Appendix: The Role of Government Expenditures in National Product Statistics

Appendix: The Role of Government Expenditures in National Product Statistics

National29 product statistics have been used widely in recent years as a reflection of the total product of society and even to indicate the state of “economic welfare.” These statistics cannot be used to frame or test economic theory, for one thing because they are an inchoate mixture of grossness and netness and because no objectively measurable “price level” exists that can be used as an accurate “deflator” to obtain statistics of some form of aggregate physical output. National product statistics, however, may be useful to the economic historian in describing or analyzing an historical period. Even so, they are highly misleading as currently used.

Private product is appraised at exchange values set by the market, and difficulty occurs even here. The major trouble, however, enters with the appraisal of the role of the government in contributing to the national product. What is the government’s contribution to the product of society? Originally, national income statisticians were split on this issue. Simon Kuznets evaluated government services as equal to the taxes paid, assuming that government is akin to private business and that government receipts, like the receipts of a firm, reflect the market-appraised value of its product. The error in treating government like a private business should be clear by this point in our discussion. Now generally adopted is the Department of Commerce method of appraising government services as equal to their “cost,” i.e., to government expenditures on the salaries of its officials and on commodities purchased from private enterprise. The difference is that all governmental deficits are included by the Department in the government’s “contribution” to the national product. The Department of Commerce method fallaciously assumes that the government’s “product” is measurable by what the government spends. On what possible basis can this assumption be made?

Actually, since governmental services are not tested on the free market, there is no possible way of measuring government’s alleged “productive contribution.” All government services, as we have seen, are monopolized and inefficiently supplied. Clearly, if they are worth anything, they are worth far less than their cost in money. Furthermore, the government’s tax revenue and deficit revenue are both burdens imposed on production, and the nature of this burden should be recognized. Since government activities are more likely to be depredations upon, rather than contributions to, production, it is more accurate to make the opposite assumption: namely, that government contributes nothing to the national product and its activities sap the national product and channel it into unproductive uses.

In using “national product” statistics, then, we must correct for the inclusion of government activities in the national product. From net national product, we first deduct “income originating in government,” i.e., the salaries of government officials. We must also deduct “income originating in government enterprises.” These are the current expenditures or salaries of officials in government enterprises that sell their product for a price. (National income statistics unfortunately include these accounts in the private rather than in the governmental sector.) This leaves us with net private product, or NPP. From NPP we must deduct the depredations of government in order to arrive at private product remaining in private hands, or PPR. These depredations consist of: (a) purchases from business by government; (b) purchases from business by government enterprises; and (c) transfer payments.30 The total of these depredations, divided by NPP, yields the percentage of government depredation on the private product. A simpler guide to the fiscal impact of government on the economy would be to deduct the total expenditures of government and government enterprises from the NNP (these expenditures equalling income originating in government and government enterprises, added to the total depredations). This figure would be an estimate of total government depredation on the economy.

Of course, taxes and revenues of government enterprises could be deducted instead from the NNP, and the result would be the same in accordance with double-entry principles, provided that a government deficit is also deducted. On the other hand, if there is a surplus in the government budget, then this surplus should be deducted as well as expenditures, since it too absorbs funds from the private sector. In short, either total government expenditures or total government receipts (each figure inclusive of government enterprises) should be deducted from NNP, whichever is the higher. The resulting figures will yield an approximation of the impact of the government’s fiscal affairs on the economy. A more precise estimate, as we have seen, would compare total depredations proper with gross private product.

In subtracting government expenditures from the gross national product, we note that government transfer payments are included in this deduction. Professor Due would dispute this procedure on the ground that transfer activities are not included in the national product figures. But the important consideration is that taxes (and deficits) to finance transfer payments do act as a drain on the national product and therefore must be subtracted from NNP to yield PPR. In gauging the relative size of governmental vis-à-vis private activity, Due warns that the sum of governmental expenditures should not include transfer payments, which “merely shift purchasing power” without using up resources. Yet this “mere shift” is as much a burden upon the producers—as much a shift from voluntary production to State-created privilege—as any other governmental expenditure.31

  • 29For a critique of the arguments for government activity—”collective goods” and “neighborhood effects” or “external benefits”—see Man, Economy, and State, pp. 1029–41.
  • 30Purchases from business should be deducted gross of government sales to the public, rather than net, for government sales are simply equivalent to tax revenue in absorbing money from the private sector.
  • 31Due, Government Finance, pp. 76–77. For application of the above method of correcting national product statistics, see Murray N. Roth-bard, America’s Great Depression (Princeton, N.J.: D. Van Nostrand, 1963), pp. 296–304.