Households Finance Only 70 Percent of Their Own Consumption, Down from 93 Percent in 1959

The leftish think tank Demos has published a very thorough criticism of how we measure Gross Domestic Product. Scholar Lew Daly argues that we give government too little credit for its spending, because government invests in goods and services that increase total GDP. For example, household incomes increased dramatically in the 20th century due to an increase in “human capital,” much of which resulted from government-funded education. Therefore, he concludes, government funding of education is good!

Interestingly, Mr. Daly’s evidence relating education to human-capital development and rising incomes is mostly from the 1950s. Needless to say, this was before public-sector-unions and the federal government got involved, and a period in which most people would agree that public schools did a better job than today.

Mr. Daly notes with concern that household incomes have been shrinking as a share of GDP for some years now. However, he does not connect this decline with the fact that households control less of their own consumption than they did in earlier decades. When third parties control so much of what we consume, and we believe those third parties are financed by others, it is unsurprising that those third parties will seize control of a greater share of GDP. Mr. Daly’s shows us that in 1959, households financed 92.8 percent of their own consumption. By 2009, that had fallen to 70.3 percent, with government and employers supplying the balance.

Mr. Daly skirts around healthcare, but he asserts that it provides a social benefit. However, most health spending these day is financed by working people and spent on elderly people. It is a real stretch to consider this redistribution to be increasing “infrastructure” or “human capital.” Indeed, in aging democracies where older people vote disproportionately, it would defy all common sense to trust government to use our money to finance the future. The situation is put straightforwardly by Christopher DeMuth in the National Review (“Our Democratic Debt”, vol. LXVI, no. 13, July 21, 2014, pp. 28-34):

A somewhat edgier formulation of our fiscal situation is that debt and deficits are “robbing our grandchildren.” This is Speaker Boehner’s position today, and it was President Obama’s position when, as a senator, he opposed President Bush’s proposed debt-ceiling increase in 2006 – but Obama renounced it when campaigning for his own increase in 2011. It seems to be the position of the opposition party....

For an even more severe perspective on measuring the government’s role in GDP, have a look at the Austrian school, which discounts government spending, considering it to be spent on intermediate goods and services.

John R. Graham is a Senior Fellow at the Independent Institute.
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