Archive for May, 2012

Do Millionaires Vote with Their Feet?

May 30th, 2012 1 comment

Andrew Rosenthal points us to one of the most eye-poppingly specious arguments I’ve ever seen against high-earner taxes, from Scott Hodge at the Tax Foundation (my bold).

612,520 people renounced their New York State citizenship and moved to Florida between 2000 and 2010. They took with them nearly $20 billion in adjusted gross income, after adjusting for inflation. During the same period, 208,784 Pennsylvania residents renounced their state citizenship and moved to Florida, taking $8 billion in income with them.

Many of these New York and Pennsylvania residents no doubt moved to Florida for the warm weather, but many more may have moved their because the state does not have an individual income tax, an estate tax, nor an inheritance tax.

“May have” is certainly a strong piece of evidence. It’s hard to argue with.

But let’s try.

Back when we were trying to pass a high-earner tax in Washington State a couple of years ago (with Bill Gates Senior as the lead spokesman and cheerleader; it failed dismally), I got curious to know whether millionaires do actually congregate in low-tax states.

It turns out they don’t:

The correlation is -0.00003. Notice in particular the giant gaping hole in the upper left corner, where the millionaires should all be congregating. (Florida’s over there by the 5% mark.)

Of the 12 states with the highest concentration of millionaires, 10 (83%) have above- or at-trend (in this case, median) income tax rates.

This Hodge piece got me curious again, so I plotted the raw number of millionaires (since this doesn’t account for population, it’s just for grins):

The correlation here is somewhat negative (lower tax rates, more millionaires), but still effectively nil: -.035. Florida and Texas do stand out, but so do New York and California. Who you gonna believe?

Here it is with the X-axis scale changed, so it’s easier to see the bulk of the states:

(I just noticed a screwup here: one of the MAs should be MD for Maryland.)

So the evidence suggests that Hodge’s fond notion is nothing more than that: something he wants to believe, which is utterly contradicted by the facts on the ground.

Rosenthal quotes Michael Bloomberg, who some might consider an authoritative source on this subject:

I can only tell you, among my friends, I’ve never heard one person say I’m going to move out of the city because of the taxes. Not one. Not in all the years I’ve lived here. You know, they can complain, ‘Ugh, I got my tax bill, it’s heavy.’ But my friends all want to live here.

The Scott Hodges of this world don’t seem to have read their Adam Smith, in particular the passage containing the “invisible hand” coinage of which they are so fond:

every individual endeavours to employ his capital as near home as he can, and consequently as much as he can in the support of domestic industry… By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.

How many of them do you think actually know what Smith was talking about in that passage?

Many thanks for the effective tax rate data to Eric de Place of Sightline Daily, who did the yeoman’s work of compiling it based on…get this…Tax Foundation data (XLS).

Millionaires percentage: Phoenix Affluent Marketing (PDF).

Cross-posted at Angry Bear.

About Scaring that Confidence Fairy Away

May 29th, 2012 No comments

Home Work, GDP, and Family Values: It’s Nice to be Validated

May 29th, 2012 6 comments

A while back I put together a rough calc estimating what our country’s “home-work” is worth as a share of GDP, based on the idea that such work is production, and that it has every bit as much value to our lives as work that we get paid for.

By that estimate (based on the BLS American Time Use Survey), adding the value of home work performed at the median wage would increase our measured GDP by 33%.

It turns out that that estimate was pretty good. Nancy Folbre points to an article in this month’s Survey of Current Business (PDF) that comes to quite similar conclusions:

inclusion raises the level of G.D.P. 39 percent in 1965 and 25.7 percent in 2010.

I also surmised that since Europeans work less hours than Americans (we work four more weeks every year than they do), they would have more time for unpaid work, so the contribution of such work to GDP would be higher in EU countries. Following the data trail back from the SCB piece led me to Cooking, Caring and Volunteering: Unpaid Work Around the World by Veerle Miranda, based on the Multinational Time Use Study. We find therein:

With the exception of Norway (where total GDP is greatly reliant on oil revenues), the European countries do indeed range well up the scale from the U.S.

As I said in that previous post:

If you truly believe in family values, those are some numbers worth pondering.

Cross-posted at Angry Bear.

The Fed Faces the End Game — And Blinks?

May 26th, 2012 4 comments

If you’ve ever been involved in a legal contention, like a business or personal dispute or a contested divorce, you know that the whole game pivots, ultimately, on the potential end game: what would happen if the thing went to court — even if (even because) everyone involved knows that it never will. The fact that it could, and the expected results if push did come to shove, determine the terrain of the playing field and the positions of the players, and all the ploys and counterploys played out on that field.

Ryan Avent brings that principle to bear in one of the nicest pieces I’ve seen laying out the game theory of monetary policy over the next couple of years. For my purposes, starting with the end game (my bold):

At one extreme, we can imagine a situation in which America’s government has entirely lost market confidence and is unable to sell its debt. In that case, the central bank, as lender of last resort, would be unable to avoid stepping in to buy that debt, in the process transferring control over inflation to the fiscal authorities.

Voilá: MMT World, where Treasury is simply spending newly-created money into existence, at the behest of the legislative and executive branches, by depositing it in recipients’ bank accounts. Bond/debt issuance is immaterial, because the Fed has no choice but to buy all the new bonds for “cash.” (Yes, the Fed is actually “printing” the money, but effectively the Treasury is doing so.) There is no Fed “independence.”

This is the scenario that would result if the Republicans were foolish and feckless enough to take their chicken game to the limit and let the head-on collision actually occur, with a default on U.S. debt. It’s the expected (inevitable) result if they “take it to court” — at least if they leave it that way for any period. (Has anybody mentioned the irony of the Republicans’ claim to be creating “confidence”? And, do you think they’d like the MMT World that they’re unwittingly trying to create? They really should, given how much they dislike the “unelected” Fed making decisions…)

Now moving one step back from that end game, Ryan looks at three “fiscal cliff” scenarios as projected (PDF) by the Congressional Budget Office (using a graphic from Brian Beutler at Talking Points Memo):

Just to multiply this out for you, one-year growth under the three scenarios (Q4/12–Q4/13) would be circa 0%, 2%, and 4%.

These scenarios all assume that the Fed does “nothing” in response — which I’ll define as keeping their balance sheet the same size, with no big (net) bond/asset purchases or sales, and making no announcements that that will change.

Which means we need to take another step away from the end game. Here looking at the righthand scenario:

Except, of course, that the economy will almost certainly not grow at a 5.3% rate no matter what Congress does. Arguments to the contrary are subject to what econ bloggers have come to call the Sumner Critique… Growth that rapid would … [prompt] steps to tighten monetary policy.

In Sumner’s words, the Fed — as the last player in every round of the game — would “sabotage” any growth that rapid (especially, I would add, if it saw any traces of that terrifying bogeyman, “wage inflation”).

All the players know that the Fed can do this by simply selling bonds (something they have no shortage of). Bond prices drop, yields and market rates rise, people borrow and spend less, confidence drops, stocks decline, people feel less wealthy, unemployment rises, inflation (and growth) are held in check. As they are at pains to remind us, the Fed has spent decades building this inflation- (and, collaterally, wage- and employment-)quashing credibility.

Nor does anyone doubt that they will  do it. They always do, have done since Volcker.

But what about the other push-comes-to-shove scenario — the “fiscal cliff” on the left?

The Fed could therefore proclaim to the world that will maintain aggregate demand growth (in the form of, say, nominal income growth) at all costs, and that it would by no means allow the fiscal cliff to knock the economy off its preferred path. It could explain in great detail what specific steps it would be willing to take to achieve this goal, so as to boost its credibility. And if demand expectations as reflected in equity or bond prices showed signs of weakening ahead of the cliff, the Fed could preemptively swing into the action to establish the credibility of its purpose.

The Fed will almost certainly not do this.

And everybody knows this. After three decades of taking away the (wage- and employment-)growth punchbowl when the party starts getting (“too”) hot, and after four years of subordinating their employment mandate to their cherished inflation-control credibility, the Fed has a serious shortage of “growth credibility.”

Which means that the Fed has created a game that is asymmetrical. It has great power to quash growth through open-mouth operations; we know they’ll sell bonds if they promise and need to, and that doing so will dampen inflation (and growth).

But on the expansionist side, we can’t believe their promises. They would need to make actual bond purchases to spur growth. And even if they do both promise and live up to the promise, we (with the exception of [market] monetarists, few of whom are running large businesses or managing large amounts of money) don’t have great or certain expectations for the results.

“Show me QE3, and show me the results; I’ll believe it when I see it.”

But: Why won’t the Fed adopt policy that delivers strong GDP growth?

There’s the runaway inflation/loss-of-credibility explanation, of course. But the Fed isn’t run by adolescent freshman Republicans who think that 3 or 4 percent inflation is the slippery slope to ZimbabWeimar. They know that if they promise to let inflation rise then fall over a few years, then do exactly that, it would greatly stengthen their inflation-control reputation and credibility.

And there’s my theory: it would transfer hundreds of billions of dollars in real buying power per year from creditors to debtors, and the Fed is run by creditors. (Depression is a choice.)

Ryan has a different theory:

…moral hazard… if [the Fed] promises to protect the economy against reckless fiscal policy Congress will have no incentive to avoid reckless fiscal policy. … lay out a plan for medium-term fiscal consolidation but keep short-term cuts small and manageable.

Now you gotta ask whether manipulating the legislative and executive branches into being “responsible” by setting their expectations is any part of the Fed’s mandate. Talk about a nanny state.

But that aside: this is exactly what the Fed is doing, and has done for thirty years with its inflation-fighting moxie — (promising to) “protect the economy against [so-called] reckless fiscal policy” by reining in inflation (and wage and employment growth). It’s called The Great Moderation. (So by Ryan’s reasoning, the Fed has spent three decades encouraging “reckless fiscal policy.”)

Ryan thinks that the Fed’s afraid that it:

…will need to roll out dramatic, unconventional actions—the fear being, of course, that such actions would leave it hopelessly politicised and powerless to fight inflation. … [They're] fighting to maintain their vulnerable independence.

Translation: They’re fighting to avoid the MMT-World end game, where the Fed becomes an irrelevant mechanical actor.

And one price of that fight may be the need to occasionally allow fiscal policy to matter—as unfortunate Americans may soon learn.

Why “unfortunate”? Where did that come from?

Is the prospect unfortunate because runaway inflation will result? You can count our problematic inflation periods from the past century on two three fingers. Now count the recessions.

Or is it because higher government debt will be a drag on growth? Vague and poorly reasoned concerns based on a few here-and-there sample points nothwithstanding, we’d be well advised to look to our last bout of serious public debt increase: the one that ended in 1947, and was followed by the fastest decades of economic growth in living memory.

Cross-posted at Angry Bear.

Abraham Lincoln Sure Thought Majority Rule Was a Constitutional Principle

May 20th, 2012 1 comment

No mean constitutional thinker, he.

364,511 American soldiers died for that principle between 1860 and 1865, after the southern states refused to go along with Lincoln’s majority-rule election. 281,881 were wounded.

He coulda just rolled over.

But what’d he know? He was just one of those pointy headed coastal elitist intellectuals.


11 Percent of the Population Can Veto Anything

May 20th, 2012 No comments

Read it here.

Why Does Y Equal Real GDP?

May 20th, 2012 17 comments

I hesitate to post this while Nick Rowe is on vacation, because he’s always so generous with his replies and explanations. Here’s hoping he gets back to this.

But he does get me thinking. I’ve spent several days re-reading and pondering his Identity Economics post and (his) related others, which post begins [my brackets]:

Here are two macroeconomic identities:

1. Y=C+I+G+NX [the National Income Identity]

2. MV=PY [the Identity of Exchange]

Both are true by definition.

Without (for the moment) burdening you with all my thinking, here’s the question that I’m left with:

By convention and practice — “by definition” —  Y in these identities equals real GDP. Y means ”real GDP”.

Here’s why that doesn’t make sense to me:

Say that in Year 1, U.S. GDP (IOW, Y) is $14 trillion. That’s the total dollars spent on real-world, newly-produced goods and services. This quantity is necessarily counted in dollars, because that’s how the measurement is done (at least in the expenditure approach) — adding up all the dollar-denominated purchases/sales.

Assume: in Year 2, the economy produces that same quantity of real goods and services, and their aggregate human utility is unchanged. Real output is unchanged.

But in Year 2, the prices are 10% higher (for whatever reasons). Measured, counted GDP (a.k.a. “Y,” total dollar transactions) increases by 10%.

If Y is real GDP, then real GDP just went up by 10%. Even though real output didn’t.

This doesn’t make any sense to me. Shouldn’t Y mean nominal GDP?

Even: mustn’t it? Because it’s always counted in nominal dollars.

This would give us:

MV = Y


Y/P = Real GDP

This seems much more tractable and conceptually coherent to me. The “real” definition keeps running me into (what seem like) conceptual/arithmetic contradictions.

I was going to stop here, hoping to keep this discussion focused, but as I’m about to post I find that Saturos has given me a very nice response to my comment over at Nick’s place. The confusion expressed here fully explains the more profound confusion in that earlier comment; I simply assumed therein, based on the fundamental construction of the National Income Identity (and the methods of national accounting), that Y means nominal GDP.

Saturos sez:

Talk to any Keynesian and you’ll find that they’re far more inclined to interpret Y = C + I + G + NX as referring to real (CPI or GDP deflator adjusted) quantities. Of course P is here assumed to equal 1, because “prices don’t matter in the short run”. But I agree that it makes far more sense, and is far more consistent with the Keynesian approach, to talk about nominal spending flows. (Really, you should use lowercase for real variables, and uppercase for nominal – and the identity is true in either case, as it’s just a listing of the different categories that any spending or output must fall into.) Matt Yglesias ( has a new post in which he takes Scott Sumner’s version: MV = C + I + G + NX. That might be the best approach of all – it shows you that all the changes in “income accounting” variables that get reported on the news must all be manifestations of fluctuations in the overall volume of spending, MV. If we’re talking about fiscal policy or “exogenous shocks” to NGDP, then this must be a fluctuation in V (base velocity).

My responses:

1. Are you telling me that economists don’t even agree on what Y means? Not sure if that’s what you’re saying. If so, doesn’t Nick’s “by definition” start this whole discussion (even: the whole discipline of national-accounting-based and monetary economics) on a bed of quicksand?

2. Is it really standard practice to “use lowercase for real variables, and uppercase for nominal”? Seems like a great convention. Do economists adhere to this convention consistently? They don’t seem to. (If Y equals real GDP, shouldn’t it always be lowercase?) Nick uses uppercase throughout in his post, except here in his #3:

If I re-wrote the first identity in nominal terms, as PY=PC+PI+PG+PNX, it might invite the same question. Or if I re-wrote the second identity in real terms, as Y=Vm (where m is the real money stock), I could hide that question.

I presume that m = M/P. So Y = VM/P. This says rather explicitly that Y is real GDP. (So it should be lowercase, no?) So, also: is Nick a Keynesian? Sometimes, sort of…

3. Mediocre philosophical minds obviously think alike. Matthew’s (and Scott’s) MV = C + I + G + NX is exactly where I went in my first stab at this post, which I’ve discarded or at least put aside for the moment.

4. I’ve been coming to the same conclusions about NGDP and velocity. Cf. the subtitle to this post.

I’m going to add one last thought here, to thoroughly muddle the waters: Somebody could presumably argue that price can’t increase by 10% unless the utility derived from produced goods — real output — also increases by 10%. That would resolve the apparent contradiction inherent in the Y = real GDP definition. (At least as that contradiction seems to arise in my example above re: the National Account Identity.) But I can’t really conceive a very convincing empirical and/or theoretical basis for that assertion.

Cross-posted at Angry Bear.

Inflation, Credibility, and Expectations: Again Some More

May 17th, 2012 No comments

Paul Krugman rightly attacked the confidence fairy again yesterday — claiming that the unemployment of the 80s following Volcker’s tightening proves that Fed credibility doesn’t help — but I think he misfires this time. Here’s what I sed over there, with some tweaks:

To be fair, Paul, isn’t the point here that in 1980 the Fed was decidedly lacking in inflation-fighting credibility? Volcker changed that — as you say, at great cost — and reluctance to lose the resulting credibility has been grounds for not sufficiently addressing the employment side of the Fed’s mandate ever since.

More to the point, though: I am utterly mystified why the Fed thinks that saying it will allow slightly higher inflation (3 or 4 percent), doing so, then presumably bringing it back down, would hurt its inflation-fighting credibility. Quite the contrary.

Unless: they actually believe that they couldn’t pull it off — that a wage-price spiral would ensue, destroying their credibility. Which is the same as saying “if we let things go a little now, allowing more inflation while spurring employment, we may have to allow a lot of unemployment in the future (a la Volcker) to control runaway inflation.”

Given our (their) inability to predict economic futures, and their at-least-perceived decades-long ability to control inflation without big Volcker-style employment hits, this seems like a ridiculous concern.

The more likely explanation in my view: each extra point of inflation would transfer hundreds of billions of dollars of buying power every year from creditors to debtors. Permanently. This isn’t just Econ 101; it’s simple arithmetic.

And the Fed is run by creditors.

This explanation is completely in keeping with the rightie mantra that (only personal financial) incentives matter.

This raises a question I have, especially for (Market) Monetarists:

Suppose two or three years from now inflation is at 4% and employment is strong. Could the Fed bring inflation down by saying they’re going to be less expansive — setting expectations for lower inflation? Or is expectations-setting asymmetrical?

Can the Fed set higher expectations for growth/inflation largely through Open Mouth Operations, while lowering expectations would require (more) actual monetary operations, Volcker-style?

Cross-posted at Angry Bear.

The Top Two Criteria for Expert Judgment: Curiosity and . . . Curiosity

May 15th, 2012 No comments

First a recap:

Philip Tetlock’s Expert Political Judgment was a groundbreaking look at whether political experts really are expert, as judged by their success at making predictions. His overall conclusion: they aren’t. But (lifted from a previous post):

…among the experts, “foxes” — those who in Nicholas Kristof’s words are “are more cautious, more centrist, more likely to adjust their views, more pragmatic, more prone to self-doubt, more inclined to see complexity and nuance” — resoundingly beat out the “hedgehogs” — those who “have a focused worldview, an ideological leaning, strong convictions.”

This even while hedgehogs end up getting the biggest megaphones for their incorrect predictions.

But as Bryan Caplan pointed out quite cogently, there were two key flaws in Tetlock’s methodology (my words here, again from my previous post):

1. He only examines questions that are highly controversial among experts. (If 50% believe each way, 50% will inevitably be wrong.) Tetlock explicitly ignores the “dumb” questions that seem to the experts to have obvious answers, but which everyday folks might consider controversial.

2. He doesn’t compare the the experts to the average person on the street. The only such comparison in the book is between experts and Berkeley undergrads — who are darned high on the elite/expert spectrum, in absolute terms. And even in that comparison, the experts win in a landslide. The undergrads aren’t even as good as chimps or dartboards.

Back to the present: Tetlock’s latest initiative, the Good Judgment Project, looks to address those shortcomings. The first-round results are in — reported in an email to Tyler Cowen – and they’re eye-opening. Their predictors:

collectively blew the lid off the performance expectations that IARPA had for the first year. Their original hope was that in Year 1 the best forecasting submissions might be able to outperform the unweighted average forecasts of the control group by 20%. When we created weighted-averaging algorithms that gave more weight to our most insightful and engaged forecasters, these algorithms beat that baseline by roughly 60% (exceeding IARPA’s expectations for Year 4).

And what, you may ask, are the characteristics of their successful expert predictors?

(1) an intense curiosity about the workings of the political-economic world; (2) an intense curiosity about the workings of the human mind; (3) cognitive crunching power (“fluid intelligence” and a capacity for “timely self correction”).

Again: the foxes kick the hedgehogs’ butts.

I always agreed with the commentary about George W and his ilk — that they have no real curiosity about how the world works, they just seek confirmation of their existing (and often simplistic) beliefs — but I never considered it much of a knock-down argument. These results — once we see them explained (the email is pretty thin stuff) — may change my beliefs about that.

Caveat: these “curiosity” criteria are uncannily good at describing Philip Tetlock, Bryan Caplan, Tyler Cowen, and me. I tend to look askance at findings that are self-congratulatory.

Justin Fox reports and ruminates on his experience as a fairly mediocre forecaster in the project (emphasis mine):

So what distinguishes a bad forecaster? In my case, two things: (1) a discomfort with expressing my level of confidence with the size of my bets — this is a real flaw, perhaps traceable to the fact that I had never played a game of poker until two weeks ago; and (2) an almost complete lack of interest in the events being forecast. I think I’m pretty curious about the workings of the political-economic world. I just wasn’t interested in whether the IMF would officially announce before 1 April 2012 that an agreement had been reached to lend Hungary an additional 15+ Billion Euros.

… Hedgehogs who are obsessively focused on a particular theory of how the world works aren’t very good at forecasting. But foxes who don’t care aren’t very good at it either. The best forecasters would appear to be foxes who really really want to win the game of forecasting. To quote Saffo again, the key is to “hold strong opinions weakly.” Don’t be stuck in your views; be willing to revise them quickly when new information comes in. But have bold views, or don’t bother trying to make forecasts.

Cross-posted at Angry Bear.


U.S. Versus Europe: Who’s Winning Now?

May 14th, 2012 3 comments

Now that the OECD has updated their GDP data for 2010, I thought I should revisit the question I asked a few years ago:

Who’s growing faster? The U.S. or Europe?

The answer’s the same as it was then: it’s a dead heat.

As I pointed out in that previous post, people love to cherry-pick periods and show how the US has grown so much faster than Europe. (Funny how liberals don’t seem to play this particular game, while conservatives do, quite constantly — usually while going all gooey about people named Reagan and Thatcher.)

The problem is, what they’re saying isn’t true.

Being a curiously curious cat, with an apparently blithe disregard for my own mortality, I went out and looked at the changes in real (inflation-adjusted) GDP per capita over the last forty years. Which I share with you here. Feel free to cherry-pick at will.

(Click for larger.)

Example, for the upper-right cell:

Starting Year 1970
Ending Year 2010
EU Starting GDP $14,462
EU Ending GDP $30,590
US Starting GDP $20,544
US Ending GDP $41,976
EU Change $16,128
US Change $21,432
EU Change % 112%
US Change % 104%
Change difference subtractive -7%
Change difference percent -6%

In the 40 years between 1970 and 2010, real GDP per capita grew by 112% in the EU15, and 104% in the U.S., for a difference of 8%. (Rounding results in 7% showing here; I chose not the display the extra digit everywhere because it makes the table hard to scan easily.)

It’s also easy to show how much growth rates varied proportionally to each other, by percent (the difference between the US and the EU growth rates, divided by the EU growth rate; that’s “Change difference percent” in the last row above).

This is a useful comparative, but it can result in showing big (and rhetorically spurious) swings for short periods, swings that smooth out as soon as you look at periods longer than even six or eight years. Scan along the bottom diagonal horizon and you’ll find no shortage of wonderful cherry-pickable moments. Have at it.

But if you’re actually curious about how our different economic models play out over decades — which is what we do or at least should care about — look to the upper right. I’ve highlighted periods greater than twenty and greater than thirty years for your viewing pleasure.

If you can see any kind of long-term pattern anywhere, I’d be delighted to have it pointed it out to me. The average for those upper-right, dark blue cells is -2.6%, meaning that over the long run, U.S. growth shows as 97.4% of the EU15′s — well within the statistical noise.

Also note that the new data for this post — the right column, for 2010 — seems just as random as all the rest. (Though the two bottom cells do provide some juicy numbers, which I’m sure commenters can spin out into an endless and truly fruitless and specious series of arguments. You go girls.)

Speaking of statistical noise, even though this is about the best national-level data we’ve got (we have to use some data to make our judgments), there’s inevitably some messiness in here. So for the curious and/or skeptical, here are the details.

The data is from The OECD — a think-tank cum rich-country club – assembles this data from individual countries’ national accounts. (They just updated US 2010 GDP in March.) They also compile it to some extent, and apply various conversions using best practices. Viz:

For comparison to the U.S., I used the OECD’s compiled data for the 15-country European Union (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United Kingdom). In my previous post I used a simple average of GDP/capita for non-English-speaking Western European countries (excluding Luxembourg and Norway, for instance, because of size, banking, and oil). I think that selection provided a better representative comparison group, but the OECD does a better job of agglomerating the data than I could do. I’ll just say that judging from my non-systematic journeys through the data over the years, changing country choices doesn’t change the top-line results much at all. Please feel free to prove me wrong.

 I chose GDP/Capita as a measure because it’s a pretty good big-picture yardstick of prosperity, and removes one key confuting variable from the comparison: population growth over the decades. GDP has lots of things wrong with it (it only counts remunerated work, for instance, which gives the U.S. a notable advantage in the comparison, because Europeans have more free time for productive but unremunerated “home work”), but it’s hard to name a better big-picture measure for which we have consistently compiled data for lots of countries, going back four decades.

All the foreign numbers are converted to US dollars based on “purchasing power parity.” This adjusts for different purchasing power in different countries, in an effort to impart people’s relative buying power in those countries. It’s not a perfect method, by any means. But just using market exchange rates isn’t either. Since I’m curious about standards of living in the two areas, PPPs made more sense than exchange rates.

Adjusting for inflation — especially in different countries — is also an imperfect science. Many European countries, for instance, don’t use “hedonic adjustment” to correct for massively increasing computer value per euro or dollar. (This makes those countries’ growth rates look worse.) The U.S. and several other European countries do. I’m not a ShadowStats fan (CPI tracks too closely with the Billion Price Index, for instance, to give much credit to their rather wild claims), but I do realize that adjusting for inflation requires holding up your thumb and squinting some. Again, though, if we want to compare countries’ prosperity over decades, we need to talk about real buying power as opposed to nominal units of currency.

Those were my choices. If you think there are better ones, and that they would change these results significantly, please go do it yourself and report back. I’m wildly curious. Here’s my spreadsheet. I’m happy to help anyone figure out how to use it (the Data Tables are especially neat), and also how to navigate the OECD’s stats.

I should end by pointing out the fact that commenters will undoubtedly raise: the EU remains way behind the U.S. in (at least) this measure of prosperity. Europeans buy 20-30% less stuff per person than Americans. After catching up fast (and predictably) in the decades following WWII, they’ve been stuck at about the same level (relative to us) for forty years. Standard economic convergence theory suggests that they should have continued that catch-up. But that’s a topic for another post.

Cross-posted at Angry Bear.