Here’s a bit of data that always blows my mind…
Even the poorest of US states are richer than most European countries.
We’re talking “richer” in GDP per capita, here. Because a lot of US states have small populations, compared to countries in Europe.
(You can’t really compare Maine to Germany on total GDP, in other words, because Maine’s got 1.4 million people, and Germany’s close to 84 million.)
A couple of weeks ago I saw a survey that asked British people: If the UK were a US state, where would it be in the ranking of the richest states?
The average answer given by Brits was around 7th place. The reality is different.
If the UK were a US state, it’d be 51st. In last place, in other words: poorer than Alabama, Arkansas, West Virginia, or Mississippi.
Shocking, innit?
(There are some of the usual caveats here, that GDP is different than nominal GDP, which is different than GDP adjusted for purchasing power parity. And I promise not to continue boring you with statistics.)
Anyway, this is a blog about Spain.
Where does Spain fit in, wealth-wise?
Spain is obviously not as rich as the UK. So it would be far lower. In fact, if Spain were a US state, with its current GDP per capita, it would be by far the poorest in the union.
Spanish GDP works out to about $30,000 per person. Mississippi’s is $53,000. That’s (does some mental math) not quite double. But it’s a big difference, nonetheless.
So all this brings up a few questions in my mind:
- Is Spain a poor country?
- Does your average person in Mississippi live better than someone in Spain?
- What does GDP mean, anyway?
I’m no economist, but I like doing research into things like this. So today we’re going to talk about what GDP is, and whether it matters all that much.
Let’s get to it.
Profit-shifting and “leprechaun economics”
The wealthiest countries in Europe are tax havens.
Most of them are tiny – Lichtenstein, Monaco, etc.
The wealthiest among “larger” countries is Ireland, which used to be one of the poorest places in Europe. Now, it’s got a GDP per capita of around $130,000. That’s more than New York or California.
Impressive statistic… But if you speak to any younger Irish person, they’ll say their country is basically unliveable. Rents are through the roof – around 2500€ for a 1-bedroom apartment. And people are leaving.
Seems like having all those tech companies based there doesn’t improve the lives of regular Irish people much. At least not directly.
(I had the experience of going to a fancy restaurant outside Dublin a couple of years ago, and eating, for example, a single scallop cut into slivers, which cost 16€. I wish I were making it up, but I’m not.)
Of course, this isn’t a Great Famine level problem. But it’s still worth talking about.
Huge companies can currently use a legal loophole called “profit shifting” to declare profits in areas with lower taxes, even if there’s little economic activity going on there. It’s especially used with intangible assets like intellectual property.
For example, in what economist Paul Krugman termed “leprechaun economics”, the Irish GDP rose by 26% in the first quarter of 2015. Later it was shown that this GDP gap was mostly due to Apple using a new “accounting tool” for offshoring profits.
Actual benefit for your average Irishman: presumably around zero.
Incidentally, as a YouTuber I get paid for in-video ads each month, the “check” is written by Google Ireland Limited. Spain just gets my income tax, but not the corporate or VAT taxes.
My Amazon book royalties are paid out of Luxembourg, which I couldn’t locate on a map. But apparently Amazon has an office there.
What is GDP anyway?
Other GDP-wealthy countries in Europe include Germany and the usual suspects up in Scandinavia: Norway, Sweden, Denmark, etc.
But what is GDP?
It’s calculated by a simple formula: Consumption + Investment + Government Spending + Net Exports. Basically, it’s the monetary value of finished goods and services in a country.
Here’s a joke I saw recently, that makes an important point:
Two economists are walking in the forest. They see a pile of shit in the middle of the trail. The first economist says to his friend, “I’ll give you $100 to eat that pile of shit”.
“One hundred dollars? Well, I guess it would be dumb not to…” says the second economist, sitting down to eat.
A few minutes later they’re walking and see another pile of shit. The second economist says, “I’ll give you $100 to eat that pile of shit.”
Economists being intelligent, left-brained people, the first economist digs into the pile, and gets his $100 back.
In the end, neither of the two has more money than they started with. But their country’s GDP has gone up by $200. Two jobs have been created! (Temporary ones, but very well-paid.)
But in the meantime, nobody’s better off – in fact, they’ve spent most of the afternoon eating shit.
Gross Domestic Product counts all the bad things
I suppose that joke is a rather crude reformulation of the parable of the broken window, a thought experiment introduced by French economist Frédéric Bastiat in an 1850 essay… not to be confused with the criminological concept of “broken windows theory”.
One major criticism of GDP, then, is that it counts a lot of “bad things” as being positive for the economy.
If I punch you in the mouth, the money you spend on dental work is good for the economy.
Do you want dentists to go out of business? Of course not! But you might legitimately wish that the whole thing hadn’t happened.
Another interesting aspect of GDP is that it includes only “final goods and services” – meaning that if a lumber company buys the forest the two economists chose for their walk, and cuts it down, that’s still not necessarily adding to GDP.
Only final goods (like particleboard IKEA furniture) or exports become GDP, so if the lumber is sent abroad it’s GDP, and when it’s sold as furniture it’s GDP. But not until then.
One of the factors in the the equation is net exports (exports minus imports), which I suppose is why countries often fret about trade deficits. Chopping down a forest to export the lumber is good for GDP. Receiving someone else’s lumber as as import is bad for GDP.
Getting treated for chlamydia is good for GDP. Hugging your mom is GDP-neutral. Paying someone to fix your fence is good for GDP. Fixing your own fence improves your life, and possibly the life of others in your neighborhood, but it does nothing for Gross Domestic Product.
Spain’s economy, that raging bull
The Wikipedia article on the topic says, explicitly, that “GDP is not a measure of overall standard of living, or well-being, as it does not account for how income is distributed among the population”.
The problem is that people usually pretend that GDP is well-being.
Here in Spain, the last couple of years, Pedro Sánchez’s government loves to talk about how hot the Spanish economy is. If you asked the average person on the street, I bet you’d get a different idea.
The Spanish GDP is up more than 2% annually – I guess that’s true enough.
Meanwhile, the population is up, too, due to mass migration. We’ve got a large housing crisis. And prices for everything have doubled in the last few years.
So are we all better off than we were in 2016? Obviously, yes.
Just look at the article in The Economist!
India and the GDP question
I can’t talk about wealth and poverty without mentioning India.
If you’ve been around this blog for a while, you know that my wife Morena is from Kerala, in the south of India.
Someone who looked at the GDP per capita for Kerala – it’s less than $4000 a year – would (logically) decide that the people there are living in unspeakable poverty.
But I’ve been to Kerala multiple times, and that’s not the feeling one gets at all.
Most people in Kerala look to be living perfectly dignified lives. It’s hard to find anyone begging, for example, and you barely see people who would appear to be “poor” in the same sense that the homeless in my street in Barcelona are.
I wouldn’t have believed it, but it’s true.
On the other hand, there’s the state of Maharashtra (where Mumbai is located). With a much higher economic output, it still manages to seem depressing. You see quite a bit more poverty there – people digging through trash, and massive slums by the sides of the highways.
So in my opinion, something else is in play, besides GDP.
Spanish GDP and lifestyle
When Americans contemplate moving to Spain they often talk about how hard it is to “earn a good living” here. And it’s true. The average Spanish salary clocks in at a bit more than 28,000€ a year.
But because of Purchasing Power Parity, and (I suspect) general lifestyle expectations, it’s hard to compare those 28,000€ in Spain with an average salary of $65,000 per year in the US.
The lifestyles are just too different.
In Spain, you’re probably living in a (relatively) tiny flat, somewhere walkable, and you have a street life that’s not common in most US cities. In the US, you’ve got a (relatively) giant house and a three-car garage… but you can’t just walk out the door and “be somewhere”.
Factor in the differences in healthcare systems, tax rates, etc, and it’s hard to say that one lifestyle is “better” than the other. It’s a personal preference, depending on a lot of factors.
(Going back to the Indian example, you could move to Kerala with a few thousand dollars a month and live a pretty “rich life” out there: you could have a cook and a maid and a driver and a gardener and a nanny with that kind of money. But you wouldn’t have anything resembling the lifestyle of a middle-class person in Europe.)
Gross Domestic Product and Happiness
So GDP is a bad way of measuring well-being. But I also distrust “happiness index”-type metrics. Asking people around the world if they’re happy runs up against all sorts of cultural nuance that confuses the statistics.
For example, I’ve read that no sane Japanese person is going to admit to being happy: their culture emphasizes modesty and humility, and someone who just announces that he’s “happy” might seem full of himself.
Anyway, as I mentioned in my recent article on finding happiness abroad, I think happiness is overrated – you might be better off chasing meaning, or impact, or self-transcendence.
The idea that raising your salary by 20% in itself is going to create a better life is probably true if you have very little to start out with. At a higher income level, the gain is much less.
And much like the idea that “GDP does not equal quality of life”, I’d like to suggest that using your personal income as a synonym for your well-being is a deeply flawed way of thinking about things.
Comparison is the thief of joy
So: does the average Mississippian live better than people in Spain? Probably not.
Does he feel richer, day to day? Again, I doubt it.
Comparing the US to European economies is like comparing elephant yams to apples. Obviously, elephant yams are bigger. And they both come from plants. But there the similarities end.
Quality of life depends on a lot of intangibles – the kind of things economists don’t count at all.
Moreover, does it really matter?
A saying I think about a lot is “Comparison is the thief of joy.”
Social media (and economic data) make it easier than ever to compare your life to that of everyone else you know – and also to that of perfect strangers halfway around the world. But in doing so, you’re probably missing out on the joy of being grateful for your life just as it is.
Yours, with immense gratitude,
Daniel AKA Mr Chorizo.
P.S. If you want to send some GDP-per-capita my way, here’s the donation page. Send anything from 10€ on up to however much you’re comfortable with… I’ll use it to support my impoverished European lifestyle. Thanks!
P.P.S. Last time I expressed doubt about Pedro Sánchez’s economic miracle, some idiot from the Bluesky social network yelled at me for not just taking the government’s propaganda at face value. What do you think? Is Spain’s 2.5% growth making your life better? Would you rather move to India? Let me know, right here in the comments…
P.P.P.S. Whenever someone goes off about how they wish the prices of real estate would just drop, I remember that we had a massive economic crisis that achieved just that – and everyone hated it. For more, check out my article on the Great Recession. Or if you’re in the market for a house or flat, maybe you’d enjoy my more recent article about Spanish real estate vocabulary. Enjoy!
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