I don’t often agree with Bryan Caplan, but this post on the Greek economy raises what I think is an underdiscussed issue that makes international comparisons difficult — when calculating a country’s GDP, the public sector counts inputs as outputs. There are sound accounting reasons for doing it this way, but it makes it difficult to do international comparisons of living standards when we talk about developed countries with relatively large public sectors.
To see the problem, consider that in a commonsense view a clean, quiet, pleasant, timely tram is more valuable than a dirty, loud oft-late, tram. But if the good tram is just better because that country’s transportation departments are better-run, then the higher tram quality doesn’t “show up” in the per capita GDP. Insofar as high-quality public services have beneficial spillover consequences for the rest of the economy, that does show up. But insofar as good services just make people’s lives better — think of Medicare treating someone in a timely and effective manner rather than let them linger ill for three months before they recover — that’s off the radar. Public spending as a percent of GDP is similar in Greece and the Netherlands but I’d wager a fair amount that the Dutch civil service is delivering more value-per-euro.