Suppose a man hires himself for a day, digs a hole, then fills it. Sweat darkens the soil, coins jingle from one pocket to the other and yet at sundown the landscape looks exactly as it did at dawn. Common sense calls the exercise futile. Our national accounts, however, would record the wages as production. The parable has become more than a classroom trick; it now animates Secretary of Commerce Howard Lutnick’s proposed renovation of Gross Domestic Product, announced in early March. Lutnick contends that by continuing to treat every dollar spent by government as value created, the official ledger mistakes motion for progress and flatters political vanity over economic truth.
The current expenditure approach, GDP equals consumption, investment, government spending and net exports, rests on a wartime intuition that any outlay harnessed to the collective must be part of the productive surge. Yet wartime ended 80 years ago. Today the government sector pays more economists to forecast growth than masons to erect bridges. In 2024 federal outlays reached nine hundred billion dollars just in interest on the debt and almost seven hundred billion in means‑tested transfers, none of which lays asphalt or manufactures silicon.
To be fair, the Bureau of Economic Analysis already excludes transfer and interest payments from the “G” component because they purchase no good or service. But what remains inside G is still porous. Compensation for compliance seminars, the travel budgets of offices whose deliverable is another meeting and consultancies that expire in footnotes all surface as if they were bulldozers or power plants. BEA’s own handbook concedes that government consumption “measures the portion of final expenditures that is accounted for by the government sector,” treating the state simultaneously as producer and consumer. If the producer outputs only bureaucracy, the consumer buys bureaucracy, and the books claim prosperity.
Lutnick’s preliminary staff study pegs at least one quarter of reported 2024 GDP, roughly seven trillion dollars, as “non‑productive.” The estimate shocks, but parallel evidence piles up. The Government Accountability Office tallied one hundred sixty‑two billion dollars in improper federal payments for 2024 alone, the latest installment of a two‑decade saga of waste. Its annual duplication report now documents six hundred sixty‑seven billion dollars in savings available were Congress simply to consolidate overlapping programs. These sums dwarf the gross domestic product of entire mid‑sized nations, yet they masquerade as value added each time they appear in payroll lines.
Critics answer that excluding such spending will rattle markets and hinder cross‑country comparison. The protest forgets that statistics serve analysis, not ceremony. Lutnick proposes a twin‑track disclosure: for two decades the Commerce Department would release orthodox GDP alongside a “net productive” measure, letting investors, scholars and foreign ministries decide which tells the clearer story. Transparency, not conformity, anchors credibility. If the new yardstick proves insightful, others will adopt it voluntarily, much as nations migrated from crude tallies of grain to standardized national income accounts in the mid‑twentieth century.
Some economists wave the specter of austerity, invoking John Maynard Keynes’ famous remark that paying people to dig holes could, under depression conditions, lift aggregate demand. Keynes offered the example as a lament, not a blueprint for normal times. We are not in a depression, and the federal government is hardly liquidity‑constrained. A measure designed to diagnose chronic health need not be calibrated for the emergency ward.
The definitional hurdle, what is productive, what is not, has been exaggerated. BEA already classifies spending with more nuance than most people realize, distinguishing between current consumption and fixed capital formation, between defense procurement and veterans’ benefits, between research equipment and administrative paperwork. Extending that taxonomy by introducing a “non‑market services” tag for activities that neither build infrastructure nor generate intellectual capital is arduous but not impossible. Peer review panels drawn from academia, the private sector and state auditors can police the boundaries and publish explicit criteria in the Federal Register.
Data support the exercise. Government consumption and gross investment rose only one point nine percent in 2024, less than half the pace of private goods production at three point four percent, yet because its base is vast the public sector’s incremental outlays supplied nearly one-fifth of the year’s headline growth. Pretending that administrative drift rivals a semiconductor fabrication boom distorts policy debate. Imagine two hypothetical republics. Atlantis devotes fresh billions to regulatory training modules and diversity workshops. Borealia channels the same sum into deep‑water ports and broadband trunk lines. Under the current framework both nations boast equal upticks. Under Lutnick’s reform Borealia’s investment registers, Atlantis’s does not, and the scoreboard aligns with palpable progress.
Nor would the change mark a break with international practice. The OECD already publishes “net government investment” as a share of GDP, revealing that American public investment has drifted below three percent, a full percentage point under the OECD average. European fiscal pacts distinguish between current outlays and capital formation, granting deficits leniency when they fund infrastructure. Lutnick’s initiative simply applies the same moral arithmetic to the core growth metric.
Skeptics object that politicians will game the categories, relabeling pet projects as “productive.” They will try, as politicians always do, but sunlight deters. When Jefferson drafted the Declaration he wrote of a candid world; Hamilton opened the Federalist by inviting examination. Reagan quipped that government’s view of the economy is, if it moves, tax it, if it keeps moving, regulate it and if it stops moving, subsidize it. Lutnick’s project reframes the dyspepsia: if it produces, record it, if it merely circulates taxes among bureaucrats, leave it on the cutting‑room floor.
Consider the political psychology. Under the present regime, any cut to an agency’s travel budget registers as negative growth, even if that travel achieved nothing. Journalists seize on the negative print, branding reformers as anti‑growth. By isolating waste outside the growth ledger, policymakers gain latitude to streamline without torpedoing headlines. Accountability replaces theatrics; the books no longer punish discipline.
What of defense spending? A tank, however destructive, is a manufactured good. Its construction engages skilled labor, metallurgy, advanced electronics. Those processes meet standard production tests. Lutnick has signaled that hardware procurement remains “productive” while much of the labyrinthine administrative super‑structure will not. His proposal forces admirals and generals to justify office swivels the same way they justify carriers.
The deeper wager is philosophical. Since the New Deal, and with escalating bravado after 1960, America has equated state spending with national greatness. GDP became the secular liturgy, chanted by progressives to sanctify expansion, by conservatives to hail tax cuts and by media anchors eager for quarterly drama. Yet as every good Aristotelian knows, a measure can define its object into being. When we measure spending, we valorize it. Jefferson trusted yeoman farmers to grow wealth; Hamilton insisted on manufactures; Reagan insisted that unrestricted enterprise outperforms centralized allocation. Lutnick stands in that lineage, reminding us that value springs from creation, not redistribution.
Caveats remain. The transition must avoid shock therapy. Publishing both series, traditional and reformed, for a generation gives markets time to build continuity models. Academic journals should host symposia auditing the classification rules each year. Congress must refrain from tagging a program as “productive” through statute, the temptation will be fierce. But these are governance questions, not conceptual refutations. The principle survives: economic metrics should illuminate, not obscure.
Imagine, finally, the scene reversed. The man starts his morning with a vacant plot, erects a greenhouse, tills seedlings, and by twilight stands amid burgeoning vines. Money has changed hands, yes, but something more tangible stands in its place, an asset capable of feeding others. Our accounts gladly record his labor as output. Lutnick demands that the same common sense apply to government itself. Holes refilled do not nourish the republic. No statistic should suggest otherwise.
If we accept the challenge, GDP will regain the austere honesty it possessed when Simon Kuznets first assembled the accounts in 1942, warning Congress not to mistake totals for welfare. The reform, then, is not radical. It is restorative. It answers with empirical rigor the child’s plain question: why call work productive if nothing new exists at day’s end? America, ever eager to create, deserves a scoreboard that celebrates creation, not ceremony.
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Update system designation
GAP: Gross American Made Product
It’s about time! I argued with my first economics prof at U of Michigan in 1962 and continued thru earning an MA (econ) a decade later, that the definition of GDP was flawed.