What they tell you Despite its recent economic problems, the US still enjoys the highest standard of living in the world. At market exchange rates, there are several countries that have a higher per capita income than the US. However, if we consider the fact that the same dollar (or whatever common currency we choose) can buy more goods and services in the US than in other rich countries, the US turns out to have the highest living standard in the world, barring the mini-city-state of Luxemburg. This is why other countries seek to emulate the US, illustrating the superiority of the free-market system, which the US most closely (if not perfectly) represents.
What they don’t tell you The average US citizen does have greater command over goods and services than his counterpart in any other country in the world except Luxemburg. However, given the country’s high inequality, this average is less accurate in representing how people live than the averages for other countries with a more equal income distribution. Higher inequality is also behind the poorer health indicators and worse crime statistics of the US.
Moreover, the same dollar buys more things in the US than in most other rich countries mainly because it has cheaper services than in other comparable countries, thanks to higher immigration and poorer employment conditions. Furthermore, Americans work considerably longer than Europeans. Per hour worked, their command over goods and services is smaller than that of several European countries. While we can debate which is a better lifestyle – more material goods with less leisure time (as in the US) or fewer material goods with more leisure time (as in Europe) – this suggests that the US does not have an unambiguously higher living standard than comparable countries.
The roads are not paved with gold Between 1880 and 1914, nearly 3 million Italians migrated to the US. When they arrived, many of them were bitterly disappointed. Their new home was not the paradise they had thought it would be. It is said that many of them wrote back home, saying ‘not only are the roads not paved with gold, they are not paved at all; in fact, we are the ones who are supposed to pave them’.
Those Italian immigrants were not alone in thinking that the US is where dreams come true. The US became the richest country in the world only around 1900, but even in the early days of its existence, it had a strong hold on the imagination of poor people elsewhere. In the early nineteenth century, US per capita income was still only around the European average and something like 50 per cent lower than that of Britain and the Netherlands. But poor Europeans still wanted to move there because the country had an almost unlimited supply of land (well, if you were willing to push out a few native Americans) and an acute labour shortage, which meant wages three or four times higher than those in Europe (see Thing 7). Most importantly, the lack of feudal legacy meant that the country had much higher social mobility than the Old World countries, as celebrated in the idea of the American dream.
It is not just prospective immigrants who are attracted to the US. Especially in the last few decades, businessmen and policy-makers around the world have wanted, and often tried, to emulate the US economic model. Its free enterprise system, according to admirers of the US model, lets people compete without limits and rewards the winners without restrictions imposed by the government or by misguided egalitarian culture. The system therefore creates exceptionally strong incentives for entrepreneurship and innovation. Its free labour market, with easy hiring and firing, allows its enterprises to be agile and thus more competitive, as they can redeploy their workers more quickly than their competitors, in response to changing market conditions. With entrepreneurs richly rewarded and workers having to adapt quickly, the system does create high inequality. However, its proponents argue, even the ‘losers’ in this game willingly accept such outcomes because, given the country’s high social mobility, their own children could be the next Thomas Edison, J. P. Morgan or Bill Gates. With such incentives to work hard and exercise ingenuity, no wonder the country has been the richest in the world for the last century.
Americans just live better . . .
Actually, this is not quite true. The US is not the richest country in the world any more. Now several European countries have higher per capita incomes. The World Bank data tell us that the per capita income of the US in 2007 was $46,040. There were seven countries with higher per capita income in US dollar terms – starting with Norway ($76,450) at the top, through Luxemburg, Switzerland, Denmark, Iceland, Ireland and ending with Sweden ($46,060). Discounting the two mini-states of Iceland (311,000 people) and Luxemburg (480,000 people), this makes the US only the sixth richest country in the world.
But, some of you may say, that cannot be right. When you go to the US, you just see that people there live better than the Norwegians or the Swiss do.
One reason why we get that impression is that the US is much more unequal than the European countries and therefore looks more prosperous to foreign visitors than it really is – foreign visitors to any country rarely get to see the deprived parts, of which the US has many more than Europe. But even ignoring this inequality factor, there is a good reason why most people think that the US has a higher living standard than European countries.
You may have paid 35 Swiss francs, or $35, for a 5-mile (or 8-km) taxi ride in Geneva, when a similar ride in Boston would have cost you around $15. In Oslo, you may have paid 550 kroner, or $100, for a dinner that could not possibly have been more than $50, or 275 kroner, in St Louis. The reverse would have been the case if you had changed your dollars into Thai baht or Mexican pesos on your holidays. Having your sixth back massage of the week or ordering the third margarita before dinner, you would have felt as if your $100 had been stretched into $200, or even $300 (or was that the alcohol?). If market exchange rates accurately reflected differences in living standards between countries, these kinds of things should not happen.
Why are there such huge differences between the things that you can buy in different countries with what should be the same sums of money? Such differences exist basically because market exchange rates are largely determined by the supply and demand for internationally traded goods and services (although in the short run currency speculation can influence market exchange rates), while what a sum of money can buy in a particular country is determined by the prices of all goods and services, and not just those that are internationally traded.
The most important among the non-traded things are person-to-person labour services, such as driving taxis and serving meals in restaurants. Trade in such services requires international migration, but that is severely limited by immigration control, so the prices of such labour services end up being hugely different across countries (see Things 3 and 9). In other words, things such as taxi rides and meals are expensive in countries such as Switzerland and Norway because they have expensive workers. They are cheap in countries with cheap workers, such as Mexico and Thailand. When it comes to internationally traded things such as TVs or mobile phones, their prices are basically the same in all countries, rich and poor.
In order to take into account the differential prices of non-traded goods and services across countries, economists have come up with the idea of an ‘international dollar’. Based on the notion of purchasing power parity (PPP) – that is, measuring the value of a currency according to how much of a common consumption basket it can buy in different countries – this fictitious currency allows us to convert incomes of different countries into a common measure of living standards.
The result of converting the incomes of different countries into the international dollar is that the incomes of rich countries tend to become lower than their incomes at market exchange rates, while those of poor countries tend to become higher. This is because a lot of what we consume is services, which are much more expensive in the rich countries. In some cases, the difference between market exchange rate income and PPP income is not great.
According to the World Bank data, the market exchange rate income of the US was $46,040 in 2007, while its PPP income was more or less the same at $45,850. In the case of Germany, the difference between the two was greater, at $38,860 vs. $33,820 (a 15 per cent difference, so to speak, although we cannot really compare the two numbers this directly). In the case of Denmark, the difference was nearly 50 per cent ($54,910 vs. $36,740). In contrast, China’s 2007 income more than doubles from $2,360 to $5,370 and India’s by nearly three times from $950 to $2,740, when calculated in PPP terms.
Now, the calculation of each currency’s exchange rate with the (fictitious) international dollar is not a straightforward affair, not least because we have to assume that all countries consume the same basket of goods and services, which is patently not the case. This makes the PPP incomes extremely sensitive to the methodologies and the data used. For example, when the World Bank changed its method of estimating PPP incomes in 2007, China’s PPP income per capita fell by 44 per cent (from $7,740 to $5,370), while Singapore’s rose by 53 per cent (from $31,710 to $48,520) overnight.
Despite these limits, a country’s income in international dollars probably gives us a better idea of its living standard than does its dollar income at the market exchange rate. And if we calculate incomes of different countries in international dollars, the US (almost) comes back to the top of the world. It depends on the estimate, but Luxemburg is the only country that has a higher PPP income per capita than that of the US in all estimates. So, as long as we set aside the tiny city-state of Luxemburg, with less than half a million people, the average US citizen can buy the largest amount of goods and services in the world with her income.
Does this allow us to say that the US has the highest living standard in the world? Perhaps. But there are quite a few things we have to consider before we jump to that conclusion.
. . . or do they? To begin with, having a higher average income than other countries does not necessarily mean that all US citizens live better than their foreign counterparts. Whether this is the case depends on the distribution of income. Of course, in no country does the average income give the right picture of how people live, but in a country with higher inequality it is likely to be particularly misleading. Given that the US has by far the most unequal distribution of income among the rich countries, we can safely guess that the US per capita income overstates the actual living standards of more of its citizens than in other countries. And this conjecture is indirectly supported by other indicators of living standards. For example, despite having the highest average PPP income, the US ranks only around thirtieth in the world in health statistics such as life expectancy and infant mortality (OK, the inefficiency of the US healthcare system contributes to it, but let’s not get into that). The much higher crime rate than in Europe or Japan – in per capita terms, the US has eight times more people in prison than Europe and twelve times more than Japan – shows that there is a far bigger underclass in the US.
Second, the very fact that its PPP income is more or less the same as its market exchange rate income is proof that the higher average living standard in the US is built on the poverty of many. What do I mean by this? As I have pointed out earlier, it is normal for a rich country’s PPP income to be lower, sometimes significantly, than its market exchange rate income, because it has expensive service workers. However, this does not happen to the US, because, unlike other rich countries, it has cheap service workers. To begin with, there is a large inflow of low-wage immigrants from poor countries, many of them illegal, which makes them even cheaper. Moreover, even the native workers have much weaker fallback positions in the US than in European countries of comparable income level. Because they have much less job security and weaker welfare supports, US workers, especially the nonunionized ones in the service industries, work for lower wages and under inferior conditions than do their European counterparts. This is why things like taxi rides and meals at restaurants are so much cheaper in the US than in other rich countries. This is great when you are the customer, but not if you are the taxi driver or the waitress. In other words, the higher purchasing power of average US income is bought at the price of lower income and inferior working conditions for many US citizens.
Last but not least, in comparing living standards across countries, we should not ignore the differences in working hours. Even if someone is earning 50 per cent more money than I earn, you wouldn’t say that he has a higher living standard than I do, if that person has to work double the number of hours that I do. The same applies to the US. The Americans, befitting their reputation for workaholism, work longer hours than the citizens of any other country that has a per capita income of more than $30,000 at market exchange rate in 2007 (Greece being the poorest of the lot, at just under $30,000 per capita income). Americans work 10 per cent longer than most Europeans and around 30 per cent longer than the Dutch and the Norwegians. According to a calculation by the Icelandic economist Thorvaldur Gylfason, in terms of income (in PPP terms) per hour worked in 2005, the US ranked only eighth – after Luxemburg, Norway, France (yes, France, that nation of loungers), Ireland, Belgium, Austria, and the Netherlands – and was very closely followed by Germany.1 In other words, per unit of effort, the Americans are not getting as high a living standard as their counterparts in competitor nations. They make up for this lower productivity through much longer hours.
Now, it is perfectly reasonable for someone to argue that she wants to work longer hours if that is necessary to have a higher income – she would rather have another TV than one more week of holiday. And who am I, or anyone else, to say that the person got her priority wrong? However, it is still legitimate to ask whether people who work longer hours even at very high levels of income are doing the right thing. Most people would agree that, at a low level of income, an increase in income is likely to improve your quality of life, even if it means longer working hours. At this level, even if you have to work longer in your factory, higher income is likely to bring a higher overall quality of life, by improving your health (through better food, heating, hygiene and healthcare) and by reducing the physical demands of household work (through more household appliances, piped water, gas and electricity – see Thing 4). However, above a certain level of income, the relative value of material consumption vis-à-vis leisure time is diminished, so earning a higher income at the cost of working longer hours may reduce the quality of your life.
More importantly, the fact that the citizens of a country work longer than others in comparable countries does not necessarily mean that they like working longer hours. They may be compelled to work long hours, even if they actually want to take longer holidays. As I pointed out above, how long a person works is affected not only by his own preference regarding work – leisure balance but also by things such as welfare provision, protection of worker rights and union power. Individuals have to take these things as given, but nations have a choice over them. They can rewrite the labour laws, beef up the welfare state and effect other policy changes to make it less necessary for individuals to work long hours.
Much of the support for the American model has been based on the ‘fact’ that the US has the highest living standard in the world. While there is no question that the US has one of the highest living standards in the world, its alleged superiority looks much weaker once we have a broader conception of living standards than what the average income of a country will buy. Higher inequality in the US means that its average income is less indicative of the living standards of its citizens than in other countries. This is reflected in indicators such as health and crime, where the US performs much worse than comparable countries. The higher purchasing power of US citizens (compared to the citizens of other rich countries) is owed in large part to the poverty and insecurity of many of their fellow citizens, especially in service industries. The Americans also work considerably longer than their counterparts in competitor nations. Per hour worked, US income is lower than that of several European countries, even in purchasing power terms. It is debatable that that can be described as having a higher living standard.
There is no simple way to compare living standards across countries. Per capita income, especially in purchasing power terms, is arguably the most reliable indicator. However, by focusing just on how many goods and services our income can buy, we miss out a lot of other things that constitute elements of the ‘good life’, such as the amount of quality leisure time, job security, freedom from crime, access to healthcare, social welfare provisions, and so on. While different individuals and countries will definitely have different views on how to weigh these indicators against each other and against income figures, non-income dimensions should not be ignored, if we are to build societies where people genuinely ‘live well’.
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