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The following article appeared in Left Business Observer #120, August 2009. Copyright 2009, Left Business Observer.

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Overconsuming health

Everyone knows that American consumers have been on a binge for the last ten or twenty years. Data connoisseurs could even tell you that the consumption share of GDP rose from an average of 64% in the 1980s to 70% in 2007–8. But while the numbers are accurate, they’re not really telling the story of a binge. Much of the rise has come from spending on health care, not flat-screen TVs.

Sad to say, LBO was among the many who made the binge argument. We should have known better. Sorry.

The numbers

Graphed nearby is a history of the consumption share of GDP, with and without health care spending. (An Econ 101 refresher: GDP is the sum of consumption, investment, government spending, and exports less imports.) Note the relative flatness of the “ex-medical care” line—its recent level is actually below 1960’s—compared with the relentless ascent of the “total” line.

Some numbers to make these points: at the end of 1978, consumption was 61.5% of GDP; in the second quarter of 2008, it had risen to 70.3%, or 8.8 points. Well over half that increase, 5.0 points, came from spending on medical care. The share of GDP devoted to spending on goods actually fell by 4.7 points over that 30-year period.

The pattern is