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September 01, 2004

Jeremy Rifkin in the Guardian.

Jeremy Rifkin continues his drooling praise to the EU in the Guardian. It is all the usual rubbish about how the new EU is a more caring sharing place than the insufferably individualistic US. Just as his argument is a lightly reheated socialism his command of facts is seriously deficient (as of course, a deficient command of facts is a necessary pre-requisite for a belief in socialism):

Americans are used to thinking of their country as the most successful on earth. That's no longer the case: the EU has grown to become the third largest governing institution in the world. Though its land mass is half the size of the continental US, its $10.5 trillion GDP now eclipses the US GDP, making it the world's largest economy.

Note that this misses the fact that there are 450 million or so in the brave new Europe and 300 million or so in the US. GDP per capita (the measure of individual wealth, the thing that we are actually interested in) is therefore 50% higher in the US than it is in Europe. It is also false that EU GDP in aggregate is higher than that in the US. Leave aside the triviality that a 25 nation EU has only existed since May this year and we won't get decent GDP statistics for 2004 until about May 2005.
Looking at the 2002 figures (which gives us a US GDP of $10.5 trillion) at Nationmaster if we add up those new EU members in the top 100 we get a gross GDP for the EU of $10.26 trillion. To this we would have to add the output of Malta, Cyprus and Estonia, those well known economic powerhouses, to give us the full 25 nation number. As each of these must be less than $0.02 trillion (as they are not in the top 100) I think we can safely say that EU GDP is not greater than US GDP.
Unless, of course, we want to start correcting for exchange rates and use PPP, in which case I can't be bothered to look up the figures but would like to note that as Europe is generally a more expensive place than the US GDP adjusted for PPP would reflect better on the US than the EU.
Well, actually, here are the PPP figures. $9.6 trillion for the US and $9.7 trillion for the EU 25 which means my snark above was wrong.....but this is "eclipsing"? ....and of course, Rifkin is not using PPP adjusted figures is he?
So, using the number that Rifkin starts with the EU is a smaller economy than the US, correcting for market exchange rates the EU is marginally larger (although given the differential growth rates over the past two years you would expect the US to be larger using this measure now) and correcting for population the US is 50% better off.
Ain't that a great set of statistics to support your idea that the EU provides the way forward to a better world?

September 1, 2004 in Idiotarians | Permalink

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Comments

This article sounds similar to the ones in the Daily Ablution. Maybe you should link to Scotts excellent blog, so people can read about more ill-researched grauniad articles.

Posted by: Rob Read | Sep 1, 2004 11:48:42 AM

PPP? Who gives a crap about PPP?

I'm constantly astounded at supposably educated, knowledgeble people coming up with concepts that are horribly flawed yet present them as the new truth.

Your own surprise that the obvious logical outcome of a PPP comparison between the EU and the USA were wrong should lead you to question the truthfullness of PPP.

A typical example of how Purchasing Power Parity works is the Big Mac index. Listing the prices in $US of Big Mac sold worldwide gives an idea of the "bang for the buck" concept of PPP... in theory anyway.

But as usual for these academic egghead theories is that they are only true on university campuses and do not reflect the real world.

The Index states that Chile is better off than Canada.......... (Highlighting two countries that I know very well)

The main assumption and flaw of the Big Mac index is that it is assumed that the Big Mac is the exact same product worldwide and served under the exact same conditions worldwide.

Therein lies the lie behind PPP. In Canada I do NOT wait 30 minutes for my Big Mac. In Canada I do not have to beg for a measly packet of ketchup. In Canada, McDonald's are maintained spotlessly clean. In Canada, I have health inspectors. In Canada any McDonalds smelling like the one here in Santiago Centro would be ruthlessly shut down in milliseconds.

This same assumption and flaw is used in the formal PPP comparisons of various countries. For example, Electrcity is based on published tarrifs per KW/Hour yet does not take into account all the other surcharges, delays, bribes, bueracracy etc that is prevelant in the third world and the EU. So the PPP comparisons show how wonderfully cheap electricity is in countries like Chile while I cringe every time I get my bill from Chilectra since actuall KW usage is only a small portion of that bill.

Nope, PPP is just another tool in the lefty arsenal used to show how centrally planned economies are better for people than free enterprise. Stick to GDP/Capita for now, it is still the best indicator of relative wealth.

Posted by: Gerald Hayes | Sep 7, 2004 2:46:30 AM

I think you've missed one of the points about PPP. Things, (mostly non-tradeable goods) cost different amounts of money in different countries. Much of this is to do with different labour and land costs. OK. So we want to find a method of equating prices across countries, to, as you say, measure bang for buck. What we want to do is find some number by which we can adjust market exchange rates to reflect those differential costs of living.
The Big Mac index is a light hearted attempt to do this. It's a reasonable item to use, always made roughly the same way out of local ingredients in a number of countries worldwide. But please note that every time the Economist publishes it it refers to the much more complex calculations done by people like the World Bank.
Where I think you've mmissed the point is that it most certainly does not try to claim that Chile is richer than Canada. The only number one can take away from the comparison is how we should adjust market exchange rates to reflect the different bang for buck in the two countries.
To put it another way, no one at all is trying to say that Chile is richer than Canada. Only that Chile is not as comparatively poor (given the lower cost of living) as market exchange rates seem to show.
The most egregious example is probably China. Market rates (this is from memory, so please don't hold me to exact numbers) would show something like $1,000 a year as Chinese per capita GDP. PPP rates show $4,500 or so. The real use of this number is how much money do you need to live at the Chinese standard of living in the US. On $1,000 a year you would starve to death. On $4,500 a year you would be poor as shit but you could still eat. That's a better representation of reality than the idea that all Chinese are too poor to eat.
So, to conclude, I think you've missed the point of PPP. It isn't trying to say that Chile is richer than Canada. The Big Mac index is trying to show how we should adjust market exchange rates to reflect different general price levels in the two countries. It isn't a perfect measure but it does throw up a useful number.
I would also note that PPP is not from the arsenal of lefty ideas. It is very much a right wing idea. You will normally see lefties using absolute numbers to show wealth differentials and righties using PPP. The reason being that absolute numbers show greater differences, and thus greater pressure for aid to narrow them.
Finally I would note that Chile is, according to the Economic Freedom index, a much freer country than Canada, although starting from a much lower base.

Posted by: Tim Worstall | Sep 7, 2004 9:19:37 AM

"I'm constantly astounded at supposably educated,knowledgeble people" who do not know that the word is supposedly.

Posted by: Jay Davis | Dec 15, 2005 10:01:41 PM

you say that the population of the 'US is 50% better off' than the population of the EU?? even though the EU gdp per capita is lower than that of the US they still enjoy on average, better standards of living than the US. wealth re-distribution in the EU has created unprecedented equality in the form of welfare benefits, free health care and access to education for all. the US has the widest wealth gap of ANY developed nation, failing to provide sufficiently for those poorer citizens in their country. healthcare and education are predominantly privatised and as a result unaffordable to the masses.

how can you claim that people in the US are '50% better off' based on gdp per capita???

Posted by: Edward Jacobson | Jan 27, 2006 7:47:16 AM