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Accounting for the economy – and the cost of government

August 22, 2017

Back in the early 1930s, the U.S. government was groping around trying to understand how bad the developing Great Depression was.  The government engaged the efforts of a Russian-born economist, Simon Kuznets, to measure “national income” and what was happening to it. 

In his analysis, Kuznets did not include government as a sector in overall national income.  He conceived of it as a cost for private sector activity.  Over time, however, a growing number of economists began to assert that government spending belonged in overall GDP, inspired in part by the growing influence of John Maynard Keynes.

Today, Keynes’ influence lives on, at least in national income accounting.  Students learn that GDP = C + I + G + NX (consumer spending plus investment spending plus government spending plus exports minus imports).

But Kuznets’ arguments haven’t completely fallen by the wayside, and a number of influential economists question whether government spending really belongs in there the way modern GDP accounting works.

Putting that interesting and important debate aside, for the moment, consider a related quest. 

If it is good for the goose, is it good for the gander?

The large-scale accounting methods for GDP have a big section devoted to G, government spending.

How about the CPI, another government statistic?  How does our government consider the cost of government?

There are sections in the CPI for a variety of goods and services, for example Food, Energy, Medical Care Services, Shelter, Transportation Services, and Commodities (like New Vehicles).

But there is no major category for Government Services in the CPI.

Living in Chicago, Cook County, and Illinois, well, it feels like the cost of the Government Services we are forced to consume are rising.

It’s not like the cost of government is completely absent from the measured CPI.  It has indirect ways of getting in there, for instance, showing up the price of soda pop, via taxes on soda pop.

But maybe we need a fundamental revision in the CPI, providing more explicit accounting for the cost of Government Services. 

It wouldn’t be easy, of course.  Consider whether large sectors of our Education, Medical Care, and Banking and Financial Services sectors should be considered as a mix of private/government services.

But maybe the time has come for a fundamental revision in how our government accounts for our cost of living.

(Thanks to TIA intern Chao Wang for some good background research into this.)


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