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 
Yes, if you confine your analysis to market valuation and averages. But the US also has the worst Gini index among the advanced countries. From this point of view, the country that shares the closest distribution to the US is Georgia. Unfortunately, I can no longer find data on the WB site from which I could calculate whether it’s better to be poor(ish) in America than poor in, say, Sweden or Japan. They used to publish that sort of data – not sure when or why they stopped.
i wonder if a nation that spends such a high percentage of it’s money on munitions is likely to come back.
unless warfare pays for itself, which it hasn’t done since the occupation of the phillipines.
Melanie, I meant to cover your points, with which I agree, in my 2nd last para. Tim Smeeding did a bunch of good work on the question you raise, but I don’t know where there’s a regularly updated source of data on this.
You can start with the observation that the US poverty line for a family of four is about $20 000 and changes only in line with inflation, and that the proportion below this line has been stable at around 12 per cent for decades.
The Henderson poverty line for Australia is a bit above $30 000, which is a little above the US level at PPP exchange rates, while the poverty rate is a bit below. So it’s a bit better to be poor (say, 10th percentile) here than in the US.
Since Australia is more unequal than either Japan or European countries, it’s safe to conclude that the US poor are worse off than those in other developed countries.
On the topic of U.S military expenditures, it wasn’t so long ago, back when Bill Clinton was President and the U.S. federal budget was in surplus, that commentators were suggesting that the U.S. could spend 6.5% of its GDP on defence in perpetuity, without serious economic or social dislocation. However, given the predations of George Bush’s presidency, one doesn’t hear this any more.
I came across a really interesting presentation from Thomas Barnett entitled The Pentagon’s new map for war and peace, that suggests a possibly cheaper reconfiguration and re-tasking of U.S. military power. Below is the summary of the talk:
John, You’ve made several postings on the PPP v. market exchange rates issue in recent months and I welcome that. But in my opinion you’re off the track on some points and this has meant that some of the ensuing discussion has been less useful than it might otherwise have been. I’ve maintained silence so far, but I hope that you’ll now allow me to put in my two-pennorth (rather more, in fact).
My first difficulty with your analysis is your reference to “PPP indexes compiled by the World Bank”. In fact, the official PPP-based GDP comparisons between the rich countries that you’ve been discussing (the US, Japan, Australia, Western Europe, etc)are compiled by by the OECD/Eurostat program, not the World Bank.
The distinction is important not only because in general the underlying data for the rich countries are more reliable (this is especially true of EU countries), but also because OECD/Eurostat follow the EKS aggregation procedure, not the GK method that is used in the Penn World tables and in past ICP rounds. The EKS procedure is one of several leading methods that are seen by index number specialists as producing very similar results – certainly within the ranges of real average incomes of most OECD countries. Within the EU, the PPP results are used to determine allocations under large programs, and I don’t believe that their margin of error is anything like as large as the 10-20 per cent that you have recently suggested.
Secondly, it’s somewhat misleading to talk of the comparisons being based on “PPP indexes”: this leads to the notion that the PPPs “are based on the estimated relative cost of a standard bundle of goods and services” (as you said in another recemt post). This is not so: the PPP comparisons extend in principle to ALL goods and services that enter GDP.
Just as estimates of a country’s real output growth rate aren’t made by applying a price index based on the cost of a standard bundle of goods and services to nominal GDP, the comparisons of real GDP produced by PPP programs aren’t made by applying price indexes to nominal GDPs. In both cases the price indexes emerging from the analysis are implicit rather than explicit.
Thirdly, I think you make a false dichotomy between “GDP measures” and “ICP measures”, even if the latter term is extended to cover PPP comparisons other than the ICP. Real income comparisons can only be made by removing differences in price levels, so the PPP measures ARE comparisons of GDP – and they are the only ones. Comparisons made “using exchange rates” do not measure real volumes at all.
Fourthly, and notwithstanding the latter point, I don’t believe that it is any longer “standard practice” to use PPPs to compare real income levels. So-called “market” exchange rate comparisons are increasingly dominant, and the trend seems likely to continue that way as studies of organisations such as Goldman Sachs and PriceWaterhouseCoopers get more attention than the products of official statisticians.
The high point of understanding of PPPs was around 25 years ago. In his Nobel prize lecture in 1984, Sir Richard Stone pointed out that real income comparisons required the methods of adjusting for purchasing power pioneered by Colin Clark in “The Conditions of Economic Progress”, which was published in 1940. Unless the world gets itself a statistical office – and many existing institutions would fiercely resist this – the standard of macroeconomic reporting at the global level is likely to continue to deteriorate.
Finally, I don’t go along with your argument that the Human Development Index and “heaps” of other measures are alternatives to GDP. There can be debate about the boundary of production that GDP-type measures cover – and, as you’ve pointed out, there’s really no debate that IN PRINCIPLE the measurement of output should be net of capital consumption. I agree to, as I think you’ve also said, that it may be impossible to compare the output of countries at very different levels of development.
But we must either have international comparisons of aggregate output or expenditure or acknowledge that it can’t be done. With respect, I think that you are missing a critical point when you say that you can “choose whether to take account of hours worked, health and longevity outcomes and so on.”
Of course you can, but all of these choices must also be made in the case of intemporal comparisons for a single country. This doesn’t negate the point that real GDP, on some measure or another, is an indispensable starting point for many types of analysis of welfare or productivity, or even of wider measures of overall performance, of countries over time.
Nor does the fact that we need internationally-comparable measures of health, longevity and so on mean that internationally comparable measures of OUTPUT are thereby compromised. It’s horses for courses.
I think perhaps we are talking at cross purposes in some respects here. I agree that “PPP comparisons extend in principle to ALL goods and services that enter GDP”, but it’s still necessary to weight these goods and services and this process entails the construction of (something like) a standard bundle.
To take the obvious examples, for a Laspeyres price index, the bundle is base-period or base-country consumption, and for a Paasche index, it’s current-period consumption. Obviously, with multiple countries and more general aggregation procedures, things get more complex, but I think readers who care about these details already know this and other readers aren’t going to be seriously misled.
On your last few points, I agree. If you want to compare output, use an output measure like GDP, but if you want to compare socio-economic systems, use (one or more) broader measure(s). GDP is, as you say, a starting point, but not a finishing point. Horses for courses is exactly what I was trying to say here.
Ian Castles, GDP does NOT measure output, only that part of output that has a market valuation. It is an interesting fact that economists/statisticians have decided to impute such valuations to outputs such as non-traded agricultural production, but not to other non-traded goods and services such as cooked dinners and washed nappies.
Apologies for bashing on about one of my hobby horses.
Thanks John. I think that I’d want to add that the need for PPP-based measures goes beyond GDP and, in particular, extends to poverty analysis, household income and expenditure, etc. I can’t answer Melanie’s question about why the World Bank doesn’t publish certain data that it formerly did. But I know that the link between the ICP and distributional studies is strong and has been emphasised in a recent report on WB research chaired by Angus Deaton of Princeton. Unfortunately there is little interest or understanding of these issues among econometric modellers.
On the other issue, the point that I’d want to stress is that the task that confronts the statistician in comparing the output of countries and regions at a point of time is similar, at least in principle, to that of comparing the output of an individual country or region over time.
I realise that your Laspeyres/Paasche example was only intended as an example, but it’s my understanding that few advanced countries use fixed-weighted indexes in compiling their real macroeconomic measures these days. Among the countries that now use chain-weighted methodology are almost all of the OECD countries other than Korea and Mexico, and quite a few of the “economies in transition” including Russia. I don’t question that many of these countries face serious challenges in producing reliable macroeconomic data, but I think that the difficulties arising from price index methodology can easily be overstated.
Unfortunately the conclusion that is often drawn from the admitted difficulties in producing international comparisons of volumes is that somehow exchange rate-based comparisons offer a way out of the dilemma. They don’t. The only remedy for
inadequate PPP estimates is better ones – and if these still aren’t good enough, GDP shouldn’t be used at all in international comparisons.
As I’m sure that you know, PPP-based GDP comparisons are, and always have been, one of the components of the HDI.
Thanks Melanie. I thought I recognised your point in referring to the production boundary. I don’t think I’ve ever said that GDP measures output – it’s a measure of output. So is an industrial production index, or an index of farm production.
Being an academic economist, I can afford to take the purist view and say that, in some circumstances, there is no meaningful comparison. For example, it’s obvious that nearly all Swedes are better off than nearly all Ethiopians, but I don’t think this fact can usefully be expressed on a ratio scale.
However, given that numerical comparisons of living standards are necessary for various purposes, an imperfect PPP measure is better than an exact (for the second at which it is observed) exchange rate measure.
The demise of the US will see a lot more instability in the world.This is the price the US has paid for being the world’s policeman.
I for one am not celebrating their fall,like many of the left in our society.
John, All of the official statisticians that I know in international organisations or national statistical offices would agree with you about the impossibility of making meaningful numerical comparisons between the living standards of people in the most affluent countries with those in the poorest countries.
With only one or two exceptions, all of the academic economists that I know are of the same mind. Bil Nordhaus of Yale, doyen of US economic/environmental modellers, put your point on PPPs even more crisply in a invited keynote speech to an IPCC Expert Meeting in Washington in 2005 (“While we might be reluctant to employ PPP estimates, it is better to be imprecisely right than precisely wrong.”)
The Panel has chosen not to mention Professor Nordhaus’s opinion in its latest report, and to use PPP estimates “for illustrative purposes only.” It has a long tradition of error in this area and shows no sign of mending its ways.
In its Third Assessment Report in 2001, the IPCC cited a 10-year-old UNDP Human Development Report to the effect that ‘The poorest 20% of Bangladesh’s population … earn per capita incomes that are a factor of 700 lower than that of the richest 20% Swiss population”. The UNDP itself had recognised that the analysis underlying such comparisons was both invalid and inconsistent with the analysis underlying the HDI.
It would be tedious to go on recounting examples of this sort of thing. In 2004, Professor Weyant, Director, Stanford Energy Modeling Forum, invited me to nominate experts he could consult about the PPP vs MER issue. I nominated, among others, Alan Heston of the University of Pennsylvania, one of the ICP pioneers; Prasada Rao of UQ; Jacob Ryten, consultant to the UN, IMF and World Bank on the ICP; Carol Carson. then head of the IMF’s Statistics Department; Tim Smeeding, already mentioned on this thread; Angus Maddison, the world’s leading expert in macromeasurement; and Heli Jeskanen-Sundstrom, Head of Statistics Finland and President of the International Organisation of Official Statistics. So far as I know, Weyant never contacted any of them. But he was appointed review editor of the IPCC Chapter in which the criticisms of the SRES were assessed.
I read many times that USA official statistics are using very heavily hedonic pricing for GDP, more than any other country, here are a few slides from OECD:
Click to access giovannini_labour_growth.pdf
There’s also some creative accounting on the USA military spending side:
Click to access Faini.pdf
Anyone with more current views?
Re #13. Angus Maddison is critical of the extent of use of hedonic techniques in the US national accounts, noting that they “imply a direct connection between computing power (speed, memory, etc.) and computer output without considering the quality of the software that converts power to output” (The World Economy: Historical Statistics, 2001: 80).
Maddison also argues that “hedonic techniques assume competitive markets where prices accurately reflect consumer utility, but recent anti-trust cases suggest thatr this assumption may be unrealistic.” He concludes that “One would like to see a more rigorous and detailed examination of alternatives, and a smaller dose of euphoric reassurance that the results are robust.”
I notice that the Chief Statistician of the OECD says that PPPs are “based on the comparison of the prices of a common basket of products between countries” (Slide 4), thereby apparently supporting John Q’ view of this matter and disagreeing with mine. John may be right that we are at cross purposes. However, I can’t agree with his argument that “it’s still necessary to weight these goods and services and this process entails the construction of (something like) a standard bundle.”
In the OECD/Eurostat exercise, the weights of each of (from memory) 140 categories of goods and services are determined by the observed value of ALL final expenditure in each of those categories in the country concerned. Of course it is true that the prices of representative goods and services within each of these categories must be used in the process of estimating each of the 140 PPPs for each country, which is perhaps what Enrico Giovannini means.
I still don’t think that it’s right to characterise the totality of the items in these lists as a “basket” – unless one is prepared to say, for example, that the change in volume of Australia’s GDP between one quarter and the next is based on the prices of a common basket of products.
I don’t think the US is about to fall as Arjay suggests but there is one underlying fundamental fact of life in the early 21st century:
China and India’s GDPs are growing at double or more the rate of the US.
If this pattern is sustained for, say, another decade, both countries’ economies will be bigger than America’s in PPP terms.
Military and political power tend to follow economic clout.
The US even if it undergoes a sustained period of below-trnd grwoth in the next decade, will remain one of the wealthiest, most powerful and most respected countries in the world.
But it wi;; no longer be the sole superpower as it was in the post-Soviet era.
Incorrect Arjay.
This is the price that persons who have assets denominated in US dollars will have to pay because US administrations since Reagan have failed to stem a torrent of US dollars on to world markets.
If US administrations wish to play the world’s policeman, first they must convince their citizens to be more thrifty. Patently, successive administrations have failed miserably to do this.
Otherwise eventually the world’s policeman will get much less ban for his buck. This is because only idiots will want to hold on to US currency and credit of diminishing value.
Then it will cost the world’s policeman much more to buy all the stuff he needs to make a big bang in the world, e.g., oil.
And what is the use of a policeman with a dwarfish bang?
For the world’s policeman, size matters, Arjay.
Wow. What a fascinating discussion. This is why blogs are so worthwhile. Whilst 99% of them are filled up with discussions of what my ex said about my cat at a party, some of them have real worth.
Is there a text somewhere that you would recommend for a introduction to the problem of comparing wealth between countries?
As one who spends substantial time each year in both the US and Australia, the question is not in doubt: your average American is vastly better off than your average Australian. And they enjoy far more constitutionally-protected freedoms.
Australia is stuck in 1920s-style capitalism and 1970s-style welfare state: oligopolies and handouts everywhere. Real competition brings real benefits. I’ll take Super Capitalism over The Road to Serfdom any day.
OT, Congrats to all 65 readers who bothered to vote for Quiggin in the Webbie awards. My favourite Oz blog, Tim Blair, won with 1799 votes. climateaudit also won its category. Notice a trend?
I suppose that is another tack you could take:
“Markets value US output lower, but anonymous blog commenters with delusional beliefs about science assure me that Americans are better off”
“We are announcing a tie between Bad Astronomy Blog and Climate Audit, so there will be two winners in this category.”
http://2007.weblogawards.org/polls/best-science-blog-1.php
So Climate Audit actually tied – and only because the counter topped out at 20,000.
but hey they’re a shoo-in in the delusional cryptofascist corporate whore category.
Climate audit are, of course, the people who keep saying that science is not a democracy or a popularity contest.
Unless they’re winning, of course.
“OT, Congrats to all 65 readers who bothered to vote for Quiggin in the Webbie awards. My favourite Oz blog, Tim Blair, won with 1799 votes. climateaudit also won its category. Notice a trend?”
Is the trend an increase in the number of stupid people that want some excuse for having done nothing when their children spit on their graves for destroying the environment? Or is the number of people the same, but their ability to find blog sites (often run by people that I doubt know the slightest thing about physics, such as Tim Blair) has increased?
Re #17. For an introduction to the issues involved in comparing the relative macroeconomic performance of countries over time, I’d recommend Angus Maddison’s Ruggles Lecture (“Contours of the World Economy and the Art of Macromeasurement”), which was presented at the 2004 Conference of the International Association for Research in Income and Wealth (IARIW). It’s online at Maddison’s website.
Some random comments on the PPP and related issues discussion.
1. Accounting tricks in US Stats. I understand the USA prepare an alternative set of GDP related stats for the OECD more broadly comparable with European methods. The largest “adjustment” relates to defence weapons platforms that are capitalised in the US NIPA but treated as current expenditure for the OECD.
2. Volume measurement for traded goods that are on a steep technological growth path has the difficulty of separating quality improvements from price impacts. The last 5 computers I have bought cost $A2100 (+/- $A100) spaced out over about 20 years! Hedonics at leasst attempts to come to grips with the quality issue. European statistical practice was woefully off the pace and has since converged on US practice, see OECD Handbook “Understanding National Accounts” (free at http://www.oecd.org) for a discussion of volume measurement in general and computer quality adjustment in particular.
3. The same OECD handbook discusses PPPs and their methodology.
4. The recent bout of banana pricing in Australia is an excellent demonstration of the difference between price index adjustment (based on bundle of goods, the CPI) and the implicit price index arising from volume adjustment of food sales in the national accounts.
5. There is a tension between informing policy and regulation objectives for national accounting methods inside Europe. Because the budget contribution of member states and other aspects of the Maastricht treaty are determined by reference to statistical standards, there is great reluctance to move to a “best practice” solution for a given country, unless that solution is applied simultaneously by all EEC participants…. a Eurosausage solution, as lampooned in Yes Minister. (It also leads to stretching the statistical boundaries by some to remain within the Maastricht straightjacket.)Countries outside the EEC can afford to be nimble with solutions that meet emerging policy needs without fear of administrative or fiscal retribution. Thus when the international national accounting standards received a health check, it is not suprising that OECD countries outside the EEC were very keen to recognise innovation, IP, technology impacts etc. An overview of recently announced future changes can be seen at in an information paper at http://www.abs.gov.au. Defence weapons platform capitalisation and R&D capitalisation are on the agenda in Australia (and US).
6. Exchange rates measure relative claim on production of the countries of currency issue? I think there are many other factors involved, not the least the fact that some currencies (for good bad or indifferent reasons) are used as a means of exchange between 3rd parties (eg. Australia-China mineral trades are settled in USD). Maybe recent instability of the USD as a store of value will see it replaced by the Euro, which will then have to shoulder the burden. Perhaps those suitcases full of $US100 bills in circulation in the former soviet union will be replaced by euros. On the upside, this would mean one less imponderable imputation having to be made by US national accountants!
your average American is vastly better off than your average Australian.
C’mon, give us some data to play with.
Of course, you’ve totally screwed yourself with your intro statement. You’re not talking about mean but mode or median. So, c’mon, exactly how are average Americans vastly better off than Australians?
The OECD puts median household income at $38k for Aussies, $48k for Americans (http://en.wikipedia.org/wiki/Median_household_income) using PPP (about equivalent using MER). Is that ‘vast’?
How about HDI, a well-respected measure? Australia at 0.957, the USA at 09.48. Not vast, but Australia ahead.
Quite simply mugwump, you’re not going to be able to back up your statement, from which one can only conclude you’re full of it (again).
Alrighty: where I live I can buy a 4,000 square foot house on 1/4 acre within 20 minutes drive of the headquarters of some of the largest companies in the world (and hence jobs galore, not all of which are in mining or government), one of the largest international airports in the world, services galore, and public schools all of which are as good or better than the best on offer in my home town of Adelaide.
The price? $400,000. My mortgage interest is tax deductible. My property taxes fund my local schools, which gives me much greater say in school policies. Even ignoring the fact that no Australian city can match the business picture (an unfair comparison, I agree), $400,000 in virtually any Australian capital city today buys you almost nothing. A legacy of two decades of anti-development idiocy and bureaucratic bloat by state governments.
You’ve not got one foot in the grave and your children are already spitting on you for so locking up housing supply in the name of environmentalism and bureaucratic bloat that they cannot afford a first home anymore. Your cure is far worse than the disease.
Houses are a component of national and personal wealth. So as I understand it,you’re claim is that, because the average Australian is wealthier (at current market prices) than the average American in this respect, Americans are better off.
Of course, the unequal distribution of that wealth (house owners have gained at the expense of renters and would-be buyers) is a big problem, but I can’t imagine that worries you too much.
Finally, the claim that restrictive land release policies are the cause of high house prices doesn’t stand up to scrutiny.
In 2004 the Productivity Commission found that
and note that uncosted and excessive or inappropriate regulatory standards include
Click to access cs20060812.pdf
Housing was just my first example. I haven’t the time, nor the inclination, to list all the ways in which Americans are better off. But just quickly: most consumer goods are a fraction of the corresponding price in Australia. As is food. I just bought a bunch of bananas for 49c a pound. Last week in Woolworths I paid over $4.00 a kilo. Even scouring the shelves for specials in Australia it is hard to walk out the supermarket door less than $100 lighter. Here I regularly spend $50 or less for the same items. The advert showing right now on my 65 inch ($2,000) HDTV is for Mercedes starting at $31,000.
The oligopolies in Australia (which generally suit at least two members of the owner/union/government triumvirate), are not particularly competitive nor efficient.
I’ll never forget hearing Gerry Harvey (of Harvey Norman fame) on a radio interview lambasting Myers and (another retail chain I forget) for conducting a price war, describing them as “dills – look what that has lead to in the US?”. Yeah Gerry, it’s called competition. I hate to break it to you, but free markets are not there for your personal benefit…
I loathe it. It is hard to imagine a sicker society than one which so artificially restricts housing that their own children cannot afford one. Furthermore, from an economic perspective crazy high house prices represent a ridiculous waste of investment.
No, the weak arguments like those you link to don’t stand up to scrutiny.
In Adelaide, it’s a combination of restrictive land release for housing anywhere near the city, restrictions on new retail development (so new housing is less attractive because it doesn’t come with good services like shopping malls (and this is exacerbated by the retail duopoly so there is little competitive pressure on the big retailers to bring the stores to the people rather than force the people to drive 50km to the stores)), sky high taxes on new homes, and sclerotic to antagonistic development approval processes.
mugwump, it is easy to see that you are taking yourself as a representative of the average. You are relying on your personal experience which is known as ‘generalizing from the particular’ and is not an accepted procedure in ANY form of science. As noted in many places in this thread (not to mention the original post), the methodologies are flawed, but they’re at least an improvement on yours!
You also seem to think that free markets are for YOUR personal benefit, so don’t lambast Harvey for thinking it.
melanie, surprising as it may seem, the prices I pay are the same as the prices other consumers pay. Likewise, free markets are for the benefit of all consumers.
More succinctly, mugwump, remember the adage “the plural of anecdote is not data”. But of course as you’re unable to produce data I suppose you prefer anecdote.
All of the above comments (including the very interesting ones) miss the point John was originally making – that, once again, forex gyrations on this scale are inconsistent with even weak forms of the EMH. And that really does have large implications for policy.
I too have lived for extended periods of time in the US and in Australia.
Mugwump’s observations about prices of housing and consumer goods are correct.
However, I discovered that the cost of insurance, especially health insurance, was much higher than in Australia. And it is a notorious fact that in terms of longevity, a fairly definitive measure not only of quantity of life but also of quality of life, Australians, even though they may be crammed into tiny, expensive houses watching bad TV on expensive plasma screens, live for several years longer than Americans. (Makes you wonder why they’d bother, really.)
I’d like to know whether Mugwump has US health insurance, and if so, whether or not it is part of his employment package.
And I’d like to know whether Mugwump takes full advantage of the private enterprise health system of the US, or whether he makes use of the poxy, sclerotic system that so benights Australia, during his frequent sojourns to its socialised shores.
And on a more general issue, it is true that Australian governments provide a higher level of social expenditure than US governments. But, on the other hand, Australian tax payers have footed the bill for these services without imperilling the financial stability of their own banking and credit system.
On the other hand, US consumers have enjoyed services not paid for by their own taxes, but subsidised by overseas borrowing. This state of affairs began under Reagan and has deteriorated ever since.
Persons like Mugwump are like the man who has jumped from a 20 storey building. Ten storeys down he brags, “So far, so good!”
It could be argued that the current crisis in US credit markets represents the splat moment in this story.
In other words, the consumer lifestyle that Mugwump enjoys so much in the US is unsustainable.
And on the issue of Mugwump’s $400,000 property in a desirable location, I hope he didn’t buy it just before the subprime crisis, because if he did, then he has taken a huge financial haircut.
Of course, mugwump, your quoted anecdotal price doesn’t compare with what Americans are actually paying. $730k median in San Francisco, $475k median in Los Angeles, $450k in New York. All USD of course, compared to Sydney on AUD550k.
I note that the Economist’s Big Mac Index (http://www.economist.com/finance/displaystory.cfm?story_id=9448015) has one of the disgusting things at $3-45 in the US and only $2-95 in Australia (June 2007 figures – with the recent exchange rate rise that’ll be more favourable to Australia now). Given that the prices of food and grocery items are so much less in the US (50% less on the mugwump index) why might this be so? Either American tastes are so sadly deficient they’re prepared to stump up more than twice the relative mugwump-food index price for a fat-and-sugar extravaganza as their Australian Mac-eating cousins (an arguable proposition, and one I’d be keen to hear mugwump defend) or what we’re hearing here is another result of a high-Mac diet: flatulence.
Actually $3.41 in the US and $2.95 in Australia, Hal9000. That gap has subsequently narrowed somewhat, but US$2.95 (or AU$3.45) seems cheap to me, and US$3.45 for the burger in the US seems expensive – where does The Economist get its numbers from?
That said, one thing that is cheaper in Australia is red meat, which could explain some of the disparity (chicken is cheaper in the US, which may explain why KFC is much cheaper in the US than Australia). Kangaroo (my preferred choice) is obviously way cheaper in Australia, as is lamb. Americans don’t eat much lamb, and what they do eat all seems to be imported from Australia.
But red meat is about the only thing I have found to be consistently cheaper in Oz.
Personally, I eat from the dollar menu in US McDonalds. You can get a really unhealthy meal for just $1 or $2 instead of $5. No dollar menu in Australia. Maybe that also contributes to the disparity: they have to charge more for the other items to make up for us cheapskates.
I am not making this up: believe me, I’d love for things to be cheaper in Oz, but they just aren’t. Not by a long shot. Some of it is surely economies of scale, but a lot of it is the effect of government control and cozy oligopolies – the Australian consumer is getting screwed at both ends.
Oh, I just thought of another one: my electricity costs half in the US. And I can buy latest vintage Grange at costco for US$190 a bottle (not that I do, except for the odd gift).
[that last one is a bit unfair: Penfolds have obviously done a nice market segmentation and there’s no way Americans will pay what Australians pay ($450) for Grange (Grange who?). Also, it’s not that easy to reexport wine back to Australia – when I saw the costco price I sure looked into it]
mugwump, The median house price in the US (for the entire country including Hicksville) was USD 250,000 in February this year (average was about 330K).
The median house prices in Australian capital cities in March this year ranged from AUD 280 in Hobart to 480 in Sydney (Adelaide, 300).
“mugwump, it is easy to see that you are taking yourself as a representative of the average. You are relying on your personal experience which is known as ‘generalizing from the particular’ and is not an accepted procedure in ANY form of science”
You mean the denizens of Adelaide suburbia and the Americans Mugwump meets when he commutes by car between upper class US suburbia and corpoeate offices might not be perfectly representative of their two countries?
Wouldn’t a better metric be, how many hours it takes to buy a particular item.
I look forward to The Economist’s Grange index. After all, consumer preferences in the two countries (Oz and US) for this iconic Australian wine are virtually identical, Robert Parker notwithstanding …
I’m coming into this very late, but mugwump may be correct that the people who can think about buying Grange – even at the bargain price of $190 a bottle – may be better off in the US than in Australia.
However, when you compare the other end of the income scale you get a different picture. Relative to the median household income, benefits for low income households are nearly twice as high in Australia as in the USA. In a recent study based on 2000 data, we calculate that average cash transfers to the poorest quintile are worth USD 5651 in Australia (PPP adjusted), while in the US they are about $3280. For the richest quintile, the US gets average transfers of $2300, while in Australia it is only around USD 440.
Peter Whiteford, I have never bought a bottle of grange for myself, but have you never spent $190 on a gift for anyone? I agree that the poorest quintile in the US are probably marginally worse off than the poorest quintile in Australia, but is it worth sacrificing the wellbeing of 80% of the population for the sake of a marginal benefit to the other 20%?
Ian, you make a lot of unsupported assumptions. But whatever my circumstances, I shop in the same supermarkets and pay the same prices you do. My sh*t probably stinks the same too.
melanie, that median US house price is steadily falling, post bubble. It would also be falling in Oz, if not for all the issues I raised above. You also get a lot more house for your money in the US.
Mugwump, a more reasoned response:
How much do you pay for your medical insurance and how does that compare to what you would be paying in Australia?
How much do you pay into Social Security and how does your likely return on that payment compare with the return on the average Austalian super fund?
Ian, you hit the two achilles heels of the US, although I only pay $200 more per month for better private health cover in the US, after taking into account all rebates, but ignoring the “medicare levy”. But both are examples where moving towards more competitive markets, not further away, would improve things.
On health insurance and health care: I’ve commented a lot elsewhere on this blog about the deficiencies in the US, but briefly, the healthcare is excellent, and Australia rides on the back of it (where do all the PBS drugs and advanced medical equipment come from?). The health insurance system is broken, but could easily be fixed by removing the anti-competitive, insurance-company-only loopholes (insurance companies are not subject to the antitrust laws so they can and do collude), giving individuals the same tax breaks as employers, and making the state the insurer of last resort (note, not the *provider* of last resort), rather than the hospital emergency rooms.
On super: yep, social security is a terrible deal by comparison (assuming world markets don’t collapse and I don’t live until I’m 150). But Bush and the Republicans keep getting defeated by the Democrats when they try to move it towards a more private, Australian super style system, so you can’t blame the free-marketeers for its problems; they’re the solution.
Mugwump, everyone else here is talking about facts – are US living standards higher or lower than in Australia or other developed countries?
You seem to be talking ideology judging from your last post – the US is more “market-friendly” so US living standards must be higher and asking whether US living standards ARE higher is really just a stalking-horse to attack free enterprise.
Let’s answer the first question before moving on to policy prescriptions.
Mugwump, is the $200 you mention a top-up policy on top of some other, perhaps employer-provided, policy?
My guess is that Mugwump isn’t getting much health coverage for his $200 per month.
As IG says, this thread is about the relative costs of things as they stand today, not how they may or may not be improved in either some coming socialist or free-market paradise.
Also, it’s a funny thing, but many of the most important medical innovations in the US are government funded. Damn socialist yankees.
Ian Gould, I am answering the first question. Living standards are higher in the US. You asked specific questions about two areas and I answered them, but that doesn’t change the living standard question.
Here’s something I bet PPP doesn’t take into account: because of the much greater competition in the US, retailers continuously offer large discounts on large numbers of items. If you are careful, shop around, and save your coupons, you can save a lot of money. That is not true in Adelaide at least. Eg, the lack of competition between Coles and Woolworths means they discount very few items each week.
So maybe the difference between the two countries is not as large for non-bargain-hunting consumers, but that is not the way most people shop.
Katz, that $200 is the difference between what I pay in the US and the nearest equivalent private cover in Australia. In fact, my employer (which also happens to be me), pays US$750 per month for full family coverage with low deductible and almost no copay (including optical, dental, prescription drugs, etc). That money goes out pre-tax, so if it was paid to me at my marginal rate (40% including state tax), I would end up with US$600 in my pocket. So the cost to me is US$600, which I think is about $US200 more than top private cover in Oz after rebates, although the cover here is more comprehensive (eg, my copay is almost nothing for all drugs, including many that are not yet on the Australian PBS list – I know, my wife was prescribed one recently that retails for US$750 for a month’s treatment (we paid $15 copay)).
In 2006 the median household income in the US was US$43,389.
http://en.wikipedia.org/wiki/Household_income_in_the_United_States
For that household to pay for Mugwump’s level of health insurance that household would need to devote at least 12% of its gross income.
I doubt that the median household could afford the level of coverage cited by Mugwump.
At lower levels of coverage, deductables and copays start to become very expensive. Relatives of mine in the US, who are by no means impoverished, are facing this difficulty.
Katz, by-and-large employers in the US pay their employee healthcare. It goes out pre tax, so is not counted in that “median income” you quote. Think of it as a not-so-optional payroll tax (not-so-optional in the sense that employers don’t have to offer “benefits” as they call it here, but if you don’t then you’re really feeding on the bottom of the labour pool).
What often happens is employers will offer a range of plans to employees, the cheapest of which have the highest deductibles but don’t require the employee to chip in anything. Even for the most expensive plans the employee might only pay 20% of the premium. The employer usually covers the emplyee’s entire family (we pay 100% of all premiums for employee + family).
It’s a stupid system, because employment and healthcare have nothing to do with each other. But there are very very powerful vested interests keeping it this way (the insurance companies), who seem to have successfully bought off both sides of politics.