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Standard of Living

Mr Gordon argues that GDP comparisons tend to overstate America’s living standards and understate Europe’s. For example, America’s climate is more extreme than western Europe’s, so more has to be spent on air conditioning and heating to attain a given indoor temperature. This extra spending boosts GDP, but does not enhance welfare. More of America’s GDP is also spent on home and business security, largely because of a higher crime rate. In most of Europe, such spending is less necessary. The huge cost of keeping 2m people in American prisons (a far bigger proportion of the population than in Europe) also bolsters America’s GDP relative to Europe’s, but not its welfare.

Another factor is the greater dispersion of America’s population in vast, sprawling metropolitan areas with few transport options other than the car. This is partly the result not of private choice but of public policy, such as subsidies to suburban motorways and a starving of public transport, or local zoning laws that limit the minimum size of residential developments. It leads to higher spending on roads and energy, and hence higher GDP. In Europe the convenience of more compact cities and frequent train and bus transport does not count towards GDP figures.

From The Economist, “Chasing the Leader”

SUVs are good for the economy.