Beware most measures of government consumption

Garett Jones reports:

Here’s one big area where I think we should change what we call one type of government spending: Medicare and Medicaid.  Currently, these types of spending are counted as transfer payments (BEA PDF here) and so when we measure GDP they show up in C, consumer purchases.  I think they should show up in G, government purchases.  These medical purchases are so tightly controlled by the government that doctors–oops, “medical service providers”–have become and should be considered government contractors just like defense contractors or construction firms.

Sometimes you hear or read talk of “government consumption plunging,” but sometimes what is happening is that health care expenditures are crowding out other programs, which is not exactly the same thing as fiscal consolidation.


In the same vein of presentation, I would like to know when cutting deficits from 9% to 7% of GDP earned the name "austerity".

When it happens during a recession, especially a recession caused by a collapsing debt bubble, resulting in the private sector trying to deleverage on a large scale.

So...what is this, the fifth year of 'recession'?


Now I'm confused.

Q: Are we redefining 'austerity' or 'recession'?

A: Whatever it takes.

So does that mean it's time for a new 5-Year plan?

It's not a recession when there's positive growth...

Seasonably adjusted growth was negative this last quarter.

A recession is two or more quarters of negative growth.

When 2% of GDP is the difference between GDP growing and GDP shrinking, I think it's a fair name.

Since government expenditure is coerced, why should it be part of GDP at all?

Because the P in GDP stands for "Product," which has nothing to do with your aprobabion of what is produced.

If it is on both sides of the equation--one side as a purchase, and on the other side as an expenditure--why does it matter?

Are you trying to prove that when SS rates went up during Reagan's term that he dramatically increased the size of government?

No, the benefits were simply underfunded. Pay now or pay later. Of course, he did reduce the benefits by increasing the Social Security Normal Retirement Age and thus decreasing the early retirement benefits. Therefore, I would say that he decreased the size of government in this area.

Oh, Rich, I got it wrong. Income includes taxes, such as SS. Government transfer is viewed as expenditure. So, really, the Bush tax cuts, which created a deficit, were the ones which increased the size of government because the government expenditure side was not matched by tax revenue from the income side. Please forgive me for not giving George the credit.

Despite your breathtaking reasoning and/or lawyerly attempt at comedy, I don't think you're gonna get much push back on the idea that Dubya increased the size of government.

Way to change the subject. Tactical retreat.

No, I found that Income under National Income Accounts includes taxes, including SS. Same point, different president.

These medical purchases are so tightly controlled by the government that doctors–oops, “medical service providers”–have become and should be considered government contractors just like defense contractors or construction firms.

This is doubly true because so many doctors won't accept Medicaid, and many won't even accept Medicare. Many of our Section 330 clients report that they're the only providers in their area who will accept Medicaid, and that specialists are simply unavailable. Non-Section 330 providers who do accept Medicaid are usually Medicaid Mills, which may be a pejorative term but which also demonstrates that providers can only survive with Medicaid reimbursement rates if they specialize, and usually if they fudge their numbers in some capacity.

We've written about this dynamic, tangentially, here, but at some point we may write more about it.

In political coverage of healthcare, access to care is too infrequently addressed.

It has been addressed. Docs who are accepting new patients are accepting Medicare and Medicaid.


I asked this question several days ago in a post on a different issue and I didn't get a response.

How is state and local government spending calculated in our GDP figures?

Police officer salaries are included in consumption, but what about a police car?

How about state transfer payments? What are their multipliers?

Although states are required to have balanced budgets, we know that is a crock. How are state and local obligations figured into government solvency?

Exactly, real total government expenditures have only fallen ~1%/year since the 2010 peak, as opposed to the larger drop in real total government consumption. Not much of a fiscal consolidation.

Related question: why don't we do some kind of fiscal "Operation Twist" with Social Security buyouts? Raise the SS full retirement age or cut future benefits, but provide a one-time payment to everybody with a Social Security number under age 45 (or whatever the relevant age cohort affected by the future cuts). We can make the payments as small as possible subject to the constraint of maintaining a plausibly fair buyout narrative, in order to get de facto reduction in total long-run obligations. It's not far from the method local governments use for buying out expensive near-retirees.  Realistically a buyout is a much more politically palatable way to cut Social Security, and it gets us a short-term stimulus which may be beneficial--and though future benefits are sufficiently uncertain and distant that Ricardian effects are unlikely, at the very least the buyout money provides a nice safety margin against any Ricardian smoothing impact on current demand.

There are further plausible behavioral doubts about Ricardian behavior in retirement savings for most of the US; in the aggregate it looks like many people are nontraditional discounters, as many haven't saved anywhere close to enough to retire at the expected age even if Social Security were totally stable under current law. To the extent this is true, a Cowenian zero discount rate perspective seems to suggest raising the retirement age now is preferable to cutting benefits. It's a good way to move the socially expected anchor point closer to a retirement age realistically consistent with most people's woefully inadequate savings.

"health care expenditures are crowding out other programs"

This is, like, the story of all first-world governments for the past ten years and for the foreseeable future. It's pretty scary. (And this is coming from somebody who is quite happy with the Ontario health care system.)

The governments of the west found out they can bribe their citizens with their own money and will collapse in painful spasms, as predicted by De Tocqueville.

Yes, that's what happens when you make an open ended commitment to pay for something that is price inelastic and for which there is effectively infinite demand.

In an informal survey of 100 adults, 99 out of 100 said they would spend an infinite amount of other peoples money to not die.

Michael Mandel often makes the inverse point, which is that the BEA categories substantially overstate PCE, especially as described by journalists who regularly state consumers are 70% of the economy. See here:

Medical care from C to G? As Bill explained upthread, this is pure trivia.

How about moving government investment from G to I? And subtracting government investment, including for defense, from the deficit? That road and that drone aren't going to last for only a year, at least not on average. The only reason it wasn't done in the first place was that originally, the data wasn't available. This is no longer true.

Medical care from C to G? As Bill explained upthread, this is pure trivia.

How about moving government investment from G to I?

You have it backwards. The C vs.G mischaracterization is hugely significant, since government purchases of health care make up a huge proportion of budgets, whereas from even a pretty cursory perusal of the government budget figures (the federal ones are easier to find -, although I doubt state and local are very different), the vast majority of spending is in categories that are clearly not investment (e.g. Medicare/aid, SS, military salaries, VA health care, unemployment etc.) By contrast, transport is only 2.5% of the federal budget, and I have no idea how much of that is investment as opposed to consumption. R&D is only about an eighth of the federal education budget, and the defense R&D and procurement budgets (the latter of which are by no means entirely investment rather than consumption) make up less than a third of defense spending.

how about this title: "Beware of people who argue over whether temperatures should be in Fahrenheit or Celsius"

I am fascinated by questions of economic measurement, listening to a BEA advisory council meeting, or attending a panel on the redesign of the CE are true highlights of my work. I would not consider myself an expert, but I know enough to be wary of this post. The national accounts are conventions of measurement. They are not perfect by any means, but they are not political illusions either. On the specific case here, I completely disagree that Medicare reimbursements should be moved from PCE to government spending. The government doesn't get its knee replaced an individual does. And I think it would be a mess if the accounting of knee replacements depended on whether Medicare or a private insurer or an individual paid (or some combo). Not everyone is obsssesed with size of the government...some people care about total spending on health care and how it relates to health outcomes. Now the accounts are transparent enough, so I'd be happy to look at Garett's alternate government spending measure...just like I am happy to get a temp in Celsius, even though Fahreheit is more what I am used to. Rather than grumping about national accounting conventions let's improve our understanding of them and draw better inferences.

Everyone likes constructive feedback, right? You need shorter comments and more paragraph breaks, and you need to stop burying your lede.

actually, ant1900, what I would like most is a reaction to something I said. I reacted to Garett's arguments and you could react to mine. you are by no means the first person to tell me that I say too much or the wrong stuff, as in not the way they would attack the question. I am more than capable of mimic-ing the dominant style of commenting here...I do quite well at Fed speak when needed. But this is my off-the-clock time, so no I don't really want a writing coach here.

I will work on more white space though...and maybe I will even learn how to do italics here so I can highlight my main point. I do agree that the author needs make their substance accessible...or not complain if no one replies or they reply in a confused way.

but that makes it more difficult to fit into my paradigm ;-) Claudia, I appreciate your comments on this board.

Claudia rocks!

I think that the OECD breaks down transfers into transfers in kind and cash transfers. Not every country plays along with that (Canada and Italy, I'm looking at you.). An interesting boundary case is public spending on education--is it a private good (in which case it's a transfer in kind), a public good (in which case it's government consumption) or something else entirely?

I'm inclined to go with transfers in kind, but I'm like that.

This is all just about how to categorize who made purchases. The current method, for the most part, breaks down who spent the money into three groups, households, businesses, and the government (new houses bought by households being the biggest example of an oddly categorized on in my mind). Welfare, social security, etc. don't show up in G because what exactly did the government purchase?! Nothing. They transferred money to households, who then went out and purchased stuff with it. They show up when that money is actually used to purchase things by the households that received the funds. That makes perfect sense given the method of accounting.

There's a more reasonable case for Medicare and Medicaid that the purchase should be considered a purchase made directly by the government, not a purchase made by households who received the money from the government.

Although, in one sense, you could argue that it's still a household purchase since they chose to make the purchase. It's not as if gov't forced them to go get medical care. The government just paid the bill for a purchase households chose to make.

I'm a bit late with this, but did anyone think to look at the data?


Re the link above, the W824... and W729... series are personal income transfer receipts for Medicare & Medicaid, respectively. Not much crowding out that I can see.


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