Real gross domestic private product, 2000-2012.

• Author: Higgs, Robert
• Position: Etceteras ... - Essay

In the 1930s and 1940s, when the modern system of national income and product accounts (NIPA) was being developed, the scope of national product was a hotly debated topic. No issue stirred more debate than the question, Should government product be included in gross product? Simon Kuznets (Nobel laureate in economic sciences, 1971), the most important American contributor to the development of the accounts, had major reservations about including all government purchases in national product. Over the years, others have elaborated on the reasons he gave and adduced others.

Why should government product be excluded? First, the government's activities may be viewed as giving rise to intermediate rather than final products, even if the government provides such valuable services as enforcement of private-property rights and settlement of disputes. Second, because most government services are not sold in markets, they have no market-determined prices to be used in calculating their total value to those who benefit from them. Third, because many government services arise from political rather than economic motives and institutions, some of them may have little or no value. Indeed, some commentators--including the present writer--have ultimately gone so far as to assert that some government services have negative value: given a choice, the people victimized by these "services" would be willing to pay to be rid of them.

When the government attained massive proportions during World War II, this debate was set aside for the duration of the war, and the accounts were put into a form that best accommodated the government's attempt to plan and control the economy for the primary purpose of winning the war. This situation of course dictated that the government's spending, which grew to constitute almost half of the official gross domestic product (GDP) during the peak years of the war, be included in GDP, and the War Production Board, the Commerce Department, and other government agencies involved in composing the NIPA recruited a large corps of clerks, accountants, economists, and others to carry out the work.

After the war, the Commerce Department, which carried forward the national accounting to which it had contributed during the war (since 1972 within its Bureau of Economic Analysis), naturally preferred to continue the use of its favored system, which treats all government spending for final goods and services as part of GDP. Economists such as...