the marginal value of government services

From Tyler Cowen’s new ebook, THE GREAT STAGNATION, an interesting idea I’m not sure I agree with:

Let’s say government spends $1 million fixing a road: How much does that contribute to measured GDP? $1 million. … In other words, in measured GDP, we are valuing the expenditure at cost…

… A dollar spent on very basic police and courts and army protection is worth more than a dollar spent on refurnishing a warehouse in Minneapolis under the guise of urban renewal. A dollar spent on welfare for the poorest is more valuable than a dollar spent extending the program to better-off but still poor cases. And so on. Yet when it comes to national income accounting, and measuring GDP, we are valuing every one of these different expenditures at $1. In our measurements, we are assuming that the quality, importance, and efficacy of government stays constant as the size of government grows.

Over time, an increasing percentage of what we spend on government is spent on optional rather than core services because the core services tend to have been around longer. Another way of putting it is to say that the marginal value of added government, even if positive, falls as government grows larger.

To better measure how well we are doing as a nation, remember this about productivity:

The larger the role of government in the economy, the more the published figures for GDP growth are overstating improvements in our living standard.

Obviously I’ve omitted a lot of stuff from that, but I think it’s mostly scaffolding — useful context but not the core of the argument.

Anyway, it seems like there are a couple of reasonably obvious places to poke holes. I wonder how much agreement there is on what governmental services constitute “core” services and how much more they’re worth (and how reliably they’re worth more) than “optional” services. I also think the coda above, italics Cowen’s, fails promiscuously in one case, namely when all government spending generates more than a dollar of value per dollar. (In that case, it’s “the LESS [GDP growth is] UNDERSTATING…”) However, I’m not sure exactly how things are measured, so I don’t know if he can get out of that as long as the marginal value of government spending is decreasing, no matter how high it is. I’m also not sure that scenario is terribly likely.


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