In a new paper, Robert Higgs reports:
Until World War II and the postwar years, when the federal bureaucracy institutionalized the government’s preferred method for calculating national income, economists offered sound arguments for excluding government spending from estimates of gross domestic product. Using their general approach reveals that the private economy’s performance for the past thirteen years has been only somewhat better than complete stagnation.
I don’t think that zero counting of government consumption is the correct approach here, but this is nonetheless an interesting exercise. Keep in mind that even if government outputs are highly useful, many of them are closer to intermediate than final products. In other cases the output may be useful, and a final product, but not valued at actual market prices. There is then still something to be learned by considering and segregating, if only temporarily, those parts of gdp which are sold at true market prices.
For the pointer I thank Daniel B. Klein.