Households Only Finance 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. This is due to an increase in “human capital,” much of which is due to education, which is government funded. So, 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 is before public-sector-unions or the federal government got involved, and a period in which most people would agree 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 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 Figure 6 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 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 building “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.

Comments (9)

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  1. Jimbino says:

    The conclusion that gummint funding of education is good does not follow from the improvement in human capital through public education. That a gummint spends $200 to get $100 in any benefit is not good, especially when a private enterprise can do it for $80.

    To consider whether the USSA space adventure was “good,” one has to consider the opportunity costs consisting of all those potential benefits–like food, education, health, etc.–forgone.

    • Steve says:

      Good point Jimbino! It’s so typical of Leftists to claim that everything good comes from government…as though the government provides the only possible source of education. More accurately, the post points out that education has become widely inefficient in recent decades, with so little return for the huge monetary investments we have made. The private sector can do just about everything more efficiently (except for national defense) that can the public sector.

      Imagine what our economy would look like if we had better educated students instead of the results of government schools the past 5 decades!

      • Matthew says:

        Government run schools, government backed student loans. I wish we could take the government out of it altogether, maybe then schools would be effective and not just places the government pays to store our children for the day.

  2. Freedom Lover says:

    The sad thing here is the Daly thinks consumers financing less of their consumption is a good thing. Why is it better for government to doing so? Why do socialists always believe that the government will spend the money in a more socially desirable manner than will the private sector? After all, who cares more about your money, you, or a government that collects your tax money and then spends it in whatever way will result in the most votes?

    • Thomas says:

      A person values each dollar they spend much more than the government values their dollar. This way, the individual is much more efficient at spending their money.

  3. Phill S says:

    It’s probably a little too simplistic for Lew Daly to assume that all human capital comes directly from education. It doesn’t, because your human capital comes from not only your education, but all the other skills and talents a person develops over the course of their life. Such experience could be derived from vocational training, for example.

  4. Mr. Freedom says:

    This is a natural consequence of all of the big government activism since LBJ’s Great Society all the way through Obamacare. Americans will finance even less of their consumption as time goes on as we stay on this same disastrous track.

    • James M. says:

      Pretty soon the government will be in control of all our consumption. They know what’s best for us right?

  5. Buddy says:

    Sounds like more big government propaganda to me. Government financing more individual consumption is not something to praise. In fact, it is sad that individuals are in less control of their finances.