Fading Fast?

Economically speaking, many people who live here believe that the United States remains in a league of its own. That view is no doubt bolstered by American-centric press coverage that seems to screen out lots of news to the contrary.

Yet if you venture beyond our shores to hear what others are seeing, saying and reporting, you often get a different story. In "UK Living Standards Outstrip US," the London Times economics editor, David Smith, details a development that just might surprise those who believe the American empire is as robust and matchless as ever.

Living standards outstrip those across the Atlantic for first time in over a century

Living standards in Britain are set to rise above those in America for the first time since the 19th century, according to a report by the respected Oxford Economics consultancy.

The calculations suggest that, measured by gross domestic product per capita, Britain can now hold its head up high in the economic stakes after more than a century of playing second fiddle to the Americans.

It says that GDP per head in Britain will be £23,500 this year, compared with £23,250 in America, reflecting not only the strength of the pound against the dollar but also the UK economy’s record run of growth and rising incomes going back to the early 1990s.

In those days, according to Oxford Economics, Britain’s GDP per capita was 34% below that in America, 33% less than in Germany and 26% lower than in France. Now, not only have average incomes crept above those in America but they are more than 8% above France (£21,700) and Germany (£21,665).

“The past 15 years have seen a dramatic change in the UK’s economic performance and its position in the world economy,” said Adrian Cooper, managing director of Oxford Economics. “No longer are we the ‘sick man of Europe’. Indeed, our calculations suggest that UK living standards are now a match for those of the US.”

Although many people will be surprised by the figures, Americans have long complained that average incomes have been stagnant in their country. One often-quoted statistical comparison suggests that in real terms the median male full-time salary in America is no higher now than it was in the 1970s.

Oxford Economics says that while the comparisons are affected by sterling’s high value against the dollar, they also reflect longer-term factors. “The UK has been catching up steadily with living standards in the US since 2001 -- so, it is a well established trend rather than simply the result of currency fluctuations,” its report says.

It concedes, however, that a significant fall in the pound against other currencies would push Britain back down the ladder. It has assumed an exchange rate of just over $2 for the purpose of the calculation but in recent days the pound has slipped below that level.

The Oxford analysts also point out that Americans benefit from lower prices than those in Britain. With an adjustment made for this “purchasing power parity”, the average American has more spending power than his UK counterpart and pays lower taxes. (In the run-up to Christmas many Britons travelled to New York and other American cities to take advantage of the strength of sterling against the dollar and those lower prices.)

However, the British typically have significantly longer holidays than Americans as well as access to “free” healthcare.

The figures may be of small comfort to Britons worried about house prices and facing a severe squeeze on their incomes this year as a result of record petrol prices and rising energy bills.

Citigroup, which was the most accurate forecaster of Britain’s economy last year, predicts the slowest rise in consumer spending this year since 1992.

“After the credit-fuelled boom in domestic demand and asset prices, the UK economy now faces a hangover, with slowing credit growth, falling property prices and tightening lending standards,” said Michael Saunders, its UK economist.

Last week oil prices hit $100 a barrel, presaging a rise in petrol and diesel prices on the fore-courts. Npower, Britain’s fourth biggest energy supplier, announced that energy prices would go up sharply, raising the prospect of the average household bill rising above £1,000 for the first time.

America overtook Britain economically in the final years of the 19th century, during the so-called second industrial revolution, which brought mass manufacture and sharply rising prosperity to the United States.

Comments

[Sackerson]

Ah yes, free healthcare as provided by our National Health Service. We passed a van the other day, and in the dirt on the back someone had written "cleaned by the NHS". How are hygiene standards in the US?

[Deborah]

Put that article in the rubbish of the week pile. I lived in Britain and to suggest the standard of living in the UK out strip the US leave me wondering what the author is smoking, injecting and drinking at the same time.

You have an enormous number of the young adults either living at home because they can't afford a place, or if they do leave home they tend to rent a room in a shared house. My rent and utilities for a 8x9 room in a shared 5 bedroom house in the fall of 2005 was about $1000/month. You have something called council tax where the renters pay the property tax rather than the home owners. You have a TV tax. If you don't pay the TV tax and you have a TV you can be fined $1,000. That was in a neighbourhood where I often walked past vomit on the streets from the bing drinking the night before.

The quality of homes is disgraceful. To put it into perspective here's a conversation I had with someone who had lived there for over 10 years from another country. He said his sister was already there and everyone said she had a really nice home. When he got there he felt like he was walking into a dump, it was shocking compared to what he was used to. He said after a few years there and seeing so many more homes there, well, relative to the dire British standard she had a nice home, but you would feel hard done by in a home of that quality in the US.

I seriously doubt that things have changed that much in two years.

[dearieme]

"With an adjustment made for this “purchasing power parity”, the average American has more spending power than his UK counterpart and pays lower taxes." Without that adjustment, the comparison is meaningless.

[Kevin]

The claim is COMPLETELY false -- GDP-per-capita does NOT equal "living standards", as any student of basic economics would know. The Oxford Economics report does not present GDP per capita adjusted for purchase power parity (PPP), which is absolutely necessary for ANY conclusion about living standards. Things in the UK are ludicrously expensive by US standards, and so an equivalent income in the UK buys much less stuff than it would in the U.S.

The Oxford Econ analyst was quoted elsewhere (the Observer) explaining a bit about PPP and affirming that Americans have "far stronger purchasing power".

The ORIGNAL posting of this Times article made no mention of PPP at all -- now they've gone back and quietly hedged a bit after getting some abusive comments, but their headline is still bogus.

The idiots at Sunday Times made a complete botch of it and refuse to fess up to their misunderstanding.

[Juan C (Surrey, England)]

Whilst I am not British in nationality, So I do not have a vested interest in defending or attacking britain, there are a couple of points that must be said.
1) housing: Yes, housing in britain is diabolically expensive. Probably a result of lack of developable land. For reasons not known to me, only 11% of britain is built, yet they won't allow any more building. Supply and demand and rife speculation and irrational exhuberance come into play.
Does that mean that housing in US is "better"? Well, It depends where you live! If I could live in the US and still work and gain my UK salary I would be fantastically wealthy... But that is a rather academic subject... Also some houses in England date back to the 1600's and are perfectly inhabitable. Not bad for a 400 year + bit of house.
2)Wealth: I do not feel "more wealthy" than the average american (I have a higher than average UK salary with good prospects). However this is because I have no debts other than my mortgage (or home loan as you call it) and live within my means, so no extravagant expenditure. THis means that in nominal terms I am probaly on paper wealthier than the average amercian. But again, many things make me feel poorer in like for like comparisons
3) Services: Where I live, in Surrey, my children go "free" to one of the top schools in the county and England, I do not lock my house at night (I live in one of the safest places in England), the doctors and hospital nearby are first class, "free" again, though paid with my taxes. If you are like me, blessed by the "postcode lottery", it makes much more sense.
I don't buy this argument though because it is too dependent on a floating exchange rate. However the basic argument could well turn out to be true in say 10 years time if the trend continues. Will it? HMMMM I am skeptical on that.... time will tell.

[rbm411]

Standard of living better tied to the strength of the pound against the dollar. Cute, a better standard of living that depends on what the US Fed does.

[Michael Panzner]

Someone from the Center for Economic and Policy Research was kind enough to forward the following information, and I thought it only fair to add it as a comment to my recent post on U.K. and U.S. living standards.

Washington DC -- A new forecast by Oxford Economics suggesting that this year the United Kingdom's living standards will exceed those of the U.S. is misleading, according to an analysis by the Center for Economic and Policy Research (CEPR). The CEPR issue brief, " 'Misunderestimating' Living Standards," notes that the forecast relies on a basic misunderstanding of standard methods of comparing international standards of living. Using the appropriate economic method, in 2008, the GDP per capita of the United States will exceed that of the United Kingdom by almost 19 percent.

"The Oxford Economics report incorrectly uses market exchange rates to compare standards of living," said John Schmitt, Senior Economist with CEPR. "They would be hard pressed to find another economist who would back up their methodology."

Oxford Economics incorrectly used market exchange rates, which ignore differences in national prices, instead of "purchasing power parity" exchange rates, which properly take into account differences in national prices. This methodological error is the only reason that the Oxford Economics report can conclude that GDP per capita in the United Kingdom is on target to surpass GDP per capita in the United States this year.

As CEPR notes, this would be equivalent to suggesting that a worker is better off taking a $55,000 per year job in New York City rather than a $50,000 per year job in Ottumwa, Iowa. While the "market exchange rate" for New York City dollars to Ottumwa dollars is one to one, prices are of course much different and generally much higher in New York City.