Thursday, March 16, 2006

Follow the Money

During my discussions of population implosion and the dangers that a shrinking workforce poses to economic stability, I sometimes get the response “Well, Europe has a better standard of living than America, so they must be doing something right!”. In similar veins, I am regaled with stories that we need a social services system like European Socialist nations (Sweden is usually mentioned, often as a ‘socialist paradise’) or that the American preference for Capitalism over Socialism is why so many Americans are poor.

As usual, my response was to dive into the numbers, look around, and see what is *really* going on.

Poverty in America exists; trust me, I grew up in a prime example of what poverty in America can look like. According to the U.S. government, 12% of Americans live below the poverty line, or about 1 in 8 people. That seems pretty serious.

France officially reports that 6.5% of its citizens live below the poverty line. It is probably no surprise that many Eastern European nations, all recovering from communism, report higher percentages of their citizens living in poverty. What may surprise you are the Western European nations that report the same thing. Britain reports that 17% of its citizens live in poverty, for example.

One important thing to remember, though, is that these numbers are all measurements of “relative poverty”, meaning each nation has its own definition of what “poverty” is. In poorer nations, the definition is lower than in rich nations. The generally accepted definition of ‘relative poverty’ in Europe is 60% of the median income, although sometimes it is 50% or even 40% of the median income.

The U.S. doesn’t do it this way. The American government calculates a national average cost to provide a minimum number of calories for an average adult and an average child and adds in a calculation of minimum cost of living expenses for housing, utilities, etc. in short, while the American definition of poverty is an attempt to determine how many people may have trouble paying for shelter or trying to eat enough, the European measure is a variable based on how much the ‘average’ person makes.

At first blush, this sounds even worse for America; after all, while European nations are trying to define who isn’t earning “enough”, America is trying to define who is actually hungry – and America’s numbers are supposedly higher. Sweden, for example, with its combination of taxes and welfare programs designed to eliminate poverty has a poverty rate of about 6.4%.

But when you start to compare things, however, they may not be so rosy. For example, while Sweden officially has no one living in relative poverty, this may be because the average Swede is simply much less affluent than the average American. The American per capita GDP is about $42,000 while the Swedish per capita GDP is about $30,000. These numbers are called Purchasing Power Parity numbers, or (in non-government terms) they have been adjusted for cost of living.

The median Swedish income is about $27,000 while the median American income is about $43,000, so Americans in general make almost 40% more (in actual purchasing power) than Swedes. As was pointed out recently by Swedish researchers, 40% of all Swedes would be counted as “low income” Americans based on what they can purchase with their income. Also, the tax ratio (or the comparison of total taxes compared to the GDP) in Sweden is an amazing 51.3%; America’s tax ratio is about 17.5%.

This means that, adjusted for cost of living, an average American earns $1.40 for every $1.00 earned by a Swede.

Now, some argue that Swede still “win” because Americans have to pay for health care, something provided for free by the Swedish government. Well, first of all the Swedish health coverage isn’t free (see those tax burden numbers back in that last paragraph?). Secondly, the average out-of-pocket health care costs of an average American totals about $3,850 a year. That leaves a purchasing power difference of 30%. Even if you add in student loan payments of about $50 a month (this is the average for all working Americans, reflecting that some have no debt and some have paid it off, and some expenses are related to public schools), this leaves a purchasing power difference of 20%. So even with the generous government benefits (which are, after all, paid for by taxes on earnings) Americans are better off by over 28%.

Some people have argues that since Swedish households are smaller than American households, the differences are moot, since more people depend in each wage-earner in America. I am being careful to use per capita numbers, not per household numbers.

Another counter argument is that Americans work many more hours than Swedes, an average of 158 more work hours a year, or about 2 more months of work. Since Swedes get much more time off, they have a “better standard of living”. Perhaps; this may be a cultural artifact. But let us adjust the incomes again to reflect either the lost Swedish income or the lost American leisure. The difference is (rounding up) 17%, leaving Americans with ‘only’ about 12% greater purchasing power than Swedes, on average.

So even after paying for health care and education and subtracting the ‘extra’ money earned by working more hours, Americans are financially better-off than Swedes to the tune of putting $1.12 in our pockets for each $1.00 earned by a Swedish worker after the differences is services and life style are removed.

So why am I focusing on Sweden? Well, Sweden is spoken of as the epitome of Socialist Europe, routinely being ranked as having the highest standard of living, best welfare programs, etc. So if the people of Sweden don’t have the purchasing power of Americans, then Europe as a whole is further behind.

The definition of poverty as “a percentage of the median income” is a lousy way to score things. For example, if a nation goes through an economic recession making everyone poorer, but a higher percentage of the top 5% of the income earners loos more ground, statistics will show there are less people living in poverty because the median income has gone down. Also, in a nation that is generally poor the official poverty line may be well below the minimum needed to actually survive. Be that as it may, the official poverty level of Europe is 17% and their unemployment of about 9% is almost double that of America.

The obvious truth, that America is much richer and getting even richer faster, has European leaders worried. You see, European nations have lower economic growth than America. There is some argument that this is an inevitable result of the aggressive taxation and wealth redistribution of the welfare state systems prevalent there. Regardless of the cause, the fact is that the American economy, already larger than the entire EU economy, is growing about three times faster than the EU economy. Add in the fact that the EU has a total population almost 60% larger than the U.S., and that means that the per capita GDP of Europe will continue to slide compared to America. Indeed, the OECD predicts that in 2025 the average American will have twice the purchasing power of the average European. Even after all the adjustments for social services and differences in working hours, that means the average American will have a net purchasing power advantage of about 25%.

Of course, that assumes those social services will still exist in 20 years; they may not. Although Americans are very concerned with the size of the American national debt, as a percentage of GDP, it is rather bland. At a national debt of about 65% of GDP, America has a better debt ratio than Germany, France, Belgium, Italy, or Greece. The need to pay interest on this debt coupled with slower growth mean that the debt itself will almost certainly continue to grow, and rapidly. With the retirement-age population of Europe scheduled to increase 50% over the next 20 years or so, the costs of social services will skyrocket; after all, in addition to pensions, the elderly need a lot more healthcare. During that same period, however, the population within working age will go down no less than 7%, perhaps as much as 15%. So as the costs of social services climb steeply, the tax base will be shrinking; combined with slow economic growth and mounting national debt, it is doubtful that Europe will be able to continue to provide social services at the same rate.

In fact, the changes have begun. Faced with a crippling recession in the 1990’s, Sweden reformed their tax plans and social security systems somewhat, resulting in new growth and lower inflation. In a similar way, Margaret Thatcher’s reforms of the ‘80s and ‘90s resulted in an economic revival in England that continues to this day. Time and again it has been shown that a change away from a Socialist welfare state to a Capitalist market state results in economic growth that benefits everyone.

But it is unlikely that reforms will be comprehensive enough or soon enough to avoid catastrophe. For a number of reasons, ranging from the power of labor unions to the sheer inertia of a voting public that has assumed that these services would always be there, Europeans have been resisting social security reforms all over Europe.

One interesting change in the typically protectionist attitudes of Europe is immigration. While still considering clamping down even further on immigration from Africa, Asia, and the Middle East, many nations have loosened or are considering relaxing immigration from Eastern Europe.

Eastern Europe is poorer than Western Europe; the relaxation of labor laws and immigration laws will almost inevitably result in a westward migration within Europe. This will accelerate the woes of Eastern European nations without providing enough help to the West. A rolling economic crisis will erode social services and economic ability from east to west until the nations of Europe either abandon Socialism or vanish.

As for the human changes, please see my article Proud Vanguard of the Resurgent Patriarchy.

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