24 February 2012

Why is Britain so expensive (the US so cheap)?

For many years, I have wondered why the cost of living in Britain is so expensive, not just compared to the US with its massive markets and cheap resources, but also compared to the Netherlands -- a densely-inhabited country of fewer than 20 million people.

My Scottish friend says "that's because capitalism was invented here, and we're good at screwing the last penny out of each other," but that explanation assumes market power to make extra on the one hand, and a collection of wealth (to those who are better at "screwing") on the other.

But that explanation had the seed of another idea in it. Perhaps the cost of living in the UK is so high because it reflects the TRUE cost of living. In the US, for example, labor costs are lower because pensions are not fully paid; resource costs are lower because environmental damages are not included in price; food costs are lower than they would be if negative externalities were included; housing costs are lower because houses are built to last 40-50 years instead of 100+ years; and so on...

Costs may be lower in the Netherlands due to their efficient bureaucracy (I registered my new address in less than 5 minutes), their cultural homogeneity (lower transaction costs), their openness to trade, and their housing density.

Does this make sense? Your thoughts?

6 comments:

Ian W. said...

I can't speak for why the US is so cheap but after living in London for 4 years I've thought about this a lot - it's actually what drew me back to the US. In the end, I think your Scottish friend is correct - for all its benefits Britain is an incredibly greedy place that generally lives up to Dickensian stereotypes. And it's so accepted, culturally, that people seem perfectly alright with spending virtually every penny they make on housing, food and beer (more or less).

Not sure what their savings rate is but I imagine it lags the US even at the height of our recent boom. Salaries are fairly low by US standards, yet costs and taxes are huge. This may be in part due to bureaucratic inefficiencies, which definitely exist, but it seems to come down to the nation being good at screwing each other over, while having very low expectations for saving and upward mobility. Though I'm sure a lot has been said about this in more appropriate forums.

mac said...

I lived in NL- some thoughts on what keeps it (relatively) inexpensive:

- risk tolerance: 80/20 thinking makes medical costs dramatically lower (less meds, less 'over treatment, home birthing). Less litigation which lowers transaction costs
- high productivity & efficient govt: high overall education level and productive workers
- population density, as you mention
- lastly, lower 'service levels'. You get what you pay for, and it isnt a 'customer needs/cust svc' oriented place. So comparing US to NL is often not apples to apples

David Zetland said...

@Ian -- yep...

@mac -- agree. Thanks for the clarity. My motorcycle won't start, and there's nothing like AAA from the US to come see it. Looks like it may cost me 200 EUR to get a mechanic on site. The Dutch solution, of course, is to rely on friends, so I am madly networking to try to find someone...

Mr. Kurtz said...

Here is one thing that occurred to me: England, like Japan (another impossibly expensive place, at least in cities) values tradition much more than many other places. With tradition (like narrow winding streets, and peculiar cultural institutions that serve no practical purpose)these things cost money to maintain, and create many inefficiencies of their own.
The English (and Japanese) feel, consciously or not, that they receive good value for the costs these things impose, by having a better sense of who they are and where they live.
Compare this to most of the urban spaces west of the Great Divide, which are (at least in the short term) utilitarian, but tragically charmless and alienating.

Anonymous said...

Let me give this a go...since I have lived in England for a total of nine years on three different occasions from 1973 through 1994, and have traveled extensively throughout Europe and the rest of the world...to include living in Japan for five years from 1979 to 1983. It is simple...the major difference is capitalism verses socialism. In England every wage earner gives a significant portion of their wages to the British Government, which in turn does a very inefficient job of redistributing through multiple entitlement programs to many people who contribute less than they take. Lets start with the lowest wage earners first...0 to 35,000 LBS...20% income tax; 11% national insurance tax; 20% Value Added Tax on good labor and commodities; TV tax; Property Tax (rates);Road Tax;Business tax, and lets not forget gasoline tax. Now by my calculations that means even the lowest wage earner is paying the British Government over 70% of their earnings in some form of tax. In simple mathematical terms that means that the lowest British wage earner only has 30% or less to spend on Housing;food; clothing; energy (and lets not forget VAT on Energy) insurance; transportation, and savings?!?! Are starting to get my point? Now for those wealthy SODs...you know...the ones who make more than 35000 LBS...they get to pay 40% income tax along with all the other taxes mentioned above. That means about 90% of their earnings go to the British Government. Who isn't motivated to go out and start a company in that environment. It's no wonder wages are low...business recover what they have lost in taxes by minimizing the wages they pay. Also, lets not forget that taxes are costs that merchants pass directly on to the buyer. So...to summarize...the average British citizen gives 70% plus of their wages to fund British welfare entitlement programs...that don't seem to be working all that well. With the remaining 30% or less they get to purchase merchandise that has been grossly inflated by the addition of tax costs passed onto the buyer. That means the real buying power of their 30% is reduced by at least a third if not more. How am I doing so far? By the way, this is the exact same system that Progressive American Politicians want to bring to the U.S. as fast as they can possibly get it here. Hope this helps!!!

Anonymous said...

Basically, overhaul wages are too low in the u.k in the private sector and in the public sector; they just don't want to pay a decent wage here and the british people just seem to put up everything the government throws at us... We've got to be more like the 'french'-strike and protest until it becomes a fairer country to live in! And I know I'm right!!!