Matt Yglesias and Karl Smith question Bill Galston's claim that the 1980's to the mid-2000's was a period which saw an
orgy of personal consumption. From large flat-screen TVs and i-phones to furniture and foreign cars, Americans spent as though there were no tomorrow, until tomorrow came.
Galston bases his argument on the much repeated statistic that personal consumption is 70% of GDP. But as Michael Mandel pointed out in August, that 70% is comprised of categories that we wouldn't intuitively put under consumption with our disposable dollars:
But in fact, ‘personal consumption expenditures’ in the U.S. is a grab-bag category which includes all sorts of money—like Medicare spending by the government—which never passes through the hands of households. PCE also includes all the consumer goods imported into the U.S.—cars, computers, clothing, and the like—which create very little economic activity in this country.
In fact, by my very rough calculations, the money that people actually pull out of their paychecks and bank accounts to pay for domestically-produced goods and services drives about 40% of economic activity in this country. That’s still large—but the U.S. is nowhere near as dependent on consumer spending as people think.
And when you look at the change in what types of things people spend their money on since 1980, you also see that the biggest increases have been on healthcare goods and services. For example, in 1980 4.0% of total PCE went to outpatient services while in 2008 that figure was 7.4%. The 3.4 percentage-point increase over the period was the biggest relative change in PCE.
The following chart shows other categories with the biggest relative increases over the period:
So while Americans did spend more of their income buy on technical gadgets -- relative spending on video and audio equipment increased by 0.6 percentage points -- much more of the increase in the relative importance of consumption for GDP went to things like healthcare, education, and financial services.
And if you believe Robert Fogel's argument that increased healthcare spending is a natural result of our economy getting richer, then the current level of consumption might not necessarily be a bad thing.