Economist Writing Every Day

Have you seen this chart? I certainly have. It floats around on social media a lot. The chart seems to indicate that poor Americans are better off than the average person in most other rich countries. Roughly equal to Canada and France, and better off than Denmark or New Zealand.

When I’ve asked for sources in the past, people usually aren’t sure. They remember downloading it from somewhere, but they can’t recall where.

But I think I found the source: it’s this article from JustFacts. After seeing how they calculated it, I’m skeptical that it provides a good comparison of poor Americans to other countries.

Here’s what the chart does. For most countries, it uses a World Bank measure of consumption per capita. They then convert that to US dollars using PPP adjustments. For the poor in the US, they use a consumption estimate for the bottom 20% of households (Table 6), and then divide by the average number of people per household. For the poor in the US, the average consumption for 2010 was an amazing $57,049, more than double the poverty line! That’s about $21,000 per poor person.

How is this possible?

Importantly, the consumption data for US households includes the value of government services, such as healthcare and food purchased with food stamps. Healthcare is obviously a big one: for most poor Americans, this is mostly paid for by Medicaid. I think there is an argument for including it, but here’s the big problem: this chart excludes government healthcare spending for all the other countries!

This is why you get such weird numbers in the chart. Consumption per capita in Denmark is only $18,000? How can that be? GNI per capita (PPP) in 2010 in Denmark was over $43,000. That $18,000 figure from the World Bank only includes private spending by households. Since private households spend very little directly on healthcare, you are ignoring it for the Danes. But you including it for poor Americans. This chart also has the weird result that poor Americans only consume about $10,000 less than the average American: do we really believe that? Doesn’t pass the smell test.

So how could we improve the chart? Two ways are possible. One is you could try to back out government spending on poor households. But I think that’s the wrong approach. Poor Americans certainly get this consumption, and they value it!

The better approach, I believe, is to calculate a more comprehensive measure of consumption for the other OECD countries. Since I don’t know of a good one off-hand (anyone help on this?), I made one myself. It’s pretty simple. Start with GNI per capita (PPP for 2010) — I use this instead of GDP, because of some problems I’ve discussed before. And then try to back out any government spending which isn’t included in that consumption number for poor US households. The biggest one is military spending. This is not to say that citizens don’t benefit from military spending, but it’s not included in the $21,000 figure for poor Americans.

Backing out military spending doesn’t actually make that much of a difference. Even for a country with a big military, like Israel or the US, it’s only about 5-6% of national income. For many OECD countries, it’s only 1-2% of national income. It’s a worthwhile adjustment, but it doesn’t change the picture much from using straight GNI numbers. Possibly some other spending could be excluded, but I think this one change gives us a decent picture. And here is the picture (I stick with 2010 just like the chart I am responding to).

And with this new chart we can see that the US poor (highlighted in red) are… really on the low end. Similar to the average Hungarian and Estonian, certainly richer than the average Mexican, but this seems to fit much better with reality: the average Dane is more than twice as well-off as the poorest Americans.

To me, this seems like a much fairer comparison. And it makes a lot more sense. But what do you think? What other government spending should we subtract from GNI to get a more accurate measure? Leave a comment and let me know! Or, if you agree, you can start posting my revised chart on social media (but please, always cite your sources).