Increased GDP from Infrastructure Investment Can Mislead Us

​According to Tyler Cowen in a new Bloomberg article,

The first principle is not to be fooled by increases in measured gross domestic product. A new Trump stimulus would probably boost GDP, but that doesn’t mean it would be working well.

​​Measured GDP just doesn’t capture the relevant trade-offs for evaluating government spending. For instance, a lot of U.S. workers are producing organizational capital. They work on business plans, building client lists, developing marketing strategies, cultivating customer relations and performing other future-oriented activities common to service-sector enterprises. On any given day, most of us are not churning out additional widgets.

Government stimulus, on the other hand, usually is oriented toward concrete outputs such as roads and bridges or military hardware. It’s more like old-style manufacturing.

​Stimulus therefore pulls workers out of producing organizational capital. In the short run, measured GDP goes up, yet the economy may or may not be doing better overall, especially in the longer run. In desperate situations, it is indeed prudent to emphasize the short run, but that is not obviously the case in 2016, when we are nearing full employment and last quarter’s GDP growth was estimated at a respectable 2.9 percent.

There are valuable infrastructure projects governments could and should spend money on, like road maintenance. But a short-term rise in GDP is not itself an good indicator of quality or success. Even if the Trump administration makes bad infrastructure decisions and wastes a lot of money, measured GDP still is going to rise. Don’t be fooled.

The real danger is that a year or two from now, Trump will be apopular president, pointing to real gains in GDP numbers, even if his policies aren’t better for the longer run.