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!”

Finally, Dean Baker, co-director of the Center for Economic Policy Research, posting on Planet Money’s blog, complicates things further:

“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.

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16 thoughts on “How Much Better is the United States?

    • Quite. I took a pass on the last conversation as I was on the road when it happened, but numbers are calculated differently. This is true whether we’re looking at GDP, “median income”, unemployment, or what-have-you.

      And even when they’re measured the same way, of course, they sometimes tell only part of the story. And if they’re not telling the part of the story that someone likes, of course, they’re likely as not to call you a damn liar and authoritatively cite Lies, Damn Lies, and Statistics.

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    • …I should hasten to add that I’m not saying economic data is worthless or something.  Consistent measurements, constantly defined, taken in one country and compared thereto at various times, obviously provide great amounts of highly illuminating insight about what is happening economically in that country; and that it’s not as if the adjustments can’t be made to allow productive international and inter-regional comparisons: they definitely can.   It’s just thats it’s a bit like nailing Jello the experience of actually doing so.

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      • Measurements like GDP are all artificial.  There is no such thing, other than the fact that we defined it.  We defined it in such a way to be useful, for certain things.  When we treat these measurement outside of their specific definitions, trouble ensues.  I’m not a full fledged Austrian, but I think they are on to something when they differentiate between economic measurements and real wealth (whatever the heck that is).

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  1. Can’t comment on all of this right now, but it almost sounds like you’re condemning hedonic indexing, which would be the wrong response.

    If all you’re doing is pointing out that hedonic and non-hedonic measures can’t be directly compared, then, yes, and ignore my first sentence.

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    • Seems to me that’s exactly what he’s doing–suggesting that American “GDP growth” is due to A: paper money in the stock market, and B: lying.  Meanwhile Europe has trains and free doctors and government-mandated vacation.

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  2. Criticizing “hedonic indexing” is just a tarted-up restatement of “yeah the poor might be better off but they’re still poooooooor”.  If you honestly don’t think that widespread distribution of telecommunications devices improves the overall quality-of-life (and, therefore, economic productivity) of a nation, then there’s not much to say.

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  3. I didn’t intend to be taken as criticizing hedonic indexing, only that if the same methodoloy is applied to calculating European per capita GDP, the results we get will be different from the ones used in Davidson’s article.

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    • By ignoring the European debt crisis, Davidson’s critics don’t engage his thesis.

      The thesis isn’t really about Germany, which is the obvious lion of the European economy, if not the sole tent pole.  Yet they niggle over 0.5% in GDP, as if that’s a key support of Davidson’s argument.

      [My own argument is that Germany’s birthrate is 1.4, well under the replacement rate of 2.1 or so.  This is the truest measure of the health of a society, and all the rosy OECD stats on material well-being pale.]

      The core of Davidson’s thesis isn’t the 20% difference between the German and US GDPs, but that Europe as a whole averages 50% lower!

      Further, the argument that at least the Eurostates provide more social services is an artful one but not a rigorous one: it ignores that the US actually does have a safety net, food stamps, aid to women & children, Medicaid for the poor and Medicare for the old.  We are not comparing apples to apples.

       A reporter in Greece once complained after I compared her country to Mississippi, America’s poorest state. She’s right: the comparison isn’t fair. The average Mississippian is richer than the average Greek.

      That’s Davidson’s starting point, not splitting hairs over 0.5% of Germany’s GDP.

      Further, that the question isn’t whether the generous Eurostate doesn’t give one a warm & fuzzy, but that its sustainability is at question [and this touches as well on Germany’s birthrate, one of the lowest in the entire world]:

      European leaders like to mock the U.S. for its inequality and lack of social safety net. Though, for now, it looks as if Europe is headed for a two-tier society without any plan for improving the lot of the lower tier. How can Brussels excite a generation of ambitious young people — the ones who will determine Europe’s future success — when too many of them are offered low-wage, short-term work in stagnant industries to pay for the far more generous benefits their elders receive? How can Europe compete if its youth experience the flexibility while the old get the security?

      It’s time to update the discussion from a decade ago, and from the OECD–an advocacy front for Eurostatism–defining the debate.


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    • Ethan,

      Thanks for the clarification.  Ignore my first sentence.

      I want to object to the quoted bit on military spending, though.

      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.

      It’s wrong in a couple of ways.  First, most of that military spending ultimately ends up as someone’s salaries, so it is improving living standards, for someone.  It’s just not possible to make such a blanket statement about military spending without logically implicating any government spending.

      More importantly, it’s half right in a sense that makes the implication all wrong.  That is, military spending probably has a lower multiplier effect than many other forms of government spending.  But what that means is that it’s a drag on the economy, and if we account for that drag, the U.S. actually looks even better.  We’ve achieved our high GDP despite some extra drag from military spending.

      And as for healthcare spending, any such analysis ought to point out that U.S. pharmaceutical consumers are subsidizing European pharmaceutical consumers.  That accounts for some, although by no means all, the difference in health care costs.

      Some of the other things are true, though, and the comparison is not easy, in part because we and they have chosen apples and oranges as policies.

      Oh, as to Krugman’s “And all I can say is, whoa!””  If that’s truly all he could say about it, then he’s truly traded in his economist hat for his partisan pundit’s hat.

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      • I dunno, when you look at a lot of the half-assed writing that passes for economics blogging by noted and important economists, I don’t think Krugman should be judged on any harsher standard than the Arnold Klings or Greg Makiws of the world.

        That said, if half of US services sector growth is actually coming from the financial services industry, there’s something fundamentally structurally deficient with the US economy. We can make arguments about the desirability of a strong financial services sector, but accounting for half of total service sector growth shows an overweighting of priorities that’s mindboggling.

        I haven’t looked at the van Ark paper yet, but I wonder how the UK compares to other countries in that regard. Given how important the City is to the UK’s economy, I’d imagine there’s a lot of overlap in services growth.

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  4. Other interesting bits of data to compare are GDP per hour worked and GDP per ton of CO2 emitted.  Until the Great Recession, the US was pretty even with most of Europe in the former category — sometimes better, sometimes worse depending on the country.  Regarding the latter, the US compares terribly to pretty much all of Europe.


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