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What is the world’s biggest economy?

The answer, of course, is America – whose GDP is still way ahead of China’s. The rest of the top ten is made up of Japan, Germany, France, Britain, Brazil, Russia, Italy and either India or Canada, depending on who you ask.

If, however, you rank according to GDP per capita, a very different top ten emerges – with the list dominated by city states and petro-states. Nevertheless, America still makes the cut, and is unique among the ten biggest economies in doing so.

Therefore, discounting the wealthy minnows, America is the world’s richest economy as well as the biggest.

Or is it?

The concept of a ‘rich country’ is commonly understood to mean that its ordinary citizens are rich – at least in comparison to those of other nations. The trouble with GDP per capita as a measure of prosperity is that it takes no account of the extent to which a typical individual shares in the overall wealth of his or her nation.

Imagine a country whose entire GDP goes to just one person. This would correspond to a Gini coefficient of precisely 1 – i.e. total inequality. Now imagine another country with the same GDP and the same population, but where the Gini coefficient is zero – i.e. total equality. These two countries would have the same GDP per capita, but given the condition of their respective peoples one could hardly describe them as equally prosperous.

In a fascinating article for the New York Times, David Leonhardt and Kevin Quealy compare the incomes of ordinary people in different countries and conclude that America is no longer number one:

“The American middle class, long the most affluent in the world, has lost that distinction.

“While the wealthiest Americans are outpacing many of their global peers, a New York Times analysis shows that across the lower- and middle-income tiers, citizens of other advanced countries have received considerably larger raises over the last three decades.

“After-tax middle-class incomes in Canada — substantially behind in 2000 — now appear to be higher than in the United States. The poor in much of Europe earn more than poor Americans.”

Of course, welfare systems in Europe are more generous than in America (or, depending on how you look at it, more proficient in the impoverishment of future generations). A comparison of the incomes of the poor reveals more about the availability of benefits than real opportunities in the jobs market.

A more useful comparison is between people right in the middle of the income scale:

“Median income in Canada pulled into a tie with median United States income in 2010 and has most likely surpassed it since then. Median incomes in Western European countries still trail those in the United States, but the gap in several — including Britain, the Netherlands and Sweden — is much smaller than it was a decade ago.”

America, therefore, is definitely slipping – and some of the underlying factors do not bode well for the future:

“Americans between the ages of 55 and 65 have literacy, numeracy and technology skills that are above average relative to 55- to 65-year-olds in rest of the industrialized world, according to a recent study by the Organization for Economic Cooperation and Development, an international group. Younger Americans, though, are not keeping pace: Those between 16 and 24 rank near the bottom among rich countries, well behind their counterparts in Canada, Australia, Japan and Scandinavia and close to those in Italy and Spain.”

The ConservativeHome manifesto argues that GDP is a necessary, but insufficient, measure of our national prosperity – and that other headline indicators, focused on median earnings, are also required.

The purists will disagree – figuring that if a country can pay its way by letting its high-flyers fly high, then there’s no need to wait around for the plodders.

But for those of us who believe that national prosperity amounts to the opportunities available to ordinary working people, GDP can only be part of a much bigger picture.

5 comments for: The decline of the American middle class shows why we need a new measure of national prosperity

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