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Home | Wire | These US States Have Higher Incomes than Nearly Every European Country

These US States Have Higher Incomes than Nearly Every European Country

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Tags Global EconomyTaxes and SpendingU.S. Economy

06/07/2018

Back in 2015, I wrote an article titled "If Sweden and Germany Became Us States, They Would Be Among the Poorest States." It is one of the most widely shared — and also most widely disparaged — articles on mises.org. The article showed that contrary to many efforts to posit interventionist European states as being more prosperous than the United States, the record — at least if we measure things in terms of income data — doesn't bear this out. While it's true that income isn't the only measure of prosperity, it is an important one. 

The enthusiasm with which the information was promoted and defamed is not surprising since these sorts of international comparisons often provide fodder to both sides of the debate. The fact that some relatively interventionist economies have high incomes is proof that interventionist, so-called "mixed economies" are better than economies where things lean more in the direction of markets. On the other hand, if more market-oriented economies can be shown to have especially high incomes, then this is also allegedly proof that more purely market economies are best.

This conflict is then made worse by the perception that the United States is more or less a hard line, extreme free-market system, while most European economies are thought to be far more interventionist than the US. 

In reality, the truth is far more muddled. In terms of government spending on welfare programs, the United States is comparable to a number of other states commonly regarded as "welfare states." On the matter of health care specifically, US government spending outpaces nearly all other countries, both rich and poor. In other words, the US is not nearly the outlier many people think it is.

RELATED: "The Myth of America's "Stingy" Welfare State" by Ryan McMaken

Nevertheless, in many respects the US is a relatively free economy in terms of tax burden, regulations on private property, and international trade.

So where exactly does the US rank in terms of income? If we update the data using 2015 numbers, we find similar results.1 The United States, when measured according to median disposable income (which includes cash benefits from welfare programs), remains among one of the highest-income places in the world:

 

median_incomes.png

Note that here I'm using median numbers so as to avoid averages. When dealing with wealth and incomes in the United States, averages are usually skewed up considerably by the presence of so many members of the super-rich in the United States. By using medians, we mitigate those effects.

Moreover, the data used here comes from the The Organisation for Economic Co-operation and Development (OECD), which is hardly a pro-market group. Specifically, the numbers are from the "median disposable income" metric which also takes into account income from social programs, and the costs of taxation.

The median income numbers are then converted from local currencies to international dollars by using the PPP conversation factor found at the World Bank's site.2 There's nothing novel about this approach. It's exactly what the World Health Organization tells us to do when comparing values across jurisdictions. The international median-income comparisons at Wikipedia also employ a similar method. Moreover, our results in the graph above, look quite similar to final results expressed in dollars and published by the OECD itself in its 2014's "Society at a Glance" report.

Usually when comparisons like this are made in the media, they're based on GDP per capita or other measures that ignore social benefits, taxes, and the effects of a small number of ultra-large incomes at the top. The median disposable income measure takes all this into account. And we still end up with a measure that shows that the United States is still outpacing most of the countries we're so often told have been made into paradise by an interventionist state.

Comparing Incomes with Social-Benefits Spending

Moreover, when we compare these results to welfare spending by country, we don't find a solid connection here between the amount of spending on social benefits and median incomes — one way or another. It's true, for instance, that Denmark's median income is essentially the same as that of the US, at right around $32,000. Meanwhile, Denmark spends far more as a percentage of GDP on social benefits. Is this evidence that the US could spend more on social benefits and still maintain the same median income level? No. 

Skepticism in this regard is warranted since Canada and Australia, both of which spend less on social benefits than the US, have higher median incomes than the US. Isn't this evidence that the US should cut social spending if it wants to increase its median incomes? That conclusion doesn't necessarily follow from this information either. Spending in the US is about equal to that in Switzerland and New Zealand, and only two percentage points behind the UK:

 

spending1_1_0.png

 

 

SourceThe OECD Social Benefits database: http://stats.oecd.org/Index.aspx?datasetcode=SOCX_AGG

What About Inequality?

When faced with higher median numbers, the interventionist will then say "but what about poverty levels?" Sure, median numbers are high, but there are more poor in the US."

Even that, though, depends on how poverty is measured.

International measures of poverty are usually expressed in terms of the number of people who have incomes at 50 percent of the median income in each country. As I explained in an article titled "The Poor in the US Are richer than the Middle Class in Much of Europe" the poverty-level income in the US, by this 50-percent-of-median measure is nearly as high as the median income in Spain and Italy. Thus, even if poverty rates in the US are higher than they are for the poverty-tier households in most other countries,  the actual incomes of these poor households is higher than in countries with lower median incomes. For instance, 50 percent of the median US disposable income — the poverty level — is approximately $16,000. That's only $7,000 below the median income level in Italy. The poverty income in Italy meanwhile, is $12,000. 

The Pew research center has also recently provided another way of looking at this. In a 2017 report, Pew looked at median incomes across numerous countries, breaking out income groups into three tiers: middle-class, lower tier, and upper tier.

26 percent of Americans are in the lower tier. That's not much higher than what we find in southern Europe, but well above what's seen in much of northern Europe:

pew2.JPG

But also note that the income level for the lowest tier is higher than what we find in most of Europe. Yes, the lower tier is larger, but its also comparable in income (again, this is including government assistance) to that found in Denmark and the Netherlands. It's higher than in Germany:

lowerincome.JPG

So yes, there are more people in the lower tier in the US, but the people in the lower tier have higher incomes than their peers in much of Europe.

Note also that the middle tier in southern Europe (i.e., Italy and Spain) is barely more than half of the middle-tier income in the US. The lower-tier incomes there are only one quarter of the middle-tier income in the US. 

Clearly, the mere presence of a welfare state in these countries does not exactly guarantee abundance.

Breaking Out by States

One final factor to consider is that whenever we make comparisons like these, we have to remember that the US if far more geographically and demographically diverse than any single European country. The US population is much larger than any other country mentioned here, and income differences can vary significantly from state to state. Speaking of a single nationwide income number is troublesome everywhere, but it makes even less sense for a country as large and varied as the United States.

According to the Census Bureau, for instance, the median income in the US was $55,775 in 2015.

But state median incomes varied from approximately $40,500 in Mississippi to $75,800 in Maryland.

Expressed as a percentage of the nationwide median income the states break out like this:

states_income.png

So, if we look at some of the wealthier American states, we find that some of them are well above where the US ranked as a whole in international comparisons. For example, New Hampshire's median income is 126 percent of the US median income.  If we consider this information in light of the fact that the US median disposable income (according to the OECD) is $32,075, then we might conclude that New Hampshire comes in at an internationally comparable income of $40,400. That's comparable to Norway and Switzerland. In other words, taken on their own, states like New Hampshire, Massachusetts, Washington, and Colorado, are among the richest places in the world, by far.

Extending this same analysis to all states, it looks like this:

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Acknowledging that some US states are wealthier than others, we now start to get a picture of where some European countries might fit into the mix. Not surprisingly, Norway, Luxembourg, and Switzerland are still near the top. Canada and Australia come in between Rhode Island and Illinois. And Sweden comes in between Kansas and South Dakota.

Some European countries often regarded as wealthy don't fare especially well by this measure, however. France, for example, lands between South Carolina and Louisiana, while Germany ranks below Florida. Southern Europe fares even more poorly with Italy ranking below Arkansas, and Spain below Mississippi. By this measure, if Italy were a US state, it would rank behind every state except Mississippi. The United Kingdom would rank behind every state except Mississippi, Arkansas, and West Virginia. 

Much of this should be unsurprising, though. Incomes in places like Minnesota, Connecticut, Massachusetts, Utah, and Colorado have long been evidently high income places with high measures of quality of life such as life expectancy, poverty, and crime. The fact that these states might rank with places like Switzerland, Canada, Denmark, and Austria shouldn't exactly boggle the mind.

One final refinement we might include would be to take into account the differences in cost of living from state to state. We've already adjusted for the cost of living by making the PPP adjustment, but that only includes differences across international boundaries. We could also adjust median incomes in each state by the "regional price parity" in each state.3 This would move low-cost places like Mississippi up the rankings, while moving high-cost places like New Jersey down. If we make this adjustment, the result is this:

 
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The overall effect here is not significantly different from the previous graph, however. Our point has already been made: for those Americans who think it's important to live in a place with very high incomes, the answer may not lie in moving across international boundaries. It may only require moving to another state.

Although some interventionists would like to portray the US as an economic basket case where only the super-wealthy prosper. The numbers simply don't bear this out. This doesn't prove the US and other wealthy relatively libertarian countries (such as Switzerland) as flawless. But the data hardly supports crude theories that a little more government spending will pave the way to economic prosperity. 

Of course, the fact that this data on its own tells us so little illustrates the need for sound economic theory to help us understand why West Germany was rich, but East Germany was poor, why Venezuela is starving, but Chile is not. 

  • 1. When I made these calculations earlier, the calculations were based on data from 2011 through 2014. I've updated this to 2015 numbers, although in some cases, 2014 is the most recent data available. Median dispasable income data comes from oecd.stat: http://stats.oecd.org/Index.aspx?DataSetCode=IDD. The disposable income measure includes: "the sum of wages and salaries, mixed income, net property income, net current transfers and social benefits other than social transfers in kind, less taxes on income and wealth and social security contributions paid by employees, the self-employed and the unemployed." (https://data.oecd.org/hha/household-disposable-income.htm) It should also be noted that the absence of in-kind transfers is unlikely to significantly impact rankings here because the US is similar to other OECD countries in terms of in-kind transfers. The OECD average is 8.3 percent of GDP, while the total in the US is 9.4 percent of GDP. See: http://stats.oecd.org/Index.aspx?datasetcode=SOCX_AGG. See also "Why In-Kind Benefits?" by Janet Currie, Firouz Gahvari 17 December 2007. (https://voxeu.org/article/why-kind-benefits) showing that US in-kind spending is comparable to other European welfare states in terms of education, health, and child care. None of this is included in calculating US (or other) income levels.
  • 2. See: https://data.worldbank.org/indicator/PA.NUS.PPP "PPP conversion factor, GDP (LCU per international $)"
  • 3. Price parities and income use 2015 measurements.

Ryan McMaken (@ryanmcmaken) is the editor of Mises Wire and The Austrian. Send him your article submissions, but read article guidelines first. Ryan has degrees in economics and political science from the University of Colorado, and was the economist for the Colorado Division of Housing from 2009 to 2014. He is the author of Commie Cowboys: The Bourgeoisie and the Nation-State in the Western Genre.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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