Towards a general factor of consumption

Previously I demonstrated that actual individual consumption (AIC) is a superior predictor of national health expenditures (NHE) and largely explains high health spending in the United States.  Towards this point it is instructive to show that not only are health expenditures generally coordinated with AIC, but that all other major categories of expenditure are too, i.e., at given level of real consumption per capita all countries will tend to allocate their consumption quite similarly.

In this post I make extensive use of Principal Components Analysis (PCA) and related dimension reduction techniques to better characterize consumption patterns across several major categories of consumption in both the spatial and temporal dimensions.  I find that there is a latent factor that explains the great majority of the variance in consumption, that it is exceptionally well correlated with AIC, and that GDP has essentially zero incremental validity once we have accounted for AIC for practical purposes.  I also show that this factor holds up well to price adjustment for each consumption category and correlates similarly with AIC within the OECD.

Although my interest here is (was) largely in verifying my prior analysis as it pertains to health expenditures, i.e., that AIC is real, meaningful, and the measure we probably ought to prefer when discussing the efficacy of cost containment regimes, my analysis has broader implications.  For instance, it provides evidence (albeit in a roundabout fashion) that argues rather strongly against Scott Alexander’s widely cited post on cost disease, i.e., if health, education, construction, and so were truly uniquely expensive in the United States, the United States ought to stick out like a sore thumb in PCA and the like.  Instead what we found is that the US consumption patterns track well with its high overall level of real consumption (AIC).  Moreover, anticipating the argument that perhaps cost disease is simply well correlated with AIC, when we adjust for category specific price levels (i.e., “volumes”) we find PPP-adjusted AIC holds up very well in explaining the variance in the actual volumes consumed overall and that the US is, again, well on trend (which suggests actual apples-to-apples differences in cost are not the problem and actual increase in the quantity and quality of goods & services consumed in these categories drive most of the variance).

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Health, consumption, and household disposable income outside of the OECD

Previously I have shown that household gross adjusted disposable income and actual individual consumption (AIC) are superior predictors of national health expenditures (NHE) and that they largely explain why US national health expenditures (NHE) are so high.  However, my analyses have been restricted to the handful of mostly highly developed countries affiliated with the OECD for time series and the World Bank’s International Comparison Program (ICP) for cross section for ~all countries in 2011. I know of no simple ways to retrieve AIC or adjusted household disposable income outside of OECD in readily comparable formats, so I decided to spend a little time constructing these estimates for a much broader array of countries using the official system of national accounts tables available from the UN statistics division, which mostly covers between 1990 and 2014.

This analysis is largely a reproduction of prior work, but I felt I would write this up because:

  1. the data themselves are useful (sharing data & code this time around)
  2. it provides additional support for my general position vis-a-vis the utility of these measures in this context
  3. time series nature of the data helps demonstrate the non-linear relationships between these measures and NHE

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On popular health utilization metrics

This Commonwealth Fund report has been widely cited for explaining why US health expenditures are so high.

The analysis finds that the U.S. spends more than all other countries on health care, but this higher spending cannot be attributed to higher income, an aging population,
or greater supply or utilization of hospitals and doctors. Instead, it is more likely that higher spending is largely due to higher prices and perhaps more readily
accessible technology and greater obesity.

Since I have already spoken to the incomes argument at some length and explained why I find overall “high prices” to be unpersuasive as it pertains to NHE in general and the US specifically, I will instead focus narrowly on this utilization argument since there are a number of similar analyses with identical/similar indicators.

The report proffers this table as an explanation for why high utilization cannot explain high US health expenditures.


Similar analyses are found elsewhere:



My problem with these sorts of analyses is that these sorts of indicators do not themselves account for enough NHE directly or correlate with NHE well enough to claim to account meaningfully for utilization and other major non-price drivers of NHE (if you wish to remove quantities of technology, prescription medicines, etc from “utilization” for semantic reasons).  When (1) your utilization measures can only account for maybe 10-15% of the variance (2) only relates to a modest proportion of NHE in most developed countries and (3) one ought to know there are other major cost drivers to account for, it’s pretty silly to claim that your half-hearted attempt to explain the variance honestly means it cannot be utilization and that it must be (mostly) the result of some US specific prices.

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Disposable income also explains US health expenditures quite well

few months ago I argued consumption, specifically Actual Individual Consumption, is an exceptionally strong predictor of national health expenditures (NHE) and largely explains high US health expenditures.  I found AIC to be a much more robust predictor of NHE than GDP and at least an order of magnitude stronger than other components of GDP when disaggregated (collectively and separately) in multiple regression analysis.

However, because some people are inherently suspicious of consumption per se and because others are under the impression this is primarily about financing (health) consumption out of savings/debt, I think it useful to also demonstrate these patterns as it relates to household disposable income (tl;dr they’re very well correlated and produce very similar results in the long term)

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