Do We Really Want to Maximize GDP?

by Dave Schuler on March 24, 2014

At The American Sean Speer and Charles Lammam lay out the case that once the size of government has exceeded some fixed percentage of GDP that further increases in the size of government will be accompanied by declines in economic growth:

Di Matteo examines international data and finds that, after controlling for confounding factors, annual per capita GDP growth is maximized when government spending consumes 26 percent of the economy. Economic growth rates start to decline when relative government spending exceeds this level. In other words, there is a hump-shaped relationship between the size of government and economic growth (this relationship is often referred to as the Scully Curve, named after the economist Gerald Scully).

According to OECD data, the size of government in the United States was approximately 40 percent of GDP in 2012. While Di Matteo’s estimate of the tipping point is based on international data, it suggests that President Obama should reduce government to boost the U.S. economy. This conclusion is supported by a larger literature (see here, here, here, and here) that has also found that a smaller size of government than what currently exists in the United States would translate into higher annual economic growth.

While I’m open to the possibility that the assertion is correct, they don’t convince me that it is or that you can make that determination using the methods that are being employed. For one thing, I’m skeptical that all economies react the same way to big governments and most of the studies of the relation between government size and economic growth have been international.

I’m much more interested in ways and means for increasing production since I think that the particular problem of the U. S. economy is that we don’t produce enough of what we consume.

However, I’m suspicious about the premise as well. Do we really care about maximizing GDP? If we could add $10 trillion dollars to GDP and all of that $10 trillion would be put into the hands of one individual, would it be a policy we’d want to pursue? A hundred people? A thousand? Why?

{ 10 comments… read them below or add one }

Ben Wolf March 24, 2014 at 4:21 pm

A huge chunk of the “study” relies on the supposed reduction in poverty rates after Canada reduced public spending as a share of GDP. What we aren’t told is that conclusion requires the Fraser Institute’s (a conservative think tank, which means it’s a lobbying firm) own in-house measure of poverty. That measure defines poverty as an absolute minimum required to survive rather than relative poverty within a society. In reality the U.N. and the Canadian government classify the country with one of the highest poverty rates in the OECD.

Typical sleight-of-hand stuff; alter the definition so we can pretend the problem went away.

Guarneri March 24, 2014 at 9:54 pm

“Do we really care about maximizing GDP?”

Your rhetorical is a bit too stylized to be useful, don’t you think? With all the measurement and definitional caveats, per capita GDP is a reasonable measure of prosperity. An additional $10B wouldn’t be produced or consumed by one or even a few individuals. To be sure, employment and income maximization are laudable goals, but it is presumptive that employment and income follow GDP. They do call GDP declines “recessions,” after all. If we want to discuss income or employment composition and distribution we ought to just do it.

As for the productive deficit, I’m not so sure. Although the press accounts do not reflect it, by almost overwhelming amounts the major (in dollars) imports from China, Europe, Japan, and Russia are in the mass produced goods – vehicles, steel, machines/engines/pumps, and fossil fuels, which by the way are all relatively low labor intensity. Only electronic equipment from China and Japan buck the pattern. Try jacking up the price of flat screen TV’s, cell phones and tablets, and games by 2x and see how Joe Consumer reacts to that. And our leftist friends are doing their best to retard fossil fuels.

Our major labor subscribers are of course retail/hospitality delivery, professional services, education, government, health care, finance and construction. Education and health care have been milked to death. Construction went through a bubble. More government? Really? I hold no brief for banking and insurance finance, but I would posit that every time in modern history that we have gone through an entrepreneurial (steve’s erroneous observation of a few days ago aside) or technological wave requiring outside capital raising and risk management we have seen the finance sector temporarily expand. (Its a fact: see railroads, electrification, auto, computer……………and small business)

When I see the EMRATIO suddenly dip by 5 percentage points (as it has in the last 5 years) amidst a concerted effort to make employing more difficult for employers I think policy……..not imports.

Dave Schuler March 25, 2014 at 7:39 am

With all the measurement and definitional caveats, per capita GDP is a reasonable measure of prosperity.

It is only a reasonable measure of prosperity with normal distribution of wealth and/or income. We don’t have that.

Guarneri March 25, 2014 at 8:16 am

No, we don’t, Dave. We don’t have anything in economics that is perfectly normally distributed. But we don’t have the situation you posited either, and I have yet to hear the case being made for less GDP.

Dave Schuler March 25, 2014 at 8:29 am

You’re dodging the question, Guarneri. Forty years ago income was much more normally distributed than it is now. I’m not arguing for an absolutely perfectly normal distribution—just one that’s more normal than the one we have now. I think that what we have now is no accident but a consequence of policy. Change the policies.

Arguing that nobody wants to pay more for consumer goods is dodging the question, too, in more than a single way. For most consumer goods labor costs are an extremely small proportion of the total cost. The reason that manufacturing is done in China is not as simple as lower labor costs. It’s lower total costs of production and, since we’ve been exporting our manufacturing for more than 30 years now, superior production engineering.

Nobody wants to be unemployed, either. Given a choice between paying a buck less for a pair of sneakers or having a job, I’m guessing that most Americans would rather have a job.

Additionally, I’m not just talking about manufacturing but primary production. I think the choice to offshore primary production has been disastrous. The greater tragedy is that the greatest reason for the policy has been aesthetic.

The strawman arguments and tertium non datur arguments are flying fast and thick around here lately and coming from both directions. There’s a lot of middle ground between anarcho-capitalism and a planned economy.

... March 25, 2014 at 2:00 pm

Guarneri, I’m looking at some BEA data on US GDP in chained 2009 dollars. According to that measure, the economy is more robust and larger now than it was in 2007. Somehow we’re managing to do that with lower median income and fewer people employed.

Looking at it on a per capita basis doesn’t help much. Finding data I like is a little harder. (The FRED seems to have discontinued the relevant series.) What I find shows that by 2013 we had essentially recovered.

So yeah, maximizing GDP doesn’t really seem like all that useful a goal if it means that rich people get richer while leaving most families poorer and a bunch more of unemployed people behind. It’s pretty much completely fucking useless unless you’re some shit-head politician (read: Obama) or one of his bunghole-licking sycophants (read: every Obama supporter ever) blowing smoke up people’s asses.

... March 25, 2014 at 2:07 pm

There’s a lot of middle ground between anarcho-capitalism and a planned economy.

Good luck convincing anyone of that. Go to a site that leans “rightward” and mention that you think income inequality levels have reached worrying levels and one gets denounced as a communist.

TastyBits March 25, 2014 at 2:38 pm

@Icepick

The GDP numbers have increased because of what is counted as Product. A lot of that is not actual value. It is paper value. This is one of the reasons the B+ economy has so many unemployed people, and as you have noted, they will never find a job again.

The conservatives want a free market economy until they actually have to pay for it. They court system is a huge government provided benefit. A fee should be required before a contract is legally binding in the court system. Instead, we have businesses freeloading off the taxpayers.

Andy March 25, 2014 at 7:13 pm

I volunteer to take the burden of $10 trillion in GDP. I promise I’ll use it well….

... March 26, 2014 at 1:42 pm

I’ll take that burden, Andy, and I promise to spend it recklessly.

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