoom out: More conceptually, it's not the job of economic statistics to make value judgments on what individuals, businesses or governments do with their money. It's just trying to get the math right.

• You might not agree that a given government expenditure was worthwhile, but that's true of every line of GDP.

For example, if somebody orders an absurdly priced $2,000 bottle of wine at a restaurant, that counts on line 20 of the GDP report as personal consumption expenditures on food services and accommodations.

• If a movie studio spends $100 million to make a terrible movie, that shows up on line 38 of the report, as fixed investment in entertainment, literary, and artistic originals.

Lutnick suggested the GDP statistics lack transparency about how government spending is incorporated.

• In fact, the data releases make crystal clear how much government contributes to overall GDP — and data-watchers can, and regularly do, exclude government for purposes of analyzing economic trends.

By the numbers: In Q4 of last year, overall U.S. output was an annualized $29.7 trillion, of which $1.9 trillion was federal government consumption and investment spending, and another $3.2 trillion state and local governments.

• Measures of activity that exclude government spending can give a better sense of the underlying trend in the economy than the headline GDP number.
• We're partial, for example, to real final sales to private domestic purchasers, which rose at a 5.4% rate in Q4. You can find it in Table 1, line 41 of the report.

The intrigue: Interestingly, the federal government's share of GDP has been relatively low of late. It was 6.4% last year, roughly the same as during the first Trump administration and well below Cold War levels. It peaked at 18% in 1953.

• Keep in mind that while federal spending on purchases and employee salaries count in these tabulations, transfer payments don't.
• So when the government sends out Social Security checks each month, that expenditure does not count toward GDP but does show up as personal consumption expenditures once recipients spend the money.

The bottom line: There are flaws and limitations in how government GDP statistics account for government spending.

• But they are well-known, transparent and the kinds of things economy-watchers can adjust for as they wish.