Elon Musk is wrong about GDP

OF ALL the dubious claims uttered recently by Elon Musk, I have yet to see a more interesting one than his tweet asserting that “a more accurate measure of GDP would exclude government spending. Otherwise, you can scale GDP artificially high by spending money on things that don’t make people’s lives better”.

Whether or not he is serious, the idea is worth a closer look, because it explicitly expresses one instructive misunderstanding and heavily implies a second. The explicit misunderstanding is that an accurate measure of GDP – gross domestic product – would include all and only the things that make people’s lives better. It wouldn’t. The implicit one is that GDP needs to be accurate because governments try to maximise it. They don’t. (Look around.)

I was surprised to learn from Diane Coyle’s new book, The Measure of Progress, that when GDP measures were first being hammered out, the Musk view nearly triumphed. Government spending was included in GDP only after a vigorous debate. Part of the reason for its inclusion was crude politics: World War II was raging and governments didn’t want their military spending to be ignored.