Over the past year, pundits and columnists have been forced to keep asking why Europe’s economy is stagnating and falling behind the US economy. Many of those asking the question are Europeans. One European headline reads “Why Europe is falling behind the USA,” and Le Monde tells us that compared to the United States, “The gap with European living standards has never been wider.”
The gap between US and European living standards has been noticeable for some time, and some European countries aren’t even keeping up with the poorest states in the United States. That is, when we look at measures of income, states like West Virginia and Mississippi compare favorably against European countries like France, Italy, and the United Kingdom.
This has led to what some observers of international macroeconomics call the “Mississippi Question.” The question goes something like this: “is my country poorer than the poorest state in the United States?” The poorest state is presumably Mississippi, and if you’re country is worse off than Mississippi, that’s evidence that your country has nothing to brag about in terms of its standard of living.
Whether deserved or not, the Mississippi economy has been deemed by some as a benchmark for what not to be, and the comparison has become more popular over the past decade. About ten years ago, British journalist Fraser Nelson suggested that when we compare foreign GDP per capita between European countries and US states, we find that the United Kingdom is poorer than Mississippi. This idea has never set well with British policymakers, of course, and the matter has been debated for years with pundits and researchers suggesting different measures that help give us insight into whether or not Country X is indeed poorer than Mississippi. The Financial Times in 2023 asked the question, and concluded that the UK is still richer than Mississippi, but barely.
Indeed, where the UK and other European countries place in this ranking depends on what measure is used. For example, one comparison using GDP per capita, published by Euronews last month, does indeed show Mississippi ranking well ahead of the UK, France, and the EU overall.
On the other hand, comparisons like these have led to debates over whether or not GDP per capita is an adequate measure that really reflects the actual income that residents of a country or state have to play with.
It’s a good question, but most everywhere we look, the more “nuanced” measures also show that much of Europe—including the comparatively rich countries of northern Europe—often rank behind the poorest American states. Even taking into account welfare benefits and income, American states like Mississippi, Louisiana, and West Virginia are registering higher incomes than much of Europe.
Median Disposable Income
Many critics of these international comparisons point to the allegedly generous welfare state and social spending of Europe as evidence that we can’t simply compare per capita GDP among these countries. The assumption is that if we count welfare benefits as income, then Europeans will clearly come in as much better off than the Americans. After all, America spending almost nothing on social benefits, right?
This rationale is wrong pn both counts. Governments in the United States spend lavishly on social benefits programs, which is why we find that the US spends more of its GDP on welfare programs than does the UK, Australia, the Netherlands and several other European-style welfare states. That is, the US is generally like any other welfare state of the “wealthy West.”
So, it’s not shocking when we discover that social spending in Europe doesn’t exactly boost European income levels above American levels. For a specific measure on this, we can consult the OECD’s “annual median equivalized disposable income.” (2021 is the most recent year for complete data.) The OECD page provides a full definition, but it takes into account income received from social benefits: “Disposable income is market income (income from work and capital) after accounting for public cash transfers received and direct taxes and social security contributions paid.”
So, so once we take into account social benefits and taxes, where does the US rank overall? It’s near the very top, coming in at $46,625 behind only Luxembourg at $49,748.
Source: Figure 4.1, OECD Social Indicators.
By this measure, many of Europe’s largest countries are well behind the United States. Germany’s disposable income is 76 percent the size of the US’s, and France comes in at 65 percent of the US total. Britain fares even more poorly: disposable income in the United Kingdom is only 57 percent the size of that in the United States.
Unfortunately, the OECD does not provide a direct comparison between disposable income at the national level and the same measure at the US state level. We can estimate this, however, by looking at US state income compared to the US average.
To do this, we first use the Census Bureau’s measure of median household income for 2021. We find that income in Mississippi ($48,716) was 70 percent of the US overall ($69,717). That makes Mississippi the lowest income state with West Virginia, Louisiana, Arkansas, and Alabama rounding out the bottom five. At the other end of the spectrum is Maryland ($90,203) which comes in at 129 percent of the nationwide measure. The graph shows how far above or below each state is for median income, when compared to the national average:
(We get similar outcomes if we consult other similar measures such as disposable personal income or personal consumption expenditures.)
It’s certainly plausible that income in Mississippi would measure at around 70 percent of the national average, and that states like Maryland—and Massachusetts and New Jersey and New Hampshire—have significantly higher incomes than the national average. This matches up with what we commonly see across a variety of measures on consumption, poverty, and spending, in these states.
Now, we go back to the OECD measure of annual median equivalized disposable income. By that measure, US income is $46,625. If income in Mississippi is 70 percent of the US-wide income according to Census data, then we can estimate that Mississippi’s income level, adjusted for the OECD numbers, is $32,580. The graph below shows that this income level puts Mississippi between Sweden and New Zealand:
In this graph, I’ve included the top five and bottom five US states when it comes to income. In all cases pf the “bottom five” the poorest American states come in above the United Kingdom, Spain, France, Italy, and the OECD overall. Alabama, the fifth poorest state in the US comes in above the Netherlands, Germany, Denmark, and Sweden.
If anything, I’m low-balling the comparative income for poor US states here, because I have not adjusted for the relatively low cost of living in those states. That is, when it comes to the US states, we have not adjusted for purchasing power like we have for the national-level comparisons (using PPP).
So, is Britain poorer than Mississippi? The answer appears to be yes, and it’s yes for many other European countries as well.
Why is this? Well, as we showed above, it’s not because the United States lacks a welfare state. The US has a very large welfare state. On the other hand, the US does often have a lower tax burden than most European countries. Moreover, Americans benefit from the very large free-trade zone that is the United States which very lightly regulates the movement of goods and services from state to state. In contrast, European states still impose many regulations on cross-border trade. For example, the IMF has noted that “Europe’s internal barriers are equivalent to a 45% tariff on manufactured goods and a 110% levy on services.” Overall economic regulation is certainly heavy in Europe as well.
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