There seems to be a lot of talk among Democrats and native young people to the effect that European countries have less “income inequality” thanks to bigger government, higher taxes, and more social spending. Is there a downside to this?
The Mises Institute takes a look at it:
The battle over the assumed success of European socialism continues. Many European countries like Sweden have gained a reputation as being very wealthy in spite of their highly regulated and taxed economies. From there, many assume that the rest of Europe is more or less similar, even if slightly poorer. But if we look more closely at the data, a very different picture emerges, and we find that the median household in the US is better off (income-wise) than the median household in all but three European countries.
[…]Using the BEA’s regional price parity index, we can take now account for the different cost of living in different states…
[…]We now see that there’s less variation in the median income levels among the US states. That makes sense because many states with low median incomes also have a very low cost of living. At the same time, many states with high median incomes have a very high cost of living.
Now that we’ve accounted for the low cost of living in Mississippi, we find that Mississippi ($26,517) is no longer the state with the lowest median income in real terms. New York ($26,152) is now the state with the lowest median income due to its very high cost of living.
This has had the effect of giving us a more realistic view of the purchasing power of the median household in US states. It is also more helpful in comparing individual states to OECD members, many of which have much higher costs of living than places like the American south and midwest. Now that we recognize how inexpensive it is to live in places like Tennessee, Florida, and Kentucky, we find that residents in those states now have higher median incomes than Sweden (a place that’s 30% more expensive than the US) and most other OECD countries measured.
Once purchasing power among the US states is taken into account, we find that Sweden’s median income ($27,167) is higher than only six states: Arkansas ($26,804), Louisiana ($25,643), Mississippi ($26,517), New Mexico ($26,762), New York ($26,152) and North Carolina ($26,819).
We find something similar when we look at Germany, but in Germany’s case, every single US state shows a higher median income than Germany. Germany’s median income is $25,528. Things look even worse for the United Kingdom which has a median income of $21,033, compared to $26,517 in Mississippi.
Meanwhile, Colorado ($35,059) has a median income nearly identical to Switzerland ($35,083), and ten states (Connecticut, Iowa, Maryland, Minnesota, New Hampshire, North Dakota, South Dakota, Utah, Virginia, and Washington State) show higher median incomes than Switzerland. Luxembourg ($38,502), on the other hand, shows a median income higher than every state except New Hampshire ($39,034).
None of this analysis should really surprise us. According to the OECD’s own numbers (which take into account taxes and social benefits, the US has higher median disposable income than all but three OECD countries. Sweden ranks below the US in this regard, as does Finland and Denmark.
The fact that the median level in the US is above most OECD countries thus makes it no surprise that most of these countries then rank below most US states. The US states that have income level above the median US level will, not surprisingly, outpace many OECD countries by a considerable margin.
What’s going on here? Well, it turns out that when you have fewer regulations on business, lower business taxes, and an emphasis on working rather collecting welfare, that people have more money in their pockets and a better standard of living. The trouble with Europe is that too many able-bodied people can get by without working. In the United States, we put more emphasis on making your own way, earning your own pay, and spending or saving your money as you please.
In America, the system is geared towards equipping each person to serve their fellows in the private sector workplace. More people working means more wealth is produced, and more wealth produced means that people have a higher standard of living. You wouldn’t have a higher standard of living in a country where most people didn’t work, and just relied on the few who did work. There isn’t enough to go around in society where most people don’t work.