Friday, September 5, 2014

The U.K. is poorer than each of the 50 U.S. states

Read the title of this post again, and let it sink in.

One more time.

If you're like me, you initially may not believe it. Surely, the data must be manipulated, the numbers exaggerated, the conclusions faulty.

But it's accurate. The numbers are widely available, the methodology is mainstream.

Take the Gross Domestic Product (GDP) of each U.S. state. Divide each state's GDP by its population. That renders a GDP per capita (i.e., per person). Now compare each state's GDP per capita to the U.K.'s GDP per capita. That is the approach taken by Fraser Nelson in a recent column for The Telegraph, a conservative-leaning newspaper in the U.K. Nelson is the editor of The Spectator, a conservative British magazine, and he expanded on his column in a follow-up blog post there.

By Nelson's unremarkable measurement -- which of course rendered some remarkable gnashing of teeth on Twitter and other media -- the U.K. would rank ahead of only one state, Mississippi.

If you take Nelson's methodology and refine it a bit further, the U.K. falls behind Mississippi. That's because when you adjust the numbers for purchasing power parity (PPP) -- which adjusts for differences among the value of currencies, somewhat akin to a cost-of-living analysis -- the U.K. is a bit worse off. Though some things in the U.K. are cheaper, such as health care, other things are more expensive, like food, gasoline, and many consumer goods. These PPP measurements are shown by a Forbes follow-up to Nelson's calculations. If you want to delve even a little further into the numbers you can read more here.

U.K. flag atop Edinburgh Castle
The U.K. flag flies above Edinburgh Castle.
All of these calculations surprised me a bit, though admittedly I hadn't given a specific thought to them prior to the article and blog posts. But it's quite eye-opening in light of Scotland's upcoming independence referendum on September 18.

I've written before about the scale of Scotland's economy. With a projected 2014 GDP of $250 billion, and a population of approximately 5.3 million, Scotland has a GDP per capita of roughly $47,000. That ranks well above the U.K. as a whole; only London and part of southeast England outperform Scotland on a GDP per capita basis. I haven't located any PPP analysis for Scotland by itself, since the calculations are generally made only for the U.K. as a whole. Nevertheless, even with a sizable PPP adjustment, Scotland would rank in the middle tiers of U.S. states.

So, if the U.K. as a whole were a U.S. state, it would rank 51 out of 51. By contrast, if Scotland were a U.S. state, it would rank somewhere in the middle.

With the independence referendum now imminent, the polls have tightened considerably. According to the latest polls, the pro-independence movement has quickly closed to within about 6 percentage points (53% to 47%) of the pro-union forces. One of the main arguments made by those who want Scotland to stay in the United Kingdom has been to foretell economic doom and gloom for an independent Scotland. It's a bad economic move, they say, and possibly a catastrophe. Why would Scotland leave the U.K.'s market, its protection, its overall economic powerhouse position? Surely Scotland would be diminished, right?

But an independent Scotland would be -- in terms relative to U.S. states as well as European nations -- fairly wealthy. Not everything would be rosy, and Scotland would be forced into extremely tough negotiations with the U.K. as it departed. But all told, Scotland would not be in a terrible position. This is especially easy to see when you compare a potentially independent Scotland with the newly-freed Eastern European nations following the end of the Cold War in the early 1990s. Most of those nations are now doing passably well, particularly aided by their inclusion in the European Union and its large market. If Scotland votes for independence, even with hardship following departure from the U.K., it would be in a much better position than those Eastern European nations were in the early 1990s.

I don't want to make too much of these economic figures. GDP per capita is not a perfect measurement. Nor is adjustment for purchasing power parity, which is not an exact science. Let me stress that again: these are not perfect measurements of the U.K.'s wealth in comparison to those of the U.S. states. But in the broad brush tools of macroeconomics, it's no more objectionable than saying many other countries are poorer than U.S. states, such as Peru, Russia, South Africa, or Vietnam, to name countries at random.

Nonetheless, the calculations do provide a rough comparison. One which surprises me. I'm open to arguments that these figures are bogus or grossly misleading, if you're so inclined. Any takers?


  1. It's crap.Read the NYT / TIME etc pieces about this article.
    Actually if the UK were a US State it would have the largest GDP ( the UK is the 4th largest economy in the world) as well as the most populous by far.

    1. I'm happy to engage with you, but you're going to have to provide a bit of analysis.

      The post in Time is embarrassingly bad; I'm actually surprised it hasn't been withdrawn. In fact, the Time post is so poorly done that it actually makes Nelson's argument stronger, rather than weaker. It argued that Nelson should have used PPP instead of just GDP per capita, and that his failure to do so would make the U.K. look better. Actually, when the GDP per capita is adjusted for PPP, it made the U.K. look worse -- from ranking 50th out of 51 states, to 51 out of 51. I was aware of Time's failed analysis before I wrote my post, but it was so bad it didn't offer anything of use to this discussion.

      I'm not aware of any New York Times article on this specific topic. Haven't found one. If you can produce a link to it, I'd be happy to take a look.

      As for your point about the U.K.'s GDP, you seem to be missing the point. First off, the U.K. has the 6th largest nominal GDP. It trails the U.S., China, Japan, Germany, and France. (And by GDP adjusted for PPP, it falls to either 8th or 10th, depending on the measurement.) But the point is that the U.K.'s GDP per capita -- i.e., the amount of money per person -- would rank as the second to last state, if it were part of the U.S. If you then further adjust that GDP per capita for PPP -- which is mostly like a cost-of-living analysis -- then it would rank dead last.