As I mentioned a few days ago, using current market exchange rates, Australia now has a higher income per person than the US. Matthew Turner observed the UK passing the US a few months ago and estimated several years ago that the critical value for the Eurozone is around $1.46, which was reached in the last couple of days. I haven’t checked on the GDP comparison, but the yen and franc are also rising
Of course, it would be silly to use these numbers to support a claim that Americans are, on average, worse off than people in other developed countries. The Purchasing Power Parity indexes produced by the International Comparisons Project of the World Bank provide a much better (though far from exact) basis for comparisons of this kind. But, for the many advocates of free markets who’ve used the economic performance of the US as the basis for their case, there’s a big rhetorical problem here. You can, I suppose, argue along the lines “The market values the output of the average American less than that of the average European (or Australian) but analyses prepared by international bureaucrats show that Americans are actually better off, and therefore we should prefer the market to the state”, but it’s not a position I’d want to defend.
A few minor points to follow up:
First, I’ll spell out the point a little more. A dollar is a claim on the output of the US economy, just as a euro is a claim on the output of the eurozone economy (that’s, pretty much, what legal tender means). So the $/euro exchange rate is, precisely, the market price of claims on US output, relative to claims on eurozone output. Of course, for non-traded goods, you may have to travel to exercise your claims, but that doesn’t invalidate the point.
Second, it might seem as if this argument can be turned around. As a social democrat, shouldn’t I be worried that the World Bank’s numbers show the free-market US to have higher income per person? I don’t think so, in part because the apparent symmetry is illusory. There’s only one exchange rate, and while there are quite a few different income measures, GDP and its close relatives are the only ones that are commonly used on the market side of the debate. By contrast, there are heaps of alternatives to the ICP measures. The World Bank likes the Human Development Index, but there are lots more. There are different ways to estimate PPP index (Steve Dowrick and I had a bunch of papers on this), and you can choose whether to take account of hours worked, health and longevity outcomes and so on. On the measures that make sense for social democrats, social democracy does better.
Second, common sense and past experience suggest that the large deviation from PPP we are observing won’t last. It’s not that long ago, after all that the euro was below $1US and the $A was nearing $US0.50. Presumably the $US will recover once the trade deficit is reduced to a sustainable level.
But even weak versions of the efficient markets hypothesis are inconsistent with this expectation. Assuming equal interest rates (approximately true) the best predictor of the future exchange rate between any two currencies is the current exchange rate. I think the real problem here is with the EMH, but its defenders are free to observe that, having predicted the depreciation five years ahead of time, I failed to put my money where my mouth was, and, as a result, cannot afford the private island I’ve wanted for so long.
John Quiggin 
Mugwump, according to the above-cited Wiki article:
As you can see, the median household wage I cited does include health coverage and several other non-cash components.
Thus, your argument about the magnitude of health insurance coverage in relation to household income appears to be incorrect.
None of those are health insurance. And apart from child support, those items are minor compared to health insurance (disability is not health insurance, it’s for the event that you become disabled and can’t work). If health insurance is included you’d think they’d state it explicitly as it is the largest component of employee “benefits”. But I could be wrong.
Actually, I think we are misreading: they are counting receipt of unemployment insurance, disability benefits, and child support as income, not the payment by the employer of the premiums, which makes sense (they’re all cash in your pocket at the end of the day).
Mugwump, this site:
Click to access 03%20Supplements%20to%20Wages%20and%20Salaries.pdf
Details the US Department of Commerce’s methodology for calculating personal income.
As you may be aware, household income is an aggregation of personal incomes.
This citation indicates that employers’ contributions to all sorts of schemes and funds are included in personal income.
Among those contributions counted in personal income is employers’s contributions to health insurance. (There are several others besides.)
But are they counted in the median income you quoted?
In some ways it is irrelevant: your original point was that my health insurance is expensive, which is true. People on lower incomes do not usually take out the cadillac option, but then the Australian public system ain’t exactly the cadillac option either. Of course, the lower your income the worse it gets in the US relative to Australia, but then we’re back to the question of throwing out the baby with the bathwater: is all that inefficient state control and oligopoly worth it for a marginal gain to the lowest quintile? I’d say no: you can help the lowest quintile without throwing out the baby with the bathwater.
Yes, household income is calculated from personal incomes as reported by the Department of Commerce.
The point you make about people choosing the option that suits them, including suiting their ability to pay, is correct.
But again you have reverted to an ideological argument.
The debate revolves around questions like this:
How many kilos of expensive Australian bananas can an Australian afford per month on the saving she makes from not having to pay US-style health insurance, or putting aside money for self-insurance?
I think that you will now agree that you are guilty of painting a rosy scenario about the US vis a vis Australia in relation to this and related questions.
Katz,
Perhaps you should also ask how many kilos of bananas can Australians buy because the research into drugs is being funded by US customers of the drug companies, with an effective cross-subsidisation from the US consumers of the Australian?
How much drugs research will be foregone when or if the US adopts an Australian model, cutting off the money flow that has kept research going?
But AR, that’s disingenuous from a supporter of market capitalism like your good self.
As Milton Friedman stated many times, if governments and other actors wish to cross-subsidise, more fool them. They are voluntarily setting themselves up to be exploited.
It would amount to an abnegation of self-interest were you to attempt to stop someone from voluntarily throwing money at you.
In short, let’s worry about the effect of a change in US policy when it looks likely to happen.
BTW you have misunderstood the PBL system. Australian purchasers pay market price for drugs (minus a bit because of their ability to buy huge quantities of them). The foreign drug companies thus get an acceptable market price.
The PBL system then subsidises with public funds the cost of scheduled drugs to idividual patients.
The big issue the drug companies have with the PBL is how they can get their drugs accepted under the PBL scheme. An acquaintance of mine worked for one of the largest drug companies. After he was retrenched he recounted the filthy politics swirling around this struggle to have, among other things, old drugs reclassified as new drugs.
Katz,
The problem is that the government is not doing the cross-subsidisation – they are effectively forcing the US consumers (like Mr. Mugwump) to do so. The disingenuous part is for us to wave it about laughing with some pretence of moral superiority.
On the drug price itself – the price is not a full market price. From my understanding at least the PBL sets a price based on what they consider to be the efficacy of the drug in comparison to other, similar drugs. The company then has the choice of supplying or not supplying at that price. An additional subsidy is then paid by the Australian taxpayer to bring the price down to a nominal level.
Provided that price is at or above the marginal cost of production then the drug company would sell it to us – but this does not take into consideration the costs of R&D, often in the billions.
Yes, that is what the PBS (sorry about the previous typos) does in terms of the price for the end user.
But you need to understand the supply chain for these druges.
1. The usually foreign drug company manufactures the drug.
2. An Australian wholesaler buys the drug for the market price.
3. Australian pharmacists buy the drug for the market price plus a mark-up for the wholesaler.
4. The pharmacist sells the drug to the patient with a prescription for a subsidised price, plus a mark-up.
5. The pharmacist claims a recompense for the scheduled rebate for the drug.
6. The Australian taxpayer foots the bill for the rebate.
Bottom line: so far as the drug manufacturer is concerned, it does not care whether it is selling to American patients or to Australian patients. The company make the same amount of money on the transaction.
In other words, American patients do not cross-subsidise Australian patients.
Katz, I am not painting an excessively rosy picture of the US. I have already agreed that those at the very bottom are worse off in the US than Australia (actually, not quite true: the worst-off citizens of almost any western country are equally destitute, since they tend to be mad and homeless. I’m talking about the next tier up).
But I claim the next 80% or so are better off than their Australian cousins. Given that my original claim was that the “average” American (take it as the median) is better off than the “average” Australian, I don’t think anything you have said contradicts that.
[And that’s leaving aside the massively positive effect US free enterprise has on the world economy, alluded to by AR]
As the insurer of 20M individuals, and because of the no re-export laws, the Australian government can and does negotiate a very large discount from the drug companies. Most countries with public health insurance will negotiate similar discounts. The US does not negotiate in this way. In fact medicare, the public health system in the US [yep, Australia got the idea and even the name from its supposedly evil capitalist cousin], is not legally allowed to negotiate bulk discounts.
So, when US drug companies are planning their R&D investment, they can attribute a much larger profit to the US than they can to everyone else, which means they’ll spend more on R&D. In that sense the US drug consumer is cross-subsidizing drug consumers in other nations.
However, in my opinion the story is a little more complicated than that.
If the whole world negotiated as a block with the US drug companies, then you’d have world governments setting the price of all drugs, and hence the R&D investment levels of all drugs, with all the attendant inefficiencies that entails (it’s communism writ small).
As it stands, the price signal is set by-and-large by the US the consumer, which means R&D investment is directed to those areas with greatest demand – theoretically more efficient.
In practice, however, the drug market is not like markets for other goods. Particularly when it comes to life-saving or lengthening drugs, which is where most of the R&D money goes. I have a choice whether to buy a Toyota or Honda or Ford or whatever, and if one car company does not offer the features I want I’ll choose another.
But when it comes to life-threatening diseases, the consumer typically has the choice of only a handful of patent-protected drugs. She doesn’t have the option of choosing between near equivalents: “hmm, I think I’ll take the one with headache side-effects over the one that gives me gas”. She has a choice between dying or taking the drugs, which means she is willing to pay nearly anything for the drugs.
I think the economists call this “price inelasticity”: when changing – in this case increasing – the price does not substantially alter demand. And its compounded by a government-granted monopoly:patents.
Anyway, the way I see it is: I don’t care if rich people drive Bentleys – I can still travel just as easily in my Toyota. Maybe slightly less comfort, but who cares? But there are no Toyotas in the drug world. It’s all Bentleys and without the Bentley you’re not stuck catching public transport; you’re dead. Therefore you need some system to make them affordable for the masses.
But Mugwump, you’re arguing against a straw man. I never argued that your median Australian was more prosperous than your median American. I merely stated that your painting of the picture was too rosy.
And additional to your original comments about the US real estate market, you have neglected two major elements of costing:
1. Much of the Australian real estate market is driven by negative gearing, which represents a large rebate for investors in housing.
2. Domestic residences in the US are subject to capital gains tax upon sale. I believe in some states there are inheritance taxes as well. Owner-occupied houses in Australia are not subject to capital gains tax or to inheritance tax.
Your comments on the PBS are heavily laden with ideology and inaccuracies:
Drug wholesalers don’t “set” the price they are willing to pay drug companies. They negotiate the price with drug companies. Those companies are free to accept or reject the price offered.
It is true that many life-saving or life-extending drugs are not subsidised by the Australian PBS. Nevertheless, they are available to the Australian patient for the market price. It is inconsistent of you to complain about the way the PBS allegedly distorts drug prices and then complain when the PBS declines from distorting drug prices.
For the patient no price is too high for someone else to pay in an effort to extend her life. Nevertheless, the costs and benefits of spending a fortune to extend the lives of a very few must be calculated by anyone who has responsibility for the public purse.
As to patents, the drug companies have legitimate intellectual property rights. Again, these are measurable in a court of law against fraudulent efforts by these same drug companies to refresh old patents about to expire.
And indeed, Mugwump, if you are a property owner in the US and not a US citizen, this website on some quite swingeing costs in estate duties will be of interest to you:
http://en.wikipedia.org/wiki/Estate_tax_in_the_United_States
Even for US citizens, the amount of estate duty payable for estate duty is quite sobering. This extract should provide some insight:
Did you factor these charges into the costs and benefits of owning property in the US?
“is all that inefficient state control and oligopoly worth it for a marginal gain to the lowest quintile?”
As a former member of that lowest quintile, I’d say “yes”.
As soemone with an academic backgroudn in economics who’s followed the Australian economy pretty closely I ‘d say you seem to have overlooked te changes towards a less-regulated economy over the past two decades.
As for oligopolies, the main one you cite – the Coles/Woolworths retail oligopoly – that’s the direct result of the Liberal government allowing the dismemberment of Franklins the third major player in the market. That was justified as being the result of free market forces. Better and more vigorously applied competition laws would have prevented that.
A quick note on housing – talk to Americans and Europeans and you’ll find that they regard the quality of Australian housing as pretty poor.
One reason US houses cost more (on average) is they tend to be more massively built with more insulation and in-built air-con, central heating or both depending on the part of the country.
Australian houses are simply not built to the same standards. So an A$800.000 house in Sydney isn’t necessarily worth as much as a US$700,000 house in LA.
“Particularly when it comes to life-saving or lengthening drugs, which is where most of the R&D money goes. ”
No most of the R&D money goes into fiddling with existing drugs to expand their patent period (i.e. developing an oral version of an injectable drug) and into drugs to treat chronic conditions of the affluent.
Diabetes is a pharmaceutical company’s best friend – a life-long condition that requires daily medication.
Malaria vaccinces on the other hand are a low priority because you can;t make as much off a single shot sold in the third world.
It must be sad to hate your country so much. Why do you still live here, if we’re all so awfully socialist?
Quality of life is subjective, rather than objective.
Exactly. Like the boiled frog, you don’t notice the heat until it is too late.
Ian Gould, I am just looking at the state of the Australian market today. It may have improved a lot but I claim it could be a lot better still, particularly in areas like housing and groceries (all without hurting the bottom quintile at all, BTW).
Katz, the first $500,000 of capital gain on your family home is tax free in the US. That’s more than enough for most people.
I don’t see the tax laws encouraging housing investment in Australia as a good thing at all, particularly when coupled with the supply and government oversight problems. Why encourage investment in almost completely unproductive assets??
As for estate taxes, I think they are a reflection of some of the more desirable elements of American culture, which lauds enterprise and wealth creation, but abhors a free-ride, including the free-ride given to the descendants of the wealthy.
And I think you are reading more into my comments on the PBS than is there. I don’t think the PBS is a poor scheme at all – the Australian government would be idiots not to have such a scheme given that they already have public provision of healthcare. I was just commenting on the cross-subsidy.
wilful, I don’t live in Australia anymore, but I still commute back on a regular basis. And I don’t hate Australia, but I am pretty disappointed with the way a lot of things have gone. That would be sad if I had no other option but to live there.
Yet more ideology!
I thought this thread was about the relative costs of things.
But I’m glad that you have now acknowledged that your first tendentious statements about the relative costs of things in the US and Australia were quite simplistic.
It was, but you raised the question of estate taxes, not me. They have nothing to do with the cost of living. They are a cost of death. And a cost of death that only affects the wealthy, so hardly relevant to the standard of living of your average (median) American.
Nothing you have raised challenges the fact that the average American is substantially better off than the average Australian. They drive a better car. They live in a better house. And they can afford more consumer goods.
No, Mugwump, you asserted that the price of housing was lower in the US.
These were my first words on the topic:
All I’ve done is to show you that you did not consider many factors when you made that assertion.
And, by the way, you also omitted the cost of capital gains tax in your assertions. As you know, no capital gains taxes are paid by Australians disposing of their primary residence. This is not the case in the US.
http://en.wikipedia.org/wiki/Capital_gains_tax#United_States
So let us recap:
Shorter Mugwump: All right, but apart from all of the things I neglected to mention, such as estate tax, gift tax, and capital gains tax, housing in the US is much cheaper than in Australia.
You’re flogging a dead horse Katz. As I already pointed out, you get a $500,000 break on capital gains on your primary residence (actually, that’s for a married couple – ie joint owners, but that’s the common case). Or to put it really simply: you can make $500,000 profit on the sale of your primary residence before paying any tax on the capital gain.
Again, for the average joe, capital gains on his primary residence is not an issue. But just for the sake of argument, suppose it is: will it make housing more expensive as you want to argue? I can’t see how. It does remove a distortion that encourages Australian retirees to live in enormous, empty houses because that’s the most tax-effective investment. But the lack of such a distortion doesn’t make housing more expensive.
And perhaps you could explain how the other taxes you mention make housing more expensive? Estate, gift, and capital gains taxes are not levied on a house when it is built or originally sold, so it is a mystery to me how they can influence its price.
Oh dear Mugwump.
For a supposed free market maven you are remarkably ill-informed about its central tenets.
If there is a tax on the ownership of an asset, or on its transfer, then that tax must increase the cost of owning that asset.
Moreover, the tax necessarily adds to the general cost of living and subtracts from the discretionary income of the person subject to that tax.
And for your information, capital gains taxes and estate taxes are two different things. You don’t have to die to be subject to capital gains on th etransfer of an asset, including a house.
You also appear not to know about the property tax levied by individual US states, which is up to 4% of assessed value on real estate per annum.
Mugwump: “And perhaps you could explain how the other taxes you mention make housing more expensive? Estate, gift, and capital gains taxes are not levied on a house when it is built or originally sold, so it is a mystery to me how they can influence its price.’
Tell me mugwump, are you familiar with the law of one price?
Katz, drop the “you appear not to know”, it’s just offensive. As an owner or former owner of property (including houses) in both Australia and the US, I do know a thing or two about how the taxes work. I am well aware that capital gains and estate taxes are two different things. I pay the former; fortunately I am yet to pay the latter.
Capital gains tax may increase the cost of owning an asset, but it doesn’t necessarily increase the price of purchasing the asset itself. In fact, if capital gains tax was dropped on housing tomorrow, you’d find the price of expensive homes would increase, because they would suddenly be in more demand as an investment relative to other investment destinations.
The point is, the price of new housing is overwhelmingly driven by the basic costs of construction and the cost of the land (which is driven by supply and demand). In most of the US, that is. In Australia, there is a third component: the cost of state government interference in the process, in the form of punitive development taxes and vice-like control over development (although the latter manifests itself in the price through the lack of supply)
Yes, I am aware of property tax. I pay that too. But to adopt your approach (anything not mentioned must be unknown), you appear not to know that is levied by counties, not states. You also appear not to know that mortgage interest on your primary residence is tax deductible.
I am really sorry to break it to you that Australia might not be the best of all possible worlds, but really, it would be better if you embraced the truth and pushed for change, instead of burying your head and getting boiled to death.
“..but really, it would be better if you embraced the truth and pushed for change, instead of burying your head and getting boiled to death.”
You know economic growth, population growth and productivity growth here are all matching or beating the US right?
While we’re running a budget surplus and are rapidly porvisioning for future super commitments via the Future fund?
Ever consider maybe we aren’t the ones in the pot?
I guess it depends on your priorities Ian. Yes, Australia is doing very well, but as your side of politics is fond of pointing out, it has little to do with any government. Running surpluses in Australia off the back of a commodities boom is no great economic achievement.
Where governments – particularly state governments – do have an impact on the market, it is almost overwhelmingly negative. The stranglehold on development in the name of environmentalism or nimbyism is abhorrent. I want my children to be able to afford a decent home.
But hey, you can have it. I have lived in both countries, bought property in both countries, and run businesses in both countries. I know which one provides the greater standard of living. To me, it is a shame. Australia does many things very well, and a few very poorly (as is the case in the US too, of course). It’s just the poorly done things in Australia (housing, competition, healthcare, tertiary education) will have a pervasive and detrimental impact on the next generation.
Shorter Mugwump 1: “Taxes make you rich!”
Shorter Mugwump 2: Those poor, put-upon retirees! The inhumanity of it! There should be a tax to stop this!
Not true Mugwump. Some US states also levy property taxes. The 4% per annum figure I cited above refers to the state of New Hampshire.
http://en.wikipedia.org/wiki/Wealth_tax
http://en.wikipedia.org/wiki/New_Hampshire
Now you know.
Argument by ridicule. Devastating.
The exception proving the rule. I am sure you’re also a fan of New Hampshire’s deep libertarian roots, embodied in their license plate motto: “Live Free or Die”.
Apology accepted.