Differences in real exchange rates reflect real differences in the value of goods being produced. It quite literally reflects that the marginal euro holder values the dollar and things that can be purchased at it quite high. HDI is certainly not a better comparison. HDI has a 1/3 weighting on education and direct life expectancy comparisons are difficult when the US has significant genetic predisposition to diabetes/obesity relative to the EU.
The Boston Fed discusses this better than I could [0] that the differences in real exchange rates make poorer countries materially poorer across numerous different channels, here's one:
> Consider the implications of a higher relative price of capital goods
for a developing economy attempting to invest in a balanced mix of
machinery and structures. There is no consistent trend in the relative
price of structures across economies: Rich economies can use bulldozers
to dig foundations, but poor economies can use large numbers of
low-paid unskilled workers to dig foundations. But the higher relative
price of machinery capital in developing countries makes it more and
more expensive to maintain a balanced mix: The poorer a country, the
lower is the real investment share of GDP that corresponds to any given
nominal savings share of GDP.
In reference to gini scores, you're absolutely right (~0.45 vs 0.32) - and it means that pay for the median German is better than pay for the median Mississippian (roughly 62% higher median pay in Germany). Mississippi (and the US) need to do more to redistribute. The EU (and Germany) appear to be more output-constrained than redistribution-constrained.
Thanks for the engaged discussion, I am not an economist but find this fascinating to learn about.
My understanding is that paper's key point is the higher the absolute economic output the larger fraction of that output can be re-invested in efficiency/technological improvements, which compounds over time and leads to increasing gaps between different countries. Did I get that right even if very simplified? I'd also be curious to read De Long's most recent book since he says he has significantly changed his opinions in the intervening 30 years and has swung significantly leftwards.
As for the issue of comparing Mississippi and Germany, backing out state-level vs US growth for comparison adds some challenge, but best I can figure for the period since 1997 that I can find data, they both have roughly the same 1.4x real GDP growth, which lags the US at 1.7x. I still take issue with the implication that Germany is somehow doing worse than Mississippi, but agree the US is clearly doing better at growing in absolute terms.
Why are you confident HDI is "certainly not" a better comparison than GNI? You seem to imply that comparing achieved education levels is a bad thing or worthless? Life expectancy is confounded by population-level differences, but I would be surprised though to learn that genetic predisposition to diabetes/obesity accounts for a majority of the difference in life expectancy. In particular, diabetes rates in MS have been increasing rapidly over the last decade but falling in Germany, much more than genetic pool changes would account for. That points to environmental causes - access to healthcare, nutrition, etc.. which are very much within the abilities of the state to impact.
I think it's rather simple. Would an average person rather live in Germany or Mississippi?
Money is a proxy for quality of life, but it's not complete. GDP alone is virtually worthless to average people. Everyone on Earth is searching one thing and one thing only: the best quality of life.
The Boston Fed discusses this better than I could [0] that the differences in real exchange rates make poorer countries materially poorer across numerous different channels, here's one:
> Consider the implications of a higher relative price of capital goods for a developing economy attempting to invest in a balanced mix of machinery and structures. There is no consistent trend in the relative price of structures across economies: Rich economies can use bulldozers to dig foundations, but poor economies can use large numbers of low-paid unskilled workers to dig foundations. But the higher relative price of machinery capital in developing countries makes it more and more expensive to maintain a balanced mix: The poorer a country, the lower is the real investment share of GDP that corresponds to any given nominal savings share of GDP.
In reference to gini scores, you're absolutely right (~0.45 vs 0.32) - and it means that pay for the median German is better than pay for the median Mississippian (roughly 62% higher median pay in Germany). Mississippi (and the US) need to do more to redistribute. The EU (and Germany) appear to be more output-constrained than redistribution-constrained.
[0]: https://www.bostonfed.org/-/media/Documents/conference/40/co...