Monday, January 7, 2008

English pounds and Eskimo pence

Sadly No flags this rather idiotic London Times article (picked up by the Daily Mail and recently posted by Drudge) that claims that the UK is surpassing the US in living standards. Although I agree with SN's sentiment, this was among the stupider things published in a newspaper in recent times.

The supposed shift in "living standards" is actually an artifact of the dollar's depreciation. The article admits this, which just makes it even stupider. Think about it: The dollar has fallen about 25% against the pound since 2000. Do you feel 25% poorer than you were eight years ago? Swings in exchange rates are only marginally related to living standards.

Suppose the dollar fell 50%. Imports make up less than 15% of what we buy. Holding all other things equal and assuming that in response import prices rose by 50% (they wouldn't: we'd switch from imports to domestic goods and foreign companies would cut their prices to stay in the US market), our standard of living would fall about 7%. A 25% dollar drop would cause a 3.5% fall in living standards. And with the actual behavior of import prices, the fall would in fact be a lot less than 3.5%.

No, the right way to do this sort of thing is to strip out the effect of exchange rates by converting pounds to dollars using purchasing power parity (PPP). Wikipedia has a nice chart which shows that, according to IMF data, in 2006 the UK's GDP per capita was about 22% lower than ours and that number hasn't changed much since then. (Although, just because they're poorer, doesn't mean they don't have lots of rich people to ruin London.)

Of course, if you really want to measure living standards -- taking into account the potential leisure as well as the potential consumption that an economy generates -- then you'd look at the value of what we produce per hour of labor (a.k.a the level of labor productivity, a.k.a. GDP per hour worked). Here the UK lags behind us by 18%.

In France, on the other hand, the level of labor productivity is 2.5% higher than it is here. Which makes it puzzling why Obama's economics guru closed his recent New York Times commentary about American productivity with the following apropos-of-nothing quip: "The world economy may be tough on your industry but look on the bright side: you could be French."

Under President Obama, we'll be eating freedom fries - but with such idealism!

13 comments:

littlehorn said...

And that last bit of information is funny because Sarkozy's motto is "Travailler plus pour gagner plus". "Work more, to earn more".
Sarkozy is a great admirer of America but there's a country where people actually work more...His !

I'm not sure i understand the commentary. Is he trying to scare Americans into working more, with us French people as some kind of scarecrows ? How xenophobic !

Matthew Saroff said...

Actually, you are missing the bigger point, that the US has been behind for some time but due to an artificially high US dollar, by virtue of its being the only viable reserve currency for just about everyone

With the the Euro now an viable alternative, the dollar will stop being overvalued relative to the economic reality, and we will see something closer to the true value of the US economy.

Of course the number in question is NOT living standards, it's per capita GDP.

In terms of living standards, most of western Europe, with cheap healthcare and education, has been ahead of the US for years.

Pneumatikon said...

I'd have to agree with Matthew Saroff - to a point. The artificially high dollar could have been masking a superior British standard of living all along. Though I doubt that, because despite the pro-Thatcher Rah! Rah! propaganda all the continental leaders spout, France has been eating Britain's lunch for years in terms of standard of living and pure industrial muscularity. In fact British economists proved a couple of years ago that pretty much anything the British build the French build better. What's more, the Brits have been the poor cousins of the Continentals for quite a while. So under those circumstances I would be surprised if they'd had a higher standard of living than ours all along. But that's certainly not out of the question. This country's been run by scumbags for thirty years now.

Scumbags who, oddly enough, are idolized by the "elites" of Europe.

Littlehorn: we work harder and longer hours than the French. They produce more per hour worked. So our overall per capita GDP is higher. BUT - they have more efficient healthcare (so anything we produce there beyond their efforts is a waste of economic productivity), better public transportation (ditto), and a very small military-industrial complex. Factor all that in - and there are surely more examples - then you can be sure France's useful GDP per capita is higher than our own.

The Scanner said...

Matthew Saroff said...

Actually, you are missing the bigger point, that the US has been behind for some time but due to an artificially high US dollar, by virtue of its being the only viable reserve currency for just about everyone

...
The article was comparing GDP per capita, claiming -- questionably, of course -- that it is a good measure of living standards.

Talking about an "artificially high " dollar only makes sense if you can posit what the "correct" value of the dollar should be. In the context of comparisons of living standards, the "correct" exchange rate is, for example, $x to the pound, where x dollars will buy exactly as much in the US as one pound will buy in the UK. That exchange rate is called purchasing power parity, it usually differs from the prevailing market exchange rate, and using it, Britain has never approached US GDP per capita.

Tom said...

Wouldn't it be even better to use the U.N.'s Human Development Index? As I recall, the HDI covers both economic (e.g. PPP) and non-economic (e.g. civil rights) markers.

Anonymous said...

"No, the right way to do this sort of thing is to strip out the effect of exchange rates by converting pounds to dollars using purchasing power parity (PPP)."

If that's the right way to do this sort of thing, then why does that way say that Equatorial Guinea has the second highest standard of living in the world?

At least, according to the CIA's numbers.

Frankly it all sounds like so much handwaving to me (both the article and your response - e.g. "a 25% dollar drop would cause a 3.5% fall in living standards" - what does that even mean in the first place?). But to be clear, I don't know much about any of this, and I'm not saying you're wrong.

The Scanner said...

As I just mentioned in a comment over at Tiny Revolution, GDP has many limitations as a measure of living standards, of course. But it's not totally useless. To make it useful, though, you have to measure it correctly, which I guess was the point of my post.

Yes, measures of a country's GDP can be skewed by large amounts of oil, a small population and a corrupt government, which I think is what's going in the case of Equatorial Guinea. But stripping out petro-anomalies and tax havens, like Bermuda, the rankings seem to work pretty well, for what they'd supposed to measure.

Anonymous said...

nice Clash reference if little else

meta said...

"Of course, if you really want to measure living standards ... then you'd look at the value of what we produce per hour of labor (a.k.a the level of labor productivity, a.k.a. GDP per hour worked)."

No, that's as bogus as the figures in the newspaper article. For example, if I work twice as many hours for the same salary, then GDP increases, but my personal standard of living goes dramatically downwards.

The Scanner said...

Meta:

That's a creative use of ellipsis. The words you've omitted were: "taking into account the potential leisure as well as the potential consumption that an economy generates."

If you're producing twice as much, by definition you're producing twice as much that can potentially be consumed (or invested to make things that can be consumed). So doubling GDP really does double the amount of potential consumption/leisure.

There's no guarantee, though, that every individual will experience a doubling of their personal income. That's a question of distribution.

Davey said...

I've never heard of "the London Times". You dougnut! It's a national paper.

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