The EU vs the US: Who is Economically Better Off?

My off-hand remark that the average standard of living in the European Union is lower than in the United States was meet with howls of protest. First, as I said would be the case, Europeans denied it adamantly. And many did so in the most bigoted fashion possible. Second, people who are on the political Left howled as well since they love the European welfare states and pretend that they are more prosperous than they are. Of course I get the same howls and dishonesty from the Right when I point out that some of their own myths are false.

In spite of all my criticism of the United States I was accused of being a “patriot” toward the US. In spite of actually living in Europe I was accused of knowing nothing about living in Europe. I made three statement of facts concerning living standards in Europe.

1. I said Europeans had a lower income on average.
2. I said they are taxed more heavily.
3. I said they pay more on average for goods and services.

If you earn less, keep less of what you earn, and face higher prices then the inevitable conclusion is that you can not purchase as much as people who earn more, are taxed less and pay lower prices. I made no other claims in this matter though you would have thought I had argued that George Bush was a knight on a white horse instead of the evil, incompetent man that I actually think him to be.

I did not set out to prove my points regarding Europe as they were secondary to the issue at hand in that blog post. Now I shall do so.

Europeans earn less on average.

The GDP per capita of nations is considered a standard measure of wealth. And these days most people use them adjusted for purchasing parity. That takes into account that spending a $1 in Burundi gets you more than spending $1 in London. So I checked what is the GDP per capita (PPP) for various countries. Germany is $31,900, France is $31,100, Denmark is $37,000, Austria is $34,600, Poland is $14,300, Sweden is $32,000, Spain is $27,400, Netherlands is $32,100 and the UK is $31,8000. The average for the EU is $29,476. The average for the United States is $44,190. The World Factbook has numbers that are very similar: $44,000 for the US and $29,900 for the European Union.

Now some people will compare one nation in Europe to the entire United States instead of comparing the EU average to the US average. That is cheating. For instance Delaware has a much higher per capita GDP than does Mississippi, just over twice as much. No country in Europe beats Delaware on this index. Cherry picking the specific European countries can make the stats look better than the average does as would cherry picking which states one uses for the US.

Instead we take all 50 states all the members of the EU as two groups and compare them. And that gives us the figure of $29,476 for the EU and $44,190 for the US. By the way since these are adjusted for purchasing power that also takes into account the disparities in cost of living. And thus this answers both my first assertion and my third, which I shall address further anyway.

It was asserted by one European commentator that the average American earns something like $23,000 per year. I know that is absurd. So I went to the Labor Department for New York state and went through their data base of hundreds of professions and checked the median annual wage for those occupation. Out of hundreds of positions listed I found only a handful paying near that level. And according to the state of Indiana the “average wage per job in the United States was $36,167 in 2002” I would assume that in the five years since then the average has increased. The same site says wages were increasing at a rate of 3.57% per year. If that remained true that would mean the average today is around $43,100. Well above the bogus $23,000 level that was claimed.

And then there is the undeniable fact that the average US worker keeps a much larger portion of his income and goods and services are less expensive in the US. In addition the average European is almost twice as likely as to be unemployed. The US unemployment rate for last year was 4.6% while for the Euro-zone it was 8.9%.

This unemployment rate is important because people who have zero income are not counted in the average annual wage. Strictly speaking a country of five people, where one is employed at $100,000 and four earn nothing has an average wage rate of $100,000. But the country, where four of the five work for $50,000 and one is unemployed, has an average wages of $50,000. The first country tries to pretend it is better off. In reality the second is. In reality I argued that the incomes of zero must be added in. In that case we discover that in truth the average income in the first country is just $20,000 ($100k divided by 5) while in the second it is $40,000 (4 times $50,000 is $200k divided by 5).

As economist Don Boudreaux noted in an editorial in the Christian Science Monitor noted one way the French, as an example, inflate their average wages is my keeping low wage employees unemployed. The US has millions of immigrants, legal and illegal, who are absorbed into the work force each year. And Americans are younger than Europeans on average and have higher birth rates meaning more young workers enter the force each year. As Boudreaux noted: "If lower-skilled workers enter the labor force in unusually large numbers, the average wage rate will fall without necessarily reducing any worker's pay. Indeed, the typical worker can even see his real-wage rate rise while the average rate falls!" He notes that "A less-flexible economy, such as France's, which makes it difficult for lower-skilled workers to find jobs, will not "suffer" any such fall in its average wage rate." These sort of distortions are routinely left of the debate by the advocates of European socialism.

Europeans pay more in taxes.

The OECD surveys the tax burden in their member states, as measured by tax revenues as a percentage of GDP. The higher the percentage the higher the average tax burden per nation. Since the OECD covers the United States and most of Europe it is a helpful index to use. The five nations with the highest tax burdens were all in the EU: Sweden 50.8%; Denmark 49%; Belgium 45.8%; Finland 44.9%; France 44.2%. The United States was listed at 25.4%. The lowest EU country on the list was Ireland at 30%.

The EU doesn’t deny that is a high tax region, actually the highest taxed region in the world, so I’m perplexed as to why some of my readers want to pretend otherwise. The European Commission Taxation and Customs Union recently released their 2007 index Taxation trends in the European Union (pdf). The opening paragraph of the report states:

The European Union is, taken as a whole, a high tax area. In 2005, the last year for which detailed data are available, the overall tax ratio, i.e. the ratio between total tax revenues and GDP, in the 27 Member States (EU-27) amounted to 39.6 % (in the weighted average; see Table 1); this value is about 13 percentage points above those recorded in the United States and Japan. The EU ratio is high not only compared with these two countries but in general; amongst the non-European OECD members, only New Zealand has a ratio that exceeds 35 per cent of GDP.

We know the US tax burden measured by the percentage of GDP consumed by taxes is 25.4%. Comparing that to individual European countries shows that the rates in Europe are much higher, as the EC admits. In comparison the UK is 37%; Netherlands 38.2%; and Germany 38.8%. And I have mentioned the five very high rates in the EU earlier. But what matters is the average and according to the European Commission that figure is 39.6%. And if the EC knows what they are talking about every country in the EU has a tax burden higher, many significantly higher, than in the United States. In recent years the EU tax burden average was depressed by the admission of relatively low tax states in eastern Europe but the EU is doing its best to force those nations to increase their tax burden to stifle competition within the EU.

Europeans pay more on average.

As I noted above the PPP adjustment takes cost of living into account already. So all I am doing is offer some further comparisons. If I were to purchase an ear of corn at my local store it would cost me $1.36. The store I use is connected in some way with A&P in the US (at least they stock many A&P items) so I pulled up a random store in the US in New Jersey (not one of the cheapest states either) and they had ears of corn on sale for 16¢. Recently when I was spending a few months in the UK I remember the price for an ear of corn there was about $1.00 each.

The US store sells Barbeque sauce for 79¢ and I recently paid $6.80 here but that might be excused since it was "imported". Two liter bottles of Pepsi are $1.25 each while I would pay about twice that for 1.5 liters (actually I stopped buying soft drinks due to the prices). The potatoes I buy in Europe are slightly more expensive but they are very small, potatoes and not of the quality of the Idaho baking potatoes. A store one bus ride away does stock similar potatoes but at a much higher price plus the bus trip is $3 so I rarely purchase there unless I have to be there for another reason. The food items I picked here are items I have priced or purchased within the last few days and are merely examples.

Take petrol as another example. According to the Automobile Association of Ireland the average for one liter of petrol in the US was € .58 during June. The cheapest petrol in Europe, in comparison, can be purchased in Estonia for € .87. Here are a few other countries to compare to the US rate of € .58: Germany € 1.35; France € 1.08; Netherlands € 1.08; UK € 1.45; Italy € 1.21. The average cost for petrol is double to triple what the price is in the US. Of course those high prices have knock on effects on other goods and services as well.

One popular index is the cost of living index for various major cities in the world. They use New York City as the base rate. And New York City is the most expensive American city. It is still cheaper than many European cities. London is scary when one looks at prices. For instance a tube ticket there is almost three times the rate for a subway ticket in New York. A music CD that costs € 13.22 in New York is € 19.17 in London. A burger meal that is € 4.32 in New York is € 5.74 in London.

Of the major cities in the world, as I stated already, New York is the most expensive in the United States. Yet in Europe it would be cheaper than London, Copenhagen, Geneva, Zurich, Oslo, Milan, or Paris.

Of course one can compare specific items and find bargains in different places. The question is not whether a specific product costs more, less or the same but whether all products, on average cost more or less. That is precisely what purchasing power parity takes into account.

The average income in Europe is lower than in the US. The average American is allowed to keep more of his income than is the average European And when it comes to spending the money which is left over the average price of goods and services are lower in the US than in the EU.

Are these the only measures of well-being? No. I never claimed otherwise. Are there problems in the US? Of course, there are problems everywhere. And there are some in the US that are significant. I think the loss of Constitutional rights in the US, under the current regime, has been frightening. I believe the US has been moving rapidly toward a police state but the same is true for the UK as well. And US foreign policy is harmful to the whole world. And I don’t believe the Democrats will reverse any of this. But then I have made my position on those issues well known here.

Is this blind loyalty to the US? If so I would be living in the US. The reality is that the economic conditions in the US are vastly better than in Europe, especially in the old EU nations that have decrepit economies and demographic trends that are disastrous. Just because I despise Bush and various aspects of American culture (like the fundamentalists) that doesn’t mean I’m going to lie about the economic conditions. Unfortunately many people who share my dislikes about such aspects of America feel they are justified in distorting the truth.