Can we just change how we measure GDP?

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This is Planet Money from NPR. Next month, a crucially important measure of the economy comes out.
It's the measure, really. Gross domestic product.
It's the total tally of all the goods and services bought and sold in the economy. In this case, it'll be for the first quarter of 2025.
This one big number that tells us how the economy is doing after a pretty intense couple of months. And the report is right now being put together by the statistics nerds over at the Bureau of Economic Analysis, or the BEA.
And its publication is kind of always a big deal. It is closely watched because people can see how hot the economy is running or how cold, like if we're tipping into a recession.
But this release, this is going to be even closely watched. And that is because earlier this month, Commerce Secretary Howard Ludnick, who oversees the BEA, he went on Fox News and made what was maybe a big pronouncement.
You know, the governments historically have messed with GDP. They count government spending as part of GDP.
So I'm going to separate those two and make it transparent. In other words, Letnick is saying he's going to strip government spending out of GDP.
And the stated reason for this proposed change, he doesn't think that a lot of government spending is great for the economy. He doesn't want it incentivized and he doesn't want it included in GDP.
The unstated reason seems to be the Trump administration is firing a whole bunch of government workers, shrinking budgets, canceling contracts. And if, or I guess when, that shows up in GDP, it'll look bad.
But like, can they do that? Can they change how we measure the economy just like that? Hello and welcome to Planet Money. I'm Mary Childs.
And I'm Nick Fountain. So GDP.
What exactly is it? How is it calculated? Does it ever change? We're going to talk to the person who was the keeper of the stat for nearly 20 years. Turns out people from politicians to economists to special interest groups have been trying to bend GDP for decades to make whatever grand project they're working on look better.
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Whether you're a garage entrepreneur or IPO ready, Shopify is the only tool you need to start, run, and grow your business without the struggle. What is it? To help us understand, we brought in someone who spent 20 years in charge at the Bureau of Economic Analysis, that federal agency that calculates GDP.
Steve Landefeld. Imagine you're in front of a room of third graders.
Define GDP for me. That's easy.
My kids used to ask me that and I said, I'm not going to do it. No, I kept refusing them until one of them actually became an economist.
Okay, so parents, take note. If you want your kids to follow in your footsteps, keep your job a mystery.
Sure, but our job is to demystify. So we press Steve to give us a definition.
GDP is a statistic that captures all final transactions in the U.S. economy, buying and selling of goods and services within a one-year period.
All the goods and services in the economy in one year. The concept was developed in the 1930s, and there's a formula to calculate it that's basically remained the same for decades.
Yeah, it's essentially arithmetic. Here's how you calculate it.
You start by adding up everything regular old people buy, what are called final goods. Every car, every meal, every Tamagotchi.
And you add to that everything businesses invest in. Every factory, every new machine, every important office foosball table.
Then add to that most of what the government spends on things like schools and roads, but not on government transfers, things like Social Security. Those are excluded.
And then finally, combine all that with what's called net exports. Everything we export minus everything we import.
The economist in crowd, people like Steve, would say the whole formula this way. y equals C plus I plus G plus X minus M.

Got it? Good.

You add up all those things,

consumption, investment, government spending,

net exports, and you get a country's GDP.

Last year, that number for the U.S. was $29 trillion,

which means if you account for inflation,

the economy grew 2.8% from the year before,

which is not bad.

At the U.S. was $29 trillion, which means if you account for inflation, the economy grew 2.8 percent from the year before, which is not bad.
And GDP is important. Not only does it tell us how healthy the economy is, if we're headed towards a recession or not, but also GDP influences how the government allocates money.
It influences whether businesses build a new factory or hire more workers. A lot of decisions are made based on how our GDP is doing.
And because of all these things, presidents are often judged on how GDP is doing on their watch. And so you could see why they would want their GDP numbers to look as good as they can.
Now, Steve, Steve wanted GDP to be as accurate as possible. He was obsessed with that mission.
For 20 years, he was essentially the defender of GDP's integrity. Did you ever get political pressure from a president to change GDP? How it's calculated? Never directly, but indirectly, yes.
Leading case was a president who, uh... You're going to have to name names today.
I'm sorry. It was Clinton.
President Bill Clinton. The story goes, Steve and others at the Bureau wanted to change how GDP accounted for inflation.
They wanted to change how they calculated what's called real GDP or inflation adjusted GDP. Correcting GDP for inflation is really important because if you have 2% growth, but also 2% inflation, you don't really have growth.
And Steve wanted to use a new measure of inflation that better reflected how prices were factored in so GDP would be more accurate. So it's around 1995, and Steve and his team bring this idea to the higher-ups at the Department of Commerce.
And it eventually makes its way to Clinton. Basically, Clinton gets a note, like a written memo or whatever, explaining how they're planning on changing real GDP.
Steve still remembers some of what the note said. Experts agree it's a much more accurate measure of real GDP growth.
But what it's going to do is it's going to raise growth prior to your administration and lower it after you came into office. In other words, the note said, we are going to make your predecessor look better and you look worse, for the sake of sound statistics.
You could see how he would not want that to happen. Yeah, right.
So the joke is, he hands it back to him and he says, and I want you to do something about that. They walk out.
Not really much discussion of what's going on here. And they get back to the office and they look at it.
And it's scrawled in. This is.
And they couldn't figure out what the last word was. They were thinking, is it? Anyway, it turns out it said, this is crap.
After our interview, Steve checked. And apparently it said, this is nuts.
But regardless for Steve, this was a concerning moment. He ran this independent statistical agency and he was trying to make GDP more accurate.
But the president of the United States had expressed his displeasure about this change. But Steve was the keeper of the stat.
He thought this change was really important. Like, important enough that he was thinking he might quit over it.
So he and his team went to his boss's boss, the then commerce secretary, and told him, listen, there are a bunch of reasons why we've got to do this. You know what? He bought the whole thing.
He was great. He says, we're doing it.
I go, woo. Woo.
Steve had stood up to the president of the United States. He'd held the line for statistical soundness because he believed that this methodological change would make GDP more accurate.
And Steve was always protecting GDP. He says people from various industries would try to meet with him to get him to change how their industries were calculated.
Yeah, he told us that representatives from the Motion Picture Association of America or big companies like car manufacturers were always coming to him because they wanted their industries to look bigger. It's good for number to go up.
Why? Bigger is better. I don't know.
Maybe you get more attention in Congress. Steve says he was always open to ideas, as long as those ideas were about making GDP more accurate.
In fact, he has this one story of when Alan Greenspan, legendary economist, chair of the Federal Reserve for nearly 20 years, invited Steve to his office. I'm trying to get right in my head the power dynamics here.
Is this like, are you peers? Is he more important? Is this like sharks and jets? He's a god, and I'm a foot soldier in the Roman army, you know? Okay, that's very clear. Thank you.
It's around 1996, and Greenspan wanted to talk about an issue he was having with GDP. It boiled down to this.
Greenspan thought GDP wasn't counting a whole big portion of the economy correctly. The technical reason was that there had actually long been a problem with GDP.
And that is, it's hard to capture changes in quality when something gets better, but it doesn't always show up in the price. Let me go back to the most basic one, which is the computer.
Yeah, a thousand dollar computer in 1990 and a thousand dollar computer in 2000 are extremely different. The new computer is just way more computer, more bang for your buck.
It's way faster. It has more storage.
It can easily connect to the internet like AOL dial up. It can accept CD-ROM, not those inefficient floppy disks.
But as far as GDP was concerned, they both cost the same. They both cost $1,000.

And so they were counted the same.

So the economists at BEA tried to account for this. They made what are called hedonic adjustments.

Greenspan was fine with the hedonic adjustments BEA was doing for goods. But he had a problem with how they were doing hedonic adjustments for services.
He was worried they weren't accurately capturing all the improvements in the quality of the service sector. People were doing way more in a day.
In industries like healthcare, in education, and basically everything to do with the internet. And because GDP wasn't correctly capturing that, BEA was under-counting productivity growth.
And they should look into that. Now, Steve also knew that Greenspan wanted this because he had an agenda.
He wanted to keep interest rates low to stimulate the economy. Greenspan was expanding the money supply faster than some people thought warranted.
And a lot of people later on said, see, we told you. But any event, one thing that would allow him to do that would be if we were underestimating productivity growth in the services sector, then that would sort of justify what he was doing or what the Fed was doing.

Greenspan, as chair of the Federal Reserve,

had been lowering interest rates through a lot of the 1990s,

which meant that there was a lot of money sloshing around in the economy.

And Greenspan seemed to think if he could convince Steve

to do this hedonic adjustment for services,

then inflation would seem smaller and real GDP would look stronger. And that would justify keeping interest rates low.
And so he wanted us hopefully to go out and find a lot more productivity growth out there by correctly measuring the service industries. And we did find a lot, but it was all legit.
So Greenspan was coming to you saying, hey, it'd be really useful to my project of expanding the money supply if you could go out and find a little bit of productivity for me in those numbers. No.
In a sort of gangster tone, and you went and did it. No, no, no, no, no.
But it did seem like he was putting the pressure on you. Well, yeah.
Yeah, he was putting on the intellectual pressure. Steve says Greenspan would pepper him and his top economists with questions, run circles around them.
And yeah, they knew that Greenspan kind of had an agenda, so they made sure to do their own research. And he wasn't wrong.
So they made the changes. Now, looking back, Greenspan's easy money era is often cited as one, just one, of the reasons for the risky lending that led to the 2008 global financial crisis.
Now that we know what we know about 2008,

do you feel any regrets about making this change at his behest?

So you don't think, no.

This stuff was so long overdue.

For Steve, it's not even a question.

Empirically, it was the right thing to do.

He says the BEA was trying to keep GDP up to date. And Greenspan, despite his other motives,

did help with that. Coming up after the break, what Steve thinks of the Trump administration's

proposal to strip government spending out of GDP and what he thinks the head of his former agency

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So far, we've talked about how economists calculate GDP and how sometimes they make changes to that methodology. Incremental changes to capture an evolving economy.
Economists think that changing the fundamental formula for GDP, that is much more dangerous. GDP is often how we compare policies and leaders across time and across countries.
In fact, there are international standards for what goes into it. Countries debate at these painfully long international meetings what counts in GDP.
They have to come to a consensus on it. The last update to these global standards was in 2008, and they are working on a new update right now, which could be finalized any day.
But people have always known that the formula doesn't capture everything that's important. For instance, it doesn't capture any illegal activities.
And in

some countries, that is a big part of their economy. It also doesn't capture inequality or well-being or happiness.
Steve Landefeld, the former head of the Bureau of Economic Analysis, says there is another category of people who have been trying to change what's counted in GDP, outside groups.

And you can see why.

If governments are judged by their... who have been trying to change what's counted in GDP.
Outside groups.

And you could see why.

If governments are judged by their GDP growth,

they'll focus on whatever makes their GDP look better.

They'll work their butts off to do more of the things that increase GDP.

One group that Steve remembers pressuring him argued that all the unpaid household labor, the cooking and the cleaning and the child rearing that often women were doing, was not getting counted in GDP. But they argued it should be.
It was a huge portion of the economy and women were not getting their due. And he thought their argument had merit.
So he tried, really, to figure out how his agency could capture it all

and how they calculated GDP. But because money wasn't changing hands, the math was fuzzy.
It had

to be based on estimates and theoretical numbers. Also, there was actually nothing for GDP to

capture. GDP generally captures transactions that have happened, stuff that generates receipts.

Just because it could or should be priced doesn't mean it makes it into GDP. So Steve never ended up changing GDP to include unpaid household labor.
Another group that lobbied BEA was environmentalists. They argued that if environmental degradation were included in GDP, governments would not sit idly by as, you know, coal plants polluted.
But since burning coal raised GDP, they didn't have much of an incentive to stop it. Steve was game.
But instead of changing GDP, he tried something else. In the early 90s, he made a new separate measure that environmentalists and policymakers could look at if they wanted, but that didn't mess with the standard GDP.
Steve and his team essentially created a green-adjusted GDP. We released them, and that's when Congress specifically forbid our doing any more work on this stuff and proposed a 20% cut in our budget.
Steve says some very high-ranking members of Congress who represented coal mining areas thought Steve's green-adjusted GDP would make their regions look worse than regular GDP. And through the grapevine, he found out that Congress was proposing to slash their budget if they kept publishing their green GDP.
And it wasn't just people who represented coal mining areas. Even people from other areas, people he thought he had convinced, became worried about how their states looked.
And they pulled their support. I learned a very painful lesson that all politics are local.
Did that surprise you? How did that feel? Well, you know, I would have thought, you know, going into that, oh, I'll be really, really brave here and I'll just say, you know, if you do this, you know, you know, I would have thought, you know, going into that, oh, I'll be really, really brave here. And I'll just say, you know, if you do this, you know, I'm leaving or something.
You can't suppress this stuff. But when it came down to it and I thought it through, I thought and talked to a lot of people about it.
It wasn't going anywhere anyway. So there was no point in inflicting that kind of harm on the Bureau because it probably just made it worse.
Steve dropped it. He gave up on his green adjusted GDP project.
Now, Steve left his job as director of the BEA a decade ago. But we were curious about what he thought about what's been happening recently with senior administration officials, with the commerce secretary wanting to totally strip government spending out of GDP.
Is it like technically feasible to separate those two things out, government spending versus everything else? Yeah, well, if you look at Table 2 and the current press release. He points to a press release from the BEA about 2024 GDP.
Table 2 shows how much each part of the formula contributed to GDP. So how much consumption and investment and net exports and government spending each contributed.
And since all of those things are broken out, that means that if Trump's Commerce Secretary Howard Lutnick wants to, he can just take the top line GDP number and subtract out the government spending portion of that. You subtract line 50 from line one and you got the number he wants.
There you go. Technically pretty easy.
Just arithmetic. Well, then if you want to be more serious about it.
Yeah. If you want to be more serious about it, he says there are several different measures of GDP that BEA already publishes.
Different slices of GDP that tell different stories. Like, there's one that's GDP just not including net exports.
There are a bunch of these. There's 11 different variants of GDP in there already.
Add another one and cite it up in your first line. You know, GDP did this, it was buoyed by the government sector

or pulled down by it,

and private GDP did this.

You're done.

So just make up a new number,

not make up, make up a new indicator.

And if you want to talk about that new indicator,

talk about that, but don't mess with GDP.

It's sort of your stance.

Right, yeah, yeah.

And that's historically the way these things have tended to be solved.

We asked BEA about this. They declined to comment.

But that's what Steve expects to see in the coming months.

To be clear, he hasn't spoken with anyone there about this.

But he expects BEA will whip up a new line and put it at the top of their quarterly press release.

Steve says if he looks at that press release next month and they've announced that GDP now does not include government spending, well, that is a different story. If it were dramatically changed, I'd be very concerned.
You know, we haven't talked about it, but a big, big issue behind all this is the autonomy of a nation's statistics. They have to be trusted.
They have to be objective. And if there's even the perception that people are manipulating the numbers to produce particular outcomes of interest to them, that could be catastrophic.
That's why Steve held the line for so many years. And that's why he, like us, will have his alarm set.
Quarter one GDP estimates come out at 8.30 a.m. on April 30th.
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