Monday, January 11, 2010

Even Nobel Prize Winners Skew The Data

Today's NY Times has one of the dumbest columns Paul Krugman has ever written.

Actually, Europe’s economic success should be obvious even without statistics. For those Americans who have visited Paris: did it look poor and backward? What about Frankfurt or London? You should always bear in mind that when the question is which to believe — official economic statistics or your own lying eyes — the eyes have it. In any case, the statistics confirm what the eyes see.

It’s true that the U.S. economy has grown faster than that of Europe for the past generation. Since 1980 — when our politics took a sharp turn to the right, while Europe’s didn’t — America’s real G.D.P. has grown, on average, 3 percent per year. Meanwhile, the E.U. 15 — the bloc of 15 countries that were members of the European Union before it was enlarged to include a number of former Communist nations — has grown only 2.2 percent a year. America rules!

Or maybe not. All this really says is that we’ve had faster population growth. Since 1980, per capita real G.D.P. — which is what matters for living standards — has risen at about the same rate in America and in the E.U. 15: 1.95 percent a year here; 1.83 percent there.
First, a little math. Compounded over 30 years, the difference between 1.95% growth and 1.83% growth is about 6.5%. That's about $2,000 more in per capita income growth, which I would call significant, although not the difference between defining rich and poor.

But, it's an even more impressive that the U.S. grew faster when you consider that the U.S. starts with significantly higher income than the EU average, and you would generally expect the lower income group of countries to grow faster.

Plus, he notes the difference in population growth. Our population is younger and has higher immigration, groups that tend to have lower per capita incomes than the older and native born. That should depress our per capita numbers, and make it harder for us to outgrow the EU.

So, does that mean the U.S. is better than Europe. No, it is different, and it depends on your preferences which system is better. I think both are great places, and this is a good illustration of what economists call the equity-efficiency trade-off.

Krugman is putting words in other people's mouths and being very deceptive with the data.

Harvard economist Greg Mankiw shows the average income data Krugman doesn't cite here.

[Hat tip: BFC Research Associate Andrew Padovani who prefers Greg Mankiw to Paul Krugman. I usually have slight preference for Krugman over Mankiw, so Andrew was sure to point this out to me. Post slightly edited from original.]

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