Piketty on why stated U.S. GDP is so high

Thomas Piketty’s Capital in the Twenty-First Century addresses the apparent paradox of why U.S. GDP is so high yet Americans don’t seem to be living commensurately larger than Europeans:

the most recent available survey shows that while some European prices (for energy, housing, hotels, and restaurants) are indeed higher than comparable American prices, others are sharply lower (for health and education, for instance)

if a private health insurance system costs more than a public system but does not yield truly superior quality (as a comparison of the United States with Europe suggests), then GDP will be artificially overvalued in countries that rely mainly on private insurance. Note, too, that the convention in national accounting is not to count any remuneration for public capital such as hospital buildings and equipment or schools and universities. The consequence of this is that a country that privatized its health and education services would see its GDP rise artificially, even if the services produced and the wages paid to employees remained exactly the same.

Related: a June 2013 posting on Denmark’s bicycle infrastructure (GDP discussion at the bottom). The U.S. also spends a huge amount on litigation compared to most European countries (see this posting on divorce in Denmark, which is pretty typical for Civil Law jurisdictions). Lawyers arguing over who gets to own what are a big component of our GDP but the arguments don’t make Americans as a group better off.

How about GDP growth? Americans are champions and the Japanese are laggards, right?

Piketty reminds us to look at population growth as well:

it is important to decompose the growth of output into two terms: population growth and per capita output growth. In other words, growth always includes a purely demographic component and a purely economic component, and only the latter allows for an improvement in the standard of living. In public debate this decomposition is too often forgotten, as many people seem to assume that population growth has ceased entirely, which is not yet the case—far from it, actually, although all signs indicate that we are headed slowly in that direction. In 2013–2014, for example, global economic growth will probably exceed 3 percent, thanks to very rapid progress in the emerging countries. But global population is still growing at an annual rate close to 1 percent, so that global output per capita is actually growing at a rate barely above 2 percent (as is global income per capita).

First, the takeoff in growth that began in the eighteenth century involved relatively modest annual growth rates. Second, the demographic and economic components of growth were roughly similar in magnitude. According to the best available estimates, global output grew at an average annual rate of 1.6 percent between 1700 and 2012, 0.8 percent of which reflects population growth, while another 0.8 percent came from growth in output per head.

Such growth rates may seem low compared to what one often hears in current debates, where annual growth rates below 1 percent are frequently dismissed as insignificant and it is commonly assumed that real growth doesn’t begin until one has achieved 3–4 percent a year or even more, as Europe did in the thirty years after World War II and as China is doing today. In fact, however, growth on the order of 1 percent a year in both population and per capita output, if continued over a very long period of time, as was the case after 1700, is extremely rapid, especially when compared with the virtually zero growth rate that we observe in the centuries prior to the Industrial Revolution.

Indeed, according to Maddison’s calculations, both demographic and economic growth rates between year 0 and 1700 were below 0.1 percent (more precisely, 0.06 percent for population growth and 0.02 percent for per capita output).

The most spectacular reversal no doubt involves Europe and America. In 1780, when the population of Western Europe was already greater than 100 million and that of North America barely 3 million, no one could have guessed the magnitude of the change that lay ahead. By 2010, the population of Western Europe was just above 410 million, while the North American population had increased to 350 million. According to UN projections, the catch-up process will be complete by 2050, at which time the Western European population will have grown to around 430 million, compared with 450 million for North America. What explains this reversal? Not just the flow of immigrants to the New World but also the markedly higher fertility rate there compared with old Europe. The gap persists to this day, even among groups that came originally from Europe, and the reasons for it remain largely a mystery to demographers. One thing is sure: the higher fertility rate in North America is not due to more generous family policies, since such policies are virtually nonexistent there.

Should the difference be interpreted as reflecting a greater North American faith in the future, a New World optimism, and a greater propensity to think of one’s own and one’s children’s futures in terms of a perpetually growing economy?

Related: a June 2004 posting about whether a large number of U.S. children born into poor families might actually be a sign of optimism; an August 2008 posting about Gregory Clark’s A Farewell to Alms.