How Much Better is the United States?
A week or so ago, Tom Van Dyke linked to this NYT piece exploring Europe’s economic troubles. The article, by Adam Davidson, posited that the Eurozone suffers from economic woes that go deeper than just the recent crisis, and notes how much better the U.S. fairs when compared to its European counterparts in terms of per capita GDP.
Of course, as both a Europhile and big fan of Davidson’s work over at Planet Money, I had to look deeper into the numbers and see for myself just how well supported his argument was. It turns out that for several reasons, Davidson’s simplistic comparison is problematic.
First, as Yves Smith notes, estimates of United States per capita GDP aren’t comparable with those of European countries:
“Our GDP stats include something called a “hedonic price index” basically to allow for the fact that computers are becoming more powerful at lower costs. In essence, the US grosses up the price of computers in its GDP reports to adjust for the fact that computer prices are dropping.
These adjustments are significant. The US is the only country that uses hedonic indexing. The Bundesbank complained that if they calculated GDP the way we did, their GDP growth would be 0.5% higher. And the cumulative distortion is massive. In 2005, Michael Shedlock contacted the Bureau of Economic Advisers and they supplied some dated information on hedonics (including a spreadsheet). Even so, he found that hedonic adjustment to GDP was 2.257 TRILLION dollars, or 22% of then-current GDP.”
Yves also points out, via Paul Krugman, the distorting effects of innovation in the finance sector:
“I went back to something that was a hot topic not long ago, and will be again if and when the crisis ends: the apparent lag of European productivity since 1995…I noticed something that gave me pause.
In their paper, van Ark etc. identify the service sector as the main source of America’s pullaway — which is the standard argument. Within services, roughly half they attribute to distribution — roughly speaking, the Wal-Mart effect. OK.
But the other half is a surge in US productivity in financial and business services, not matched in Europe. And all I can say is, whoa!”
“The gap in per capita income between the United States and Europe is striking, but these numbers do not tell the whole story in comparing living standards There are three important issues to keep in mind.
First, there are some very big measurement issues in international comparisons of GDP. At the top of this list I would be put our spending on health care. We spend 17 percent of GDP on health care, whereas the average across Europe is less than 10 percent GDP. What do we get for this extra 7 percentage points of GDP? That is not obvious to say the least. The U.S. ranks behind every West European country in life expectancy and does not stand out in most other outcome measures…
The United States spends more than 4.0 percent of GDP on the military as opposed to less than 1.0 percent across Western Europe. One can argue whether this spending is necessary, but this is another 3.0 percent of GDP that is not improving living standards. The same applies to spending on criminal justice, which is more than 1.5 percent of GDP in the United States and perhaps one tenth this amount across Western Europe…
The second point is that Europeans have made a conscious policy decision to take much of the benefits of productivity growth in leisure. Across Western Europe, 4-6 weeks of vacation is standard. Also, all of these countries have paid sick leave and family leave. Average hours worked for a full-time worker is around 20 percent less in West Europe than the U.S. It is difficult to say that they are poorer if they choose to work less but then have less money.
The final point is that every country in West Europe has much less inequality than in the United States. This means that the typical worker may enjoy a comparable living standard to workers in the U.S. even if per capita income is lower. The big difference in living standards, or at least incomes, is at the high end.”
Now this isn’t to deny that European countries don’t have their fair share of poverty, or that the social contract in these places is sustainable on the long term. But it remains to be seen how exactly European nations, with more leisure time, better infrastructure, and a thicker, more widely spread safety net, are doing worse than the United States. Their 99% certainly don’t appear to be.