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Poor production values

There is much complaint on the continent and in programmes like Panorama about the plight of 'the poor' in the USA (and the UK). At the same time we are told how good it is to be poor on the caring continent.

When these claims are made, one often wonders why it is that floods of US and UK immigrants are not beating at the gates of this continental paradise. We hear too often of boat people from the developing world trying to get into the west, of Mexicans and Asians (usually illegally) flooding job-rich USA, but where are those stories about poor Americans trying to improve their lot by returning to the good old Europe their ancestors left? Where those about poor Brits taking ferries across the Channel to settle in Brest and Frankfurt?

The facts about people's incomes may provide the clue. The OECD ('The Tax/Benefit Position of Employees') has kindly provided them; forget talk about 'income per capita', dubious at best and containing all sorts of 'income' that never goes near an ordinary, let alone a poor, person or family- whether it is spent decorating the Louvre, subsidising opera in Berlin, firing off missiles in the Pacific, or indeed on corporate machinery for tax advantage. What matters for people is what reaches their pockets and what it will buy.

Let us begin with what the person and family on average manufacturing wages (roughly average earnings in most western countries) takes home. According to the OECD this was $35151 a year in the USA in 1996 for a family man with two children and a working wife on two thirds of average wages.  In Germany it was $31199; and in dreadful old Britain it was $31815. As for France and Italy it was $24650 and $27205 respectively- way below here. So for the 'average' family the US is best, Britain next, then Germany and some way behind Italy, then France.
 
Statistics these may be but they come from hard figures- for wages, taxes, social security contributions, and transfers (ie benefits of one sort or another). Finally the OECD check what the money will buy in each country and convert each net wage income into its equivalent value if spent in the USA- into (US) 'purchasing power parity' in other words. US goods and services are notoriously good value; to get the same value in pounds you should convert a dollar at $1.50 per pound according to the OECD and a DM at 2.04Dm to the $. (By implication a pound should be 3.04 DMs.) In other words at current exchange rates (DMs 1.82 per $; 1.62$ per £) the value you get from a pound here is slightly more than you get in Germany; and a fair bit less than you get in the USA.

It is pretty clear why the USA gives its ordinary people better living standards. Its productivity is the highest in the OECD, and its taxes and social security contributions the lowest. But the UK, you ask? Well, our productivity -measured in total rather than just per man- has nearly caught up with Germany's; the clue is our use of capital where we spend less on shiny machinery and get more out of it. Then our taxes and social contributions are substantially lower. The result is that the ordinary British family is rather better off than the equivalent in Germany and quite a lot better off than in France and Italy.

All very well, you say, but what about the poor? Prepare again to be amazed. In hard-hearted America poor men, on two-thirds of average earnings, take home $13966 a year net; in Britain $12352; in Germany $12111; in Italy $11059; and in France $9445. Is it any wonder then that none of those poor Americans show any interest in re-migrating across the Atlantic to a Europe flowing with milk and benefits? Tough it may be to be poor in America, but it certainly beats being poor in Europe.

What is the secret of American (and increasingly as we catch up, British) success? Both the USA and the UK have faced the relentless pressures of globalisation and the rise of computer technology on the jobs and wages of unskilled manufacturing  workers. But instead of trying to protect these jobs or prop up these wages they have let the market take its course; many of these manufacturing jobs have been allowed to go and business start-ups have been in services- whether it is the Net, the City or the humble call centre. Those with jobs that push their families below the bread line have had access to 'family credit' (UK) or 'earned income tax credits' (US). The result has been close to full employment, a low (and efficient) use of capital, and relatively low taxes. Unfortunately, on the continent this approach has been regarded with contempt as 'socially unjust' and 'damaging to the industrial base'; wages have been propped up for male manufacturing workers by powerful unions and minimum wages, and subsidies have been pumped into manufacturing and national or EU 'champions' like Philips.

It is often said that an economy must have strong export industries to survive- hence we should not let our manufacturing base wither, it is concluded. There is some truth in the first part; an economy whose industries had to sell their output on world markets at knock-down ('commodity') prices plainly could not afford high wages and the general level of wages in the economy would be low, as these workers in turn would pay little for the services of restaurateurs and hairdressers. But the conclusion about manufacturing plainly does not follow in a world where high international value-added is attached to services like the City, Hollywood, transport and travel. The US (and behind it the UK) has become a leader in international services; these in turn have driven up wages across the economy, while workers in lesser-value manufacturing have become the disappearing minority.

Add restraint in taxes and some self-reliance in welfare provision. It becomes no surprise then that the poor too are better off in countries where the state takes a back seat.

Patrick Minford is professor of economics at Cardiff Business School  

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