Why Would We Think Increased Government Spending Is A Good Thing to Pursue? — Why Paul Krugman’s Love of GDP Is Wrong, Part One
I want to spend some time this week attacking GDP as the be-all and end-all of economic analysis. It’s a very important point, because it explains why the Paul Krugmans of the world think it’s great for the economy to boost government spending . . . or to have people dig holes and fill them in, so long as they’re doing something . . . or to do anything humanly possible to get consumers to spend, spend, spend. All of these wrongheaded policies flow directly from the overemphasis on GDP.
I want to keep my points bite-sized, so I am going to make this a multi-part series. Today, I address the fact that GDP takes into account government spending, even though government spending does not necessarily satisfy people’s preferences.
The video at the bottom of this post is worth your time. It features Austrian economist Jeff Herbener and historian (and author and prolific podcast host) Tom Woods. This video will provide the basis of two of my posts attacking GDP.
If you’re short on time, jump to 1:50 in the video, and watch for three minutes, stopping at 4:55. Here, Woods asks about the fact that government expenditures are included in GDP. Herbener explains that government expenditures are disconnected from our preferences — and are disconnected from the voluntary nature of the exchange, meaning that the prices are not market-determined, and are therefore inflated.
At 3:51, Woods plays devil’s advocate. Doesn’t government spending put people to work and put money in people’s pockets? Herbener explains: “The only way we can tell whether something in a net addition to human welfare is through voluntary purchase.”
At this point, you’re either nodding your head in agreement, or an objection is popping up in your mind: “Wait, how do we know that only voluntary purchases satisfy preferences? Don’t government actions satisfy people’s preferences? Isn’t that why people vote?”
The short answer is: sure, government actions satisfy some people’s preferences, by taking money from one group and giving it to another. (Government’s economic action ultimately boils down to that.) When you take from Peter and give to Paul, Paul’s preferences are satisfied, to be sure! — but Peter’s may not be. We can’t know for sure, because Peter was not given a choice. His choice was: pay your taxes, or have men with guns take you to jail. That’s not much of a choice at all, for most people.
In the free market, however, voluntary exchange satisfies the preferences on both sides of the transaction. When a car is sold, it’s because both the dealer and the purchaser think they are better off once the sale is finalized. Otherwise, the sale would not happen.
This is the type of activity that we want to maximize: transactions in which all parties benefit. But when we include government spending in GDP, we are including transactions that don’t necessarily benefit both sides — meaning that they don’t necessarily make consumers better off.
This is just one reason among many that maximizing GDP should not be the top economic goal of society.
Here’s the video. Tomorrow, we will discuss another part of the same video, to examine how GDP overemphasizes the importance of consumer spending to economic well-being.
P.S. Woods plugs Liberty Classroom at the end of the video. If you decide to sign up, please do so though this link, which benefits this site at no cost to you. Three people have signed up through this link so far, and the commissions I have received have more than repaid the $50 I spent to join. (I got the course for half price using discount code “DISCOUNT” . . . which still works.) In essence, Tom Woods has paid me to learn Austrian economics and non-P.C. history, and to spread the word to other people. I have access to nine interesting courses, and have listened (on my commute) to about 70 lectures on topics as diverse as Western Civilization, Keynesian economics, Austrian economics, U.S. Constitutional history, and logic. And I’m just getting started!
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