America v Europe; Free exchange.

"Why a comparison of riches leaves both sides red-faced

W HEN DAVID HOCKNEY'S mother visited the British artist in Los Angeles she made an observation that points to the difficulties with transatlantic economic comparisons. "Strange," she said, after a couple of days in the sun, "all this lovely weather and you never see any washing out."

It is an observation many European visitors have echoed. American travellers to Europe, meanwhile, often despair at washer-dryer machines that leave clothes damp. Indeed, for some American writers the lack of standalone dryers is symbolic of the continent's backwardness. While economic statistics should solve such debates--by allowing for apples-to-apples comparisons--they are not immune to the problems posed by cultural differences. Is it that Europeans cannot afford proper tumble dryers? Or are they simply getting their "drying services" free of charge?

Questions like these are important when comparing countries. On the surface, America has by far the best case for prosperity. Gross domestic product (GDP) per person is almost $70,000. The only European countries where it is higher are Luxembourg, Switzerland, Norway and Ireland, where figures are distorted by firms' profit shifting. In Germany, Europe's economic powerhouse, GDP per person (adjusted for purchasing-power parity) is $58,000. That puts it level with Vermont, but far below New York ($93,000) and California ($86,000). The comparisons are even less flattering for other European countries. Incomes in Britain and France are equal to those in Mississippi ($42,000), America's poorest state.

Yet a lot is hidden by these figures. To understand why, consider how they are calculated. Spending is deflated by some measure of price, to allow accurate comparisons between countries of the amount of goods and services purchased. For manufactured goods this is a straightforward calculation: the amount Americans spend on dryers, divided by an index of their cost, will give a pretty accurate figure for total consumption.

For services, it is harder to work out a reasonable deflator. And that matters because it is here, rather than household appliances, where Europe and America differ most. Combined spending on health care, housing and finance accounts for about half the difference in consumption between America and the biggest European economies. In 2019 Americans consumed $12,000-worth of health services per person; Germans managed just $7,000.

The difficulty in working out a reasonable deflator is partly conceptual. What are people paying for when they buy health care, a service or an outcome? Is a unit of "health-care services" the cost of a specific treatment or the cost of health? What does being healthy even mean? International price indices simply (and a little unsatisfactorily) calculate the price per treatment. These differ substantially. The OECD, a club of mostly rich countries, estimates that a hip replacement in Norway costs seven times as much as one in Latvia and Lithuania. In any case, while American prices are higher than European ones, the gap is not big enough to account for the difference in health-care consumption: Americans also undergo lots more medical treatment.

Simon Kuznets, a Nobel-prize-winning economist and statistician, suggested estimates of GDP should exclude things an "enlightened social philosophy" would consider harms rather than benefits. For him, that included weapons, advertising, much of finance and anything necessary to "overcome difficulties that are, properly speaking, costs implicit in our economic civilisation".

Many Europeans would suggest this category rightfully includes American health-care spending. Life expectancy in America is five years lower than in Italy; lots of money is spent fixing the damage done by higher levels of violent crime, traffic accidents and obesity. Follow Kuznets's advice--by removing from the calculation finance, health, public administration and defence spending--and the gap between America and Germany in GDP per hour worked drops from $11 to just $4.

Much of the remaining gap is accounted for by "housing services", a category of consumption similarly bedevilled by conceptual difficulties. International comparisons are done on the basis of the rental cost per square metre. That flatters sparsely populated America and its sprawling cities, where rents are generally cheaper. While nearly everyone would rather have a bigger house, preferences for suburban over urban living are hardly universal.

Top dollar

There are diminishing returns to America's spending on health care. But treating all of it as an additional cost would be a mistake. Cancer survival rates are higher in America than Europe. Health-care spending can be considered a luxury good that a richer country may choose to spend more on (Germany, Norway and Switzerland spend the most in Europe). Meanwhile, as American defence hawks like to point out, Europe's low military spending is possible only thanks to America's largesse and the security it provides.

America has other genuine advantages. The combination of higher productivity and the fact that workers spend more time at work allows Americans to enjoy greater quantities of consumer electronics, cars, furniture and clothes. The only categories in which Germans and the French consistently consume more are education, spending abroad, and food and drink, suggesting there is something to stereotypes of Europe's cosmopolitan café culture and America's infatuation with consumer goods.

Still, while arguments can be made for Europe, there is no way of slicing the data, despite your columnist's best efforts, to make the continent's biggest economies richer than America. Even in the areas where Europe does consume more than America, the old-world economies are not ahead by much. Maybe the true lesson of the comparison is that neither side ought to be satisfied: Europeans should be unhappy with their lower incomes; Americans really should be getting a lot more from their riches.” [1]

1. "America v Europe; Free exchange." The Economist, 13 Aug. 2022, p. 67(US).