this is the Human Action podcast where we debunk the economic political and even cultural myths of the days here's your host Dr Bob Murphy folks before we get into our interview with Patrick Newman for this week's episode let me read these important announcements bureaucracy is both a weapon and a weakness for the modern State while it regulates spies on and controls almost every aspect of Our Lives it's impeded by its own incompetence and waste as me has warned in his book bureaucracy the ultimate basis of an all-around bureaucratic system is violence and as Murray rothbard said what bureaucrats and power Elites always want is for the opposition to shut up and go away to obey orders to accept their assigned tasks well we don't plan to shut up or go away join the mis's institute on April 26th in Phoenix Arizona as we expose the danger and waste of bureaucracy Dr Robert Malone Tom woods and Tom D Lorenzo will discuss the psychological operations and bureaucratic control The Madness of Co era public health and the corruption and hypocrisy of our federal bureaucracy tickets are $100 for mis's members and $120 for non-members register now at mises.org phoenix2 and here's your chance to win a free ticket enter the raffle at mises.org Phenix raffle 25 by April 1st winners will be announced the week of April 7th hope you can make it Patrick welcome to Human Action podcast thanks for having me on Bob well Patrick I was reviewing the videos from the recent uh austan economics research conference and you were basically just the star of the show like people couldn't get enough of you w well that that's very kind of you I uh I I hope it was at least I didn't have too many tomatoes thrown at me during my presentation so I I take that as a success so why I have you here besides your your general talk where you were the sole uh presenter is you were on a panel that Jonathan Newman had organized that was against mmt from various angles is going to be part of what's planned to be a book project that I'm also contributing a chapter 2 but I was not at the aerc to present on that panel and it was intriguing to me Patrick because your topic was saying hey should government spending or you know G be included in GDP statistics and that's interesting because you know Roth Bird's written about that but also it's on recent times like Elon Musk has raised it so I don't you want maybe just explain you know what why recently is this like a news hook but then also you know then what what you got into in your paper yeah sure so the discussion of discussion of what's in gross domestic product and should government spending or government's contribution to uh total economic output so to speak should that actually be considered meaningful output it included in GDP is for a long time since Murray rothbard wrote about this in the early 60s has been kind of considered a crank is libertarian position oh this is something that just a bunch of Fringe free market um uh you know anarcho capitalists Advocate but recently since the beginning of the uh the Trump Administration the Trump's president Trump's second term this has been in the news more you have Elon Musk Who is the I think he's the senior adviser to the president and is more or less in charge of the of Doge Department of government efficiency he's posted on X about this that government spending shouldn't be included in in gross domestic product figures and we've also seen the Secretary of Commerce Howard lutnick also make uh similar statements and and this is big because as the head of the Department of Commerce lutnick in theory has a Char has has has Authority over the statistics that the Department of Commerce releases in GDP is one of the statistics that is released by the Department of Commerce through the Bureau of economic analysis so this is this is a big thing there's a lot of discussion about eliminating waste Fraud and Abuse in the government and as course as austrians we would say that well there's a lot of waste Fraud and Abuse in fact it's entirely waste Fraud and Abuse and in this this this uh this session on Modern monetary Theory and the Book Project that's coming out it's a collection of essays I'm excited about that I think it's very important in in in my essay I talk about the effects of say debt monetization or just simply printing money to finance budget deficits how that would affect the structure of production and I argue like rothbard that it it would just simply lead to an increased consumption spending because government spending is consumption and that would cause higher interest rates and shorten the structure of production in making my argument I go through the the discussion of rothbard's uh accounting figure or the economic statistic that eliminates government's contribution from GDP and I go through a bit of The History of Thought which I find it's it's very interesting because all of this is is relevant what rothbart wrote about in the early 60s is relevant to today and it'll be very interesting to see what the Department of Commerce actually does about this okay great yeah a lot there just to unpack some of that make sure we're not losing people at the outset here yeah so the way I saw it come into the mainstream discussion by which I mean like people were talking about on Twitter as of a month ago or something was the I think it was the Atlanta fed published an updated uh GDP forecast like the FED now statistics or something and it had gone these numbers aren't perfectly right but it was something like in February it was you know they thought there's going to be 2 point something per GDP growth in the first quarter and then like a few weeks into the Trump ad Administration all of a sudden they were predicting a a contraction and so people were oh look at this and I think part of that was because they were building in forast of a trade War but also I think some of it was they were saying hey doge is talking about all these spending cuts and you know in the way our model works if Government all of a sudden were to unilaterally just reduce its spending then you know that's going to cause measure GDP to go down and that's what a recession is and so it was in response to that that then Elon Musk was chiming in and saying this is kind of Sil and he came up with some thought experiment about like what if the car companies laid off a bunch of Auto Workers and then the government just hired them to go work at the DMV and so he was saying if you just naively count I'm making his argument a little more rigorous than you know what he banged out on Twitter but his what you know the the Steel Man of his position was to saying that if you just count as oh yeah government giving salaries to people working at the DMV who presumably aren't making the standard of living higher for Americans when before they were earning the same salary working at a car company you know making cars that it's kind of silly to treat those two numbers into is the same footing in GDP when clearly you know the first scenario is better than the second scenario and so then you know his point was if the reason official GDP is falling is because we're cutting spending on things that aren't really doing anything for Americans then you know surely that's stacking the deck against us and that's not a good metric of economic health right so that was his point and then in response as you as you say Patrick everybody was just piling on and even I don't know if you notic this but it seems like the people who have particular scorn for the Doge people are like center right even repu like like conservative libertarian types who are like tied to DC thing tanks yeah like those people really want to come out oh yeah we're against government inefficiency but we're scholarly and academic about it we're not like these Rubes who just you know oh government bad you know so anyway they are all coming out to just make sure everybody knew how stupid Elon was and all this is violating the you know the laws of logic and and government expenditures have a valid place in the GDP statistics and then one guy this last thing I'll say here pck is he like showed a a correlation between like the Like official you know GDP and then private the private components of GDP and it was a very tight correlation and and he was saying see so and anyway it it's that doesn't really prove anyway my point is even if everything Elon said 100% true you would still see that result statistically in most cases so any like anyway they just we kind of talking in circles so one thing I did was I I pointed at the World War II period that where in the official statistics from 45 to 46 GDP went down slightly because of a massive cut in government spending and like private investment like went up like 160% or something like that in one year that was officially a recession year normally private investment doesn't go up 160% when there's a recession and in even private sector overall consumption and investment went up like 47% or something so anyway just kind of showing in extreme cases where it's driven by an exogenous cut in government spending yeah that's that's okay for the economy that doesn't you know all of a sudden leave the average people helpless so with all that context I was amazed to see your presentation and learn of your paper where you're saying this isn't just some cranky Austrian thing that even the developer of these GDP statistics Simon kets had some serious misgivings about what do we do about the government's contribution if any yeah absolutely so definitely the the the the sort of the the the brewhaha on Twitter was in part the the scholarly economists who are saying no you know that we need these now if if we're taking out government spending we're making the statistics more partisan and they're less trustworthy and I had thought that well actually and we might make them more trustworthy right if there's if they there was a disconnect between how people have been feeling about the economy over the past several years in these statistics then may maybe the statistic I'm not saying it necessarily is the statistics fault but it's just something we have to look into um but uh yeah so like this discussion I I first learned about this when I got into Austrian economics partially through some of your writings about World War II and the myth of wartime prosperity and and and stuff that a lot of people were were talking about around the the financial crisis that yeah we we think of World War II as being this enormously productive time for the US economy and that's how we recovered from the Great Depression when in reality it was actually after the war that we recovered because all of this wartime spending was really just military spending it wasn't actually making people better off and um economic historians on our side you know uh like someone like Robert higs who's has written about this the myth of wartime Prosperity has gone in into a little bit of the the origins of GDP and the history behind this but for my paper I really tried to dig in um you know could take a deep dive into the history of thought as to how these statistics originated and how did the government's contribution you know how was it you know how did it get included in GDP or um whether at the time was known as gross national product which is something we talk about if we want um and and yeah it's quite interesting because Simon kzit he had some serious qualms about how to measure government's contribution to the economy and it's not so straightforward as how the government does it now right which if the government does it now how the government does it now is just simply by how much they spend on final goods and services right it's not about how much people choose to spend on final goods and services right and this uh this is a this is a big issue and it's quite I was quite surprised to see kit make some sort of Quasi Austrian arguments in the debate with Department of Commerce officials which unfortunately as I'm sure everyone could guess he lost out on yeah so let me maybe just give a little more of the context and be and yeah what I want you to do in this episode here because we have highbrow listeners of the Human Action podcast is to you know get into into the weeds with this stuff because it does it did take it further than like I had known about I I read higs and I read rothbart but yeah you brought up some stuff that I I wasn't aware of these controversies and how like the the internal arguments of the you know FDR Administration and whatnot when this stuff was all getting banged out but um be a big picture just to make sure people understand like how where this come from theoretically and like why would standard economists think that oh yeah government expenditures and so as Patrick said there strictly speaking it's not just government spending right so Social Security payments right now are not included as part of GDP because that's considered a transfer so the idea is that when you're trying to measure economic output we're we're actually trying to gauge production right it it's gross domestic product how much stuff is produced and as Patrick says it's it's final goods and services right so if a used car dealer just sells the car they they don't count the full value of of the car they just count like you know the the additional Services provided by the dealers and intermediary whereas the you know a brand new car being sold that gets fully counted into GDP for that period and so the the idea is it's easier to measure spending just with our we have better statistics and say ideas oh well all the stuff produced is bought by somebody or it can go into inventory and they have that adjustment and so if we could just measure up all the total spending on final goods and services that's the way to to get these numbers and so then you run into the aggregation problem like what does it mean to measure like how many total cars and apples and diapers did you make this year if you're comparing two different economies like well those are different units so the obvious common denominator is to put it in money terms so that's why they measure all the spending but again it's the the idea is we for government's contribution that they want to say well it's government spending like if the government's buying tanks yep that's GDP but if the government's again just giving to Social Security beneficiaries or you know food stamps or whatever that's not GDP because that gets caught you know when the they go spend the money and buy stuff and so the theory is well yeah I mean if one household spends $10,000 on something and another household spends $110,000 on something else they both had access to those goods you know and there's competition and whatever they had voluntary choice and so what else could you do except to say both of those decisions mean GDP went up by $20,000 because of you know those things and so you kind of have to put them and so then the issue though is well wait a minute is that does that argument flow through if government officials approve spending 10 billion on fighter jets and and again this isn't just some libertarian oh I don't like the government it's just as Patrick's goingon to explain here with with kzit who you know the guy was not a minarchist by any stretch certainly wasn't an Aro capitalist but he was just saying yeah the logic by which we could say lump in all expenditures and say well you know $10 of GDP is $10 of GDP and you can't get in there and wonder about you know or cigarettes good or bad for you you know you got to kind of lump it together and but yet there is something qualitatively different if government officials are the one you know with the expenditures so you want to explain like what CU that's hand ringing was over yeah um so when kzit kzit had created the first national income statistics in sort of a one time service for the Department of Commerce this was after the the worst of the Great Depression in you know by 1934 the the bottoming out had occurred and the government was trying to figure out okay how much did output decline how much did living standards decline so kit creates these national income statistics and he's able to measure how much consumers value various goods and services by how much they're willing to pay right the market value the price times the quantity right but from the outset he recognized that there were conceptual problems with um measuring government's contribution right and and and uh he said the the first problem is that there's no profit and loss there's a lack of a profit motive right which encourages you know businesses to produce Goods that consumers are willing to spend the most amount of money on that's not what the government does that's not how the government's motivated and the government also collects money through what he called say like a fixed payment right or assessment like a tax right and it's not a voluntary price that you know consumers could choose to pay or not pay right you go to the grocery store you buy uh deli meat right or you or you could go to the grocery store and you choose not to buy deli meat right that's not how taxes work and KET struggled with how to measure a government's contribution he basically said there were two ways we could do it one of them was the cost principle what he called the cost principle which is how much the government spends right on final goods and services um you know how much they spend on employees on other factors of production and so on uh and then there's what he called the payment price principle which is how much revenue the government collects from people right assuming it's sort of a payment for the final goods and services the government produces like you know like a tax revenue and he said that there these were basically two evils right neither of them were were were were great right they both had their their conceptual problems the the payment price principal approach measuring government's contribution according to tax revenue uh has problems due basically the fact that tax revenue is not the same as business Revenue right one of them is consensual uh one of them consumers can choose you know to to to to pay or not pay the other one the tax is clearly forced and the the cost principle also suffers from some issues he initially had uh stuck with the cost principle that was what he used in his first study but then several years later he said that wait a second um this could be a problem because what if the government's running a deficit right which is something that had really started to happen in peace time in the 1930s with FDR's New Deal and then he thought that well now how much they we spend there's a big difference between that and how much revenue the government earns and he basically went back and forth where by the time of World War II he had ended up sticking with tax revenue saying that we should measure government's contribution according to how much tax revenue it collects more or less we go in the specifics of the types of taxes and this is a this is an important point of course we're going to get into the World War II story but this is already very different than how the government um uh uh measures its own contribution now it's it's interesting that back then especially like you say during peace time it was basically governments were supposed to run balanced budgets and so it's just interesting that he was like well conceptually you know how much the government takes in in revenue and how much it spends it's kind of the same oh wait a minute what if it spends more than it takes you know what I mean whereas now it's like well yeah yeah yeah like that's just normal business but back then that was a that was a big deal right you only really ran budget deficits during a war time at least that's when you were supposed to do it but uh yeah it's it was so it was I when I first read that I'm like oh well that's just totally normal right now right but I yeah so and again just for people they they would run Sur so yes they would run up debts during Wars but then they would run surpluses afterward right because the idea like it was like the government was a giant business and yeah businesses can issue bonds or whatever but you can't just perpetually keep going deeper and deeper into debt the idea was so yeah yeah and and the Other M the other point to uh mention minor point is that um the federal government spending or just government spending was a much smaller share it was it was of of the economy um you know before the 1930s and then the 1930s especially World War II it really started to creep up right and that had kind of affected the calcul the the calculus because it's like well government's spending so much well clearly it's got to have such a an outsized influence y okay so then do you want to take the story into what happens when we go into World War II yeah so the the World War II story I think is is really is really interesting so most probably most listeners on this podcast are familiar with uh what we had briefly spoken about before were the myth of wartime Prosperity uh yeah the World War II did not get the United States out of the Great Depression just because the government was spending a lot of money on tanks and and and weapons and and and drafting soldiers and and you know making bombs and sort of stuff that wasn't really output that uh consumers valued like other other goods and services on the market it was really only after the war that we saw the private seor sector recover in the economy really truly recover what's interesting is sort of when I was looking into this is that there there was a bit of a controversy between kusnitz and the Department of Commerce right because kusnitz had written this important study I think it was called something like national income and its composition had come out in 1941 and this was him kind of looking back on his research and that he had done in the 1930s on how to measure you know the the overall size of the economy and that was pretty big stuff for the time right because it was just new statistics and and then of course Pearl Harbor happens and then we enter the war shortly thereafter um but for the longest time not really for the longest time but in the run up to Pearl Harbor the United States government the FDR the FDR and the Roosevelt administration had tried to kind of mobilize for war get us prepared for a conflict that might happen but Congress was reluct to approve all the expenditures that say various alphabet soup bureaucracies in the in the executive branch wanted uh to get you know they wanted these Appropriations approved and because Congress was looking at some of these national income statistics that kusin was producing and saying well this is going to impose too big of a burden so World War II happens and right after the the the the uh the government uh the United States St government we enter the war so in early 1942 the Department of Commerce produces new um uh national income statistics which they call gross national product right and the main difference between GNP in ket's national income statistics was that now all government spending on F what they had considered final goods and services would be included right and the history this is actually really interesting because Milton Gilbert was head of the relevant part of the Department of Commerce uh who had issued these statistics and he his cousin was Richard Gilbert who was the director of the defense economic section of the office of price Administration in civilian Supply so this is we're going to have a quiz at the end of this podcast got to make sure everyone knows that and Richard had been trying to get Congress to approve War mobilization but he had failed and Richard was a Keynesian and he had convinced his cousin Milton that's like look we got to I I know you were close with kits uh but we we we got to do something different right we got to make the denominator bigger in other words since these statistics came out and um yeah they showed that well the the United States economy we can handle all of these wartime expenditures right and they were designed gross uh national product the the the that statistic was designed explicitly to make it make the uh burden of War Mo mobilization seem less of a burden right and um that that's I certainly found found that interesting and and um kusnitz had accepted the change for war because he had said well okay war is essential this is a fight for the nation survival so it's like okay this this makes sense but it was it was after the war that there was a big sort of brewhaha and I don't know if there's anything you want to add to this before jump into this I don't want to um what yeah again let's just make sure people are are getting the big picture here so again putting aside your libertarian uh thoughts on this stuff and evaluations and gut reaction but just in like let's let's say you're a a regular person who thinks like oh yeah the government's got to have like a fire department or something you know you don't you don't even conceive of could there be fire Prevention Services or that are you know privately supplied and so even if you think that's totally vital function of the government and yet obviously the firefighters have to get paid salaries and there's got to be you know fire trucks that costs money and it but still it's not obvious like how would you quantify the output of the fire department in your local city with you know the output of the grocery store down the street from it or whatever right so it's and and as Patrick was saying you could there's two obvious things you could say how much does the fire department spend or how much does it get allocated you know and then there the the the difference would be turning up if they if they were allowed to run a deficit right so you can see how the government as a whole but the point is the critical point is you could have two cities side by side they both have fire departments and in one of them maybe everyone's just lounging around and the and half the fire trucks actually have flat tires and things like that and they maybe they they have identical budgets and so the point is like it's not obvious that just the amount of expenditure or you know what line item is in the budget and whatever that that's not it's not clear how do you measure if they're really providing goods and services that the Community Values and that should be put on the a similar footing as the grocery store that has a similar amount of you know payroll or something for its employees so that because again the point is if there is a grocery store where all the employees are lounging around and you go in there and all the shopping carts half of them the wheels are broken people are going to stop going to that grocery store and so you know that's why it is a decent metric to look at like you know the the the net profit or the revenues or whatever of that grocery store to get an idea of how much service is it providing to the community what big what big a footprint is it in the economy because if it's not up to Snuff it'll go out of business whereas there's nothing that's going to make the fire department go out of business so that's kind of the issue and so then Patrick what what I thought was intriguing about your story is you're saying it's it's not that oh yeah just kind of a happen stance in the way they calculate the government statist or GDP such that by definition by Construction of the formula if government purchases of goods and services goes up then automatically GDP goes up dollar for dollar and hey you know that could be a good thing could be a bad thing I guess it depends you're saying that wasn't just a statistical thing like they intentionally the reason for that adoption was precisely to justify all the huge expenditures that were going to be necessary for war mobilization yeah ex exactly the it was designed to make it seem as though the war would it impose as harsh of of a burden and and bear in mind playing playing Devil's Advocate from the perspective of the economists who would agree with say the Department of Commerce method over Simon kusit they would say well yes this is a more accurate representation of the economy right so it's like this is this is proper uh of course other people could would would would disagree and and as you mentioned just to really kind of hammer this point home it it it it's it's the issue of the fact that the government does not run on profit and loss right the G um uh uh GDP doesn't measure business's productivity by how much it spends because if the business spends more on its factors of production uh then it the revenue it receives it's actually a loss and it's it's it's it's um it's wasting resources right the the the government though doesn't actually uh earn a profit or a loss in the revenue the tax revenues divorced from its payments and this is this is a point that austrians and free market types make but it's not just us right this was something that had been raised by Simon kzit and one thing I didn't mention is he did win the Nobel Prize for his study on economic growth so he wasn't a fringe figure he was very important in the history of thought in in the history of of of uh of macroeconomics so by the time uh World War II is over well can you hang let me just make we just reinforce the the point about the wartime spending stuff cuz I I did some stuff in my you know pop book the politically incorrect guy to the Great Depression New Deal where I was going and digging up some of the stuff that Robert higs had done you know his scholarly work that you alluded to Patrick so just make sure people understand for one thing it's typical for a lot of right-wing conservative types to say oh the New Deal didn't end the Great Depression World War II did yeah any was say okay so you're a Keynesian which is f you know maybe Keyes is right but just you know you you think you're dunking on leftist but Democrats by saying that no you're not you're conceding that oh yes big government deficit spending is what fixes depressions it's just you know the New Deal was too tepid okay so you know Paul Krugman agrees with you just to make sure you realize that that's your your point so that's why if that does make you feel awkward then you know I would invite you to consider the perspective of like Robert higs or you know Patrick Newman and Bob Murphy that um the the reason for saying that like if you just look at the standard statistics it looks pretty like a slam dun case that yeah the GDP growth was awful you know there was a double dip uh in the 30s that you know in 3637 again GDP collapsed you know real GDP and unemployment spiked up again into the high double digits and it was terrible and and it wasn't until the early 40s when the US finally you started seeing rapid real GDP growth and unemployment came down so gez guys I mean the numbers don't lie and the point is that if you decompose the reason quote real GDP exploded there was a two-fold thing that yes government spending on Bank battleships and tanks and paying troops salaries or whatever that necessarily pushed up GDP you know the nominal or GNP I guess at the time nominal the the you know the way we' calculate that but also I don't know if this was on your radar Patrick the Fed was monetizing a lot of the debt necessary to do that and so normally consumer prices would have gone up and so if you were doing quote real GDP by saying oh yeah total expenditures on final goods and services went up such and such but you know what the prices of a basket of goods and services also it was illegal for prices to go up they had price controls and higs reported they didn't account for that at all and I even emailed him when I was writing my book and I said do you mean you don't think they adequately accounted for it or they literally ignored that he said they literally ignored it so again the fed's creating a boatloads of money to lend to you know to buy government bonds and then so that's fueling these huge deficit spending so these government expenditures on war Goods is pushing up and if you look at the Decon composition I mean it was like government spending got to be like 40% of the economy in the in the peak War year so this is a huge factor and normally that would have pushed up prices to you know make real GDP not as as big but they just literally made that illegal you you can't raise prices and so that made wow nominal GDP is going through the roof prices aren't going up too much so yay government and then last thing I'll say here on the unemployment stuff higs pointed out and said Well yeah if you draft millions of men and send them overseas that might reduce unemployment and he showed it wasn't even one for one I don't remember the exact number but it was like if they took a thou a million men and put them on ships and sent them across the sea the amount of unemployed did not go down by even a million it only went down by like 800,000 so it wasn't even you get what I'm saying like so they were drawing people on net out of employment in the private sector it was just that you know they somewhat did reduce the pool of the unemployed and so therefore hey the unemployment rate went down that's awesome okay so anyway there I get off my Soap Box oh no no I I'm I'm glad you I'm glad you mentioned that I'm I'm I'm glad you mentioned your book Politically Incorrect Guide to the Great Depression that's how actually how I had first learned of this back in high school when I had when I had read the book and it was like oh yeah they because I was in my I was in my history class saying like no it didn't you know it didn't get us out of the Great Depression see and and and yeah we could there's all sorts of funny statistics the go the including the government spending or how the Department of Commerce changed you know the the measurement of uh national uh you know output statistics that's only like the tip of the iceberg there's the all the funny business with with prices and price controls and then unemployment yeah you could talk about workers getting uh you know people getting unemployed people just getting drafted right and and all sorts of stuff and yeah so it's it's they you know you could argue they cook the books and it's unfortunate that this is old myths die hard and that even many conservatives buy it I think it is partially because conservatives many some of them unfortunately have a uh you know they they're they're good they're bad they're against welfare spending but it's the military spending right that's the that's the good part of government right we need to increase that and and that's that's that that's a old myth die hard I I guess and and and yeah so the the the World War II GDP figures or what was known as GNP um they they they were a big change from say what kit was uh producing before and and um the the ks had made the point that Austrian economists and Libertarians and free market types have made which is that when you're constructing the statistic like this now if G goes up GDP goes up right and this is literally this is also the point Elon Musk had made but kits had made this point right it's not just Fringe economists making this point I mean he' recognized in you know I quote um his own statements on this and I quote historians who've written about you know who who commented on this saying kit was cynical about this and and and and and um after the war there was a very heated discussion because once kits found out that it wasn't just going to be for war time this was going to be how the statistics would be done even in peace time cousin was very upset and he said that this is like a he said it's like a fetish it's like a sort of a form of fetishism and and I don't know I just thought that was an interesting a very descriptive word for this but he made the point that again uh you've made higs is made and so on it's a just because the government's producing a lot of stuff right we see tanks we see you know we see soldiers we see bullets whatever you know and then we could even extend it to just government infrastructure and so on just because they're producing a lot of stuff doesn't necessarily mean that Society values it right and that was his Central Point that he unfortunately had you know he did not win that debate the Department of Commerce had way more resources than than kits and the Department of Commerce of course had a vested interest in increasing um government's importance in the statistics because again they could get more money their Department could you know the department could get more Appropriations from Commerce uh excuse me from from Congress and that that means they can hire more economists and so on and and that's that that of course is something that has to be um uh mentioned and it it is just important I I just found it was so timely this discussion because literally these these the these debates that are happening now uh references um what was going on in the past and um we could talk about you know this is It's oh everyone government spending is controversial some people think that government's contribution is overstated in GDP like austrians then some people like modern monetary theorists or other people say it's understated right environment stuff income inequality whatever so this isn't just a fringe debate this has literally been at the heart of macroeconomic uh statistics well yeah I'm glad you made that point and I I want to make sure that we're emphasizing here that this is not merely like oh Libertarians in your distaste for like even if if you think it was absolutely essential for the you know future free fre of the world that the US government went into World War II and spent all that money buying tanks and battleships and you know hiring troops and equipping them and whatever or not paying salaries to troops hiring is not the right word drafting troops then giving them some money after fact um that that's the point though is like okay but how do you assess you know when you're measuring the economic output of two economies side by side and one of them is cranking out battleships and aircraft carriers and things and the other one's just cranking out cars and motorcycles for civilians how do you compare those and it's not obvious how you do it and it could like Patrick is saying you could think that oh it's vastly understating it like oh for just spending whatever a billion dollars on military defense we get effectively a hundred billion dollar worth of a flow of security services and so you know that you could you could make an argument like that whatever but the the point is simply that the normal the rationale for why you put spending by household private companies on the same footing dollar for dooll just Falls away when it comes to government services so Patrick can you just go Circle back though I I want to make sure I'm getting the point was Kit's did I understand like the way he thought the national income statistics should be reckoned was that he thought basically government tax receipts were the best proxy but then in the war they said no government expenditures that was the issue and so really the the two are kind of similar if you have a balanced budget but it's when there's a am I missing something is that too simp yeah yeah so that that's the that's the the basics of it um we could go really we could take a deep dive into then talking about the types of taxes like U because then it getss into discussion of what is a final good or service that the government produces and would like a business tax be a metric for intermediate Goods or would it just be say personal income taxes and and and we could get into all that I think it it's it's probably a bit too in the weeds but in so many words that's correct kzit said tax revenue is what should be um considered and M rothbart had mentioned this in man economy and state in America's Great Depression He was discussing um uh these types of statistics and and he he saw there was certainly more Merit in ket's position than in the Department of Commerce position but you know rothbard said that well this isn't still good enough because tax revenue is not like a voluntary payment right right okay so is again I know there's a lot of subtlety involved and you're right there's different like a um a a a what do you call that a toll on a road especially like if there's free roads and then there's a you know it's a government owned and maintained and there's a toll but people can choose to drive that because there's less traffic or something like that even though you might call that tax revenue you could see how that's a lot closer to a private business charging a price than you know than you know taking money from you because hey your your stocks went up and you sold some and so you get hit with an income tax on the capital gain I so I get I get that that there's subtleties but just big picture KET is coming from the point of view that in a sense the especially if there's periodic elections or whatever that yeah the public if they're willing to tolerate a certain amount of Taxation in exchange for this package of government services You could argue Loosely speaking Yeah the cment the the public is paying for those services but then the issue is but then if the government wants to spend more and they know oh no if we tried to raise tax revenue and fund all this spending with a balanced budget the public wouldn't go for it so instead we're just going to go borrow money have the treasury issue bonds then it's like well wait a minute now even that tepid link of the public was okay now it's you know the people voluntarily lending money to the government it's because they're going to get paid in the future out of tax receipts right so it's not like they car one way or the other about the flow of government services you know what I mean like in other words they're not paying for the government services they're just getting the yield on the treasury debt so the fact that they're willing to lend money to the government isn't them blessing what the government's going to spend the money on right and so whereas again if if the government like Compares its tax burden with the government services and doesn't have a Revolt or you know vote somebody else in the next election it's like yeah you're kind of tacitly approving so is that I mean I get I get it's a lot more Nuance than that but is that a rough cut of where Kut was coming from as to why tax receipts are a better proxy than government expenditures yes yeah that's that's that's more or less what what he was getting at right he had said that you know he he had made the argument well we have to include government's contribution somehow I mean in one his first writing he's like because the post office right and it's like you know so there's the whole argument of like okay could private businesses do this but yeah then he he used tax revenue SP has entered the chat yeah yeah yeah yeah cuz it was a rough uh like it's it's a rough measure of in his mind how much people value the government services and in a balanced budget it it makes you know it makes sense right or if a government runs deficits but then they run surpluses okay that makes sense but as kit had written about this and as this debate had unfolded and I mean he had pretty much lost by the late 40s but he had kind of done some writings on this in the 50s and early 60s it had become very clear that deficits were here to stay at least the phenomenon of of deficits um in then especially in later decades but of course government's elevated uh spending uh since the you know since the Great Depression was here to stay and that has sub subsequently influenced all of our all of our views on this because then we just take it for granted oh yeah well what the government spends that's that's of course valued uh by by the people according to that you know how much the government spends and if you disagree with that well then you know you you're backwards right you're you're you're you're ignorant and and that's that's actually not really how this U how government's contribution um uh was was was included there was there was a vigorous debate you I mean for anyone interested in the really Arcane um uh details there was a serious debate I cite the papers in in in my in um in my paper and kusnitz and Department of Commerce officials were going back back and forth at each other yeah great yeah so folks just so you are reassured when when the book becomes available that's a collection of you know Patrick's essay and then um and others are going to contribute uh I'll have Jonathan Newman a different Newman on to you know push the book and let you guys know it's available so don't don't worry about that um just as an aside was just something you said triggered a thought uh Patrick that it is amazing how much The Economist understanding and rationale or whatever framework for handling government budget deficits has evolved cuz like we said at the beginning of this episode back on the classical gold standard like governments were just considered like giant companies and it was like well when when is it okay or when is it a good idea for a company to issue debt it's like well if there's an emergency or like a household you know your your kid's sick or something you may got to borrow money but then you pay it off and so that was the expl it wasn't counter cyclical fiscal policy right and then in the you know post World War II you know 50s and 60s of hydraulic keynesianism they still had a what they what they call it um like the business cycle balance budget or something like Cally adjusted yeah balance budet so the idea was the government would have a budget a balanced budget over the course of the business cycle so that yeah when the economy's in recession the government runs big budget deficits to help boost a demand but then on the flip side when the econom is booming the government should be running surpluses partly to you know to Tamp down on the excesses but also because oh yeah over the whole course of the thing you can't just keep getting deeper and deeper into debt you got it and then that all went out the window too such that you know when when I when Tom woods and I were doing Contra Krugman I mean Paul Krugman would regularly write articles about how you know if you run the numbers here you can model it and so long as the go the the share of the government's deficit you know relative to the economy is below a certain like as long as the growth rate of the economy is higher than the yield on government debt or something like that you could have a you know deficits forever right just because that you know you could run the equilibrium thing and just show that the government's total debt as a share of the economy stabilizes and that's consistent with forever deficits as you know as long as the share of the economy is is fixed and so it just interesting how that just kept changing over time until now it's like yeah you never need to run a surplus what are you talking about yeah yeah I it is interesting and I think a lot of economists don't know this because simply History of Thought history of economic thought is something that is not taught anymore in graduate schools or is that people are expected to know it's just whatever is being done now it's it's this is the latest and greatest method or whatever and and this is what people need to do but definitely our views economists views of government's contribution uh to the economy have evolved in part because in the 1800s in the early 1900s government was a relatively small share and it was seen as sort of like a necessary evil but then really beginning in the New Deal in after government had a much bigger influence and a much bigger role oh yeah the government should build X Y and Z or the government should take care of people's Health the government yeah we need to have troops you know not just in the United States but in other countries and and and and so on and and I think yeah the whole thing I was just thinking of this it came to mind it it all hinges I think on the you the profit and loss um discussion I had mentioned earlier and most economists who who like who were going to defend government's contribution they are going to go off what's known as cost benefit analysis right which is like well we can we can we don't actually get prices paid for what the government does but we can estimate them right and that's how we can justify that this regulation will benefit the economy or this government spending will will will you know will benefit the economy and and then it becomes a battle over cost benefit calculations and stuff but really this all kind of fake it's fake prices it's it's not actually real prices paid and and this is just something that I I I think we could see something like this if we saw Elon Musk tweeting about you know G shouldn't included in GDP we're going to see something inevitably about well cost benefit analysis is really just smoke and mirrors right which I think then would set off a whole Chain Reaction yeah of Revolt yeah maybe in closing here we'll just can spend a few minutes talking about Roth folks in the links for this episode I'll I'll give you a link to the the online pdf of the scholars edition of man economy and state which is Roth Bird's magnum opus in case you're unfamiliar with it and in an appendix so it's of that second edition of the scholars uh Edition it's it's Pages 1292 to 1295 where he is he's talking specifically about this and he gets into like his concept of private product remaining and stuff like that do you do you do you get into that into your paper yeah I briefly discuss uh private product remaining in I mean I in in for Simplicity rothbart says you start off with GNP and you subtract the income originating in government so or in government Enterprises so it's basically like uh government employee salaries you subtract that from from GNP and and then you subtract whichever whichever is greater tax receipts or government spending because either whichever one's greater is the real burden and then you get private product remaining and that is kind of the share of sort of the the the market just what rothar would consider genuine economic output so something that KET never went that far he had briefly kind of toyed with that at the beginning of his of his his work on this but definitely private product remaining is just sort of a more uh I view it as The Logical extension of um of of of counting government spending according to the tax revenue because I think built into all this discussion even kin's analysis is like oh well we have to include government's contribution it's like what would happen if we didn't measure the value of the post office or something like that but as rothbard shows it's like well and rothbart of course had this whole Treatise on this explaining how the market works and how the government doesn't work and saying that well actually government's productivity is is is is less than uh is is is is is less than positive right or it's it's it's it's 0% or could be you argue even negative and this is um you know going through there's no profit and loss they it's a fixed payment you know taxes it's they there they can forcibly block competition and all this stuff and he creates these statistics private product remaining um he applied it to the Great Depression he didn't really do anything after that uh using the using the statistics but some austrians have Robert bate Marco uh uh kind of developed some of these statistics um there was a a former mises student who had kind of pushed uh developed some of these statistics further on into uh you to the present day I think this is a great research project for an Austrian scholar or just someone interested in this was to kindy of create private product remaining like a a comprehensive view of it for the United States or for another country I think that's that's something that uh someone should definitely work work on maybe Doge yeah yeah last one here so I'll I'll throw this out then if you want to comment on you can Patrick or you you can choose to abstain the what I remember when I was going through like I wrote the study guy demand economy and state and something there I wasn't I didn't have time to really ponder it but I didn't I wasn't sure if if roord was almost like double subtracting like in other words for sure we get why the government spending money on you know a bunch of government employees doing something that that should not count in GDP but I wasn't sure so okay so if you don't include that then why would you subtract you know what I mean like in other words yeah certainly they're not contribute but then it wasn't obvious to me do you then subtract it as well so I get that their existence is siphoning resources away from what otherwise would have been private sector output but if what we're trying to measure is what is actual private sector output right now you know subtracting seems like oh you would have been subtracting from what would have been a bigger number if you get what I'm saying so anyway that was yeah so you're mentioning why is rothbart also subtracting the the government salaries as opposed to just not adding it I I totally get why you wouldn't add it in there but if yeah yeah I yeah that's a good point I think he mentions this in like a footnote in America's Great Depression it's it's uh it's I think he basically argues that yeah it's it's like it's based on tax revenue right and and I I I I do think there is something some more analysis that should be delved into this and um bear in mind the statistics rothbart was using were not as clearcut as some of the stuff that the government issues now but I think his argument is that well this is product that the government creates but it's it's waste so we need to take it out uh as well and then we also need to take out whichever burden is bigger I think he had mentioned that it is a slight overcounting or of the burden to the extent that the bureaucrats themselves the government employees they pay taxes but I guess he said you know there was nothing we could we could do about it but it's definitely something that I think should be standardized and Austrian could write about this what's the appropriate way to do this is there any change if you know we do it one way one way or the other and like I said there's been some uh important uh kind of studies on this that uh I think should be continued okay well that's a good place for us to wrap up so again folks if you want to see Patrick's lecture at the recent aerc we'll put that the links and we'll have Jonathan Newman on coming and promoting the book The Collection when available in the meantime thanks Patrick for your work and the presentations both of them you gave at the aarc and thanks for coming on here to tell us about what you did yeah well thanks so much for having me I hope everyone found this found this useful and really excited about the uh the anti mmt book and uh I'm excited for when it comes out and I think everyone at home is too thanks everybody for tuning in we'll see you next time check back next next week for a new episode of The Human Action podcast in the meantime you can find more content like this on mises.org [Music] [Applause] [Music] [Applause] [Music] [Applause]