Europe free-rides on America

Americans pay for medical innovation, especially pharmaceuticals, and are taken advantage of by Europeans. American consumers are first-users that pay for the development of new technology, which the rest of the world after a while gets for closer to production cost (which is very low for most drugs). The same is true for other spending on medicine that involves innovation, such as dialysis technology, invented by a European but commercialized in the U.S. Swedish dialysis firm Gambro has two thirds of its sales in the U.S.

To give a simple example: Albania has a life expectancy close to as Western Europe (77.6 years). They spend very little on health care. But even Albania can buy generic heart medicine – that is better than anything you could have had in 1995 – for almost free. Not in a hundred years could Albania have developed this on their own: They free ride on the rest of the world.

Western Europe does not free-ride quite as much as Albania, but certainly bear less of their full share of the costs. Even though Europe has a much larger population than the U.S, all of Europe accounted for a smaller share of global pharmaceutical sales than the U.S, which alone accounted for 41% of the world market in 2005, despite having only 4% of world population.

According to this study 57% of European pharmaceutical profits was made in the U.S market, whereas only 24% of American pharmaceutical profits were made in the European market.

The regulated European system pays for less of the cost of medicine, but gets get the same drugs. Drugs in the American free market system costs much more. Consumers in both places get the same quality drugs, but Americans pay much more, and bear the burden of development.

Does this mean the U.S should copy the same system? No. If America stops paying for innovation there is no one to free-ride on. Unfair but true.

The irony is that Europeans root for America to move towards socialized medicine, which would harm them massively. This suggests that ideology is stronger than self-interest, especially regarding abstract concepts.

Value of work and leisure

A commentator asked about the value of leisure time. As it happens I have written a report about this (not yet published).

Based on time diaries (ATUS and HETUS) Americans 20-74 on average have 15.25 hours of sleep, leisure and personal care per day. Swedes this age have 15.55 and Europe (population weighted average of Germany, France, Italy, UK, Spain, Poland, Hungary, Baltic nations, Slovenia, Sweden, Norway, Finland and Belgium) has 16.01.

Europeans have almost 280 hours more leisure per year compared to Americans. Some of it is involuntary (or tax and benefit induced) unemployment and other forms of social insurance. About 40% of the differences in work/leisure are explained by the higher American labor force participation rate.

The question is how much we should value leisure. The hourly wage in the US is $18.4, and $15.6 PPP adjusted for the Euro-area (the latest figures I could find for Europe are for 2002, they have probably gone up a little). On one hand this underestimates the cost, since this is a usually measure for production workers, and does not include many high-earners, self-employed etc.

On the other hand this is the marginal value of work, which is higher than the average (if you have lots of free time you value each hour less than someone who only has a little free time). Also, much of it is involuntary unemployment, people would like to work for $15.6 or even less, but no one would pay them that.

Let us be generous and value each hour at $16. That is about $4400 in leisure time advantage for Europeans compared to Americans. This accounts for third of the raw GDP gap between Europe and the US.

What about the demographically adjusted gap? I estimate that to be $19.600 per capita. However European-Americans also work more, and have less free time. According to the American Time Use Survey non-Hispanic whites had 65 hours less leisure than the US average. So Europeans enjoy a 342 hour advantage in leisure. For the average value of free time to account for the Europe-US difference, it should be $57 per hour. I don’t value my free time that much, do other people? At the European hourly wage of $16 their advantage in leisure is worth $5.500 per person, accounting for 28% of the gap in income between Europeans and European-Americans.

I (it should be emphasized subjectively) believe this overestimates the differences. Americans, the British and Scandinavians have good norms, and enjoy and take pride in their work. In all societies people who have intrinsically rewarding jobs, such as teacher, policemen or researchers, derive less dis-utility from working. The main achievement is for society and individuals to take pride in work that is not intrinsically rewarding, but nonetheless valuable for society (administrators and welders are needed).

According to the latest available World Value Survey 87% of Americans, 83% of Brits, and about 60% of Swedes say that they take “a great deal” of pride in the work they do.

Other European countries, France and Germany in particular, have after decades been influenced by Social Democratic ideology in considering work a form of exploitation that should be avoided.

The corresponding figure for Italy is 30%, Netherlands 26%, Germany 18%, France 15%.

In a healthy society working and doing something (anything) well, is part of life satisfaction and a purposeful life. Like Marx I believe that alienation is a huge problem, but unlike Marx I don’t believe it is the structure of work in a capitalist society that leads to alienation of production workers, it is Marxist ideology itself!


For the benefit of the readers of a certain Swiss-American, I have included some additional groups that were not central to the comparison with western Europe. All the data is ancestry group, except Indians and Somalians, which are foreign born only (no data on ancestry). Groups marked with star have a high percentage of immigrants.

Some things to note:

1. Russia has the second highest per capita income. Many Jewish Americans come from Russia (which, at the time of Jewish immigration, covered most of Poland, Ukraine and the Baltic states). My guess is that many Jewish immigrants that say they are from Russia are probably from one of the these countries. An estimated half of the Jewish people of the world lived in what was Russia in 1900. 28% of Russian-Americans have graduate degrees, compared to 10% for the U.S population.

2. South Africans do very well in the US. 24% have graduate degrees.

3. The West-Asian immigrant groups (gold chains and hair on our chests) combine high average income with high poverty rates.

4. For Indians 41% have graduate degrees. Wow. I believe Indians are the richest of the larger groups.

5. Somalians have not done well in the US. Their per capita income is very low. Only half work. The poverty rate is 53%. This is noteworthy for me, because the Somalians in America are often presented as a success story in Sweden (I will write a full post about Somalians at some point).

6. My home country of Iran does well. In contrast Iranians in Sweden have only 40-50% employment rate, and very low average income (but also high variance). Selection or policy? I think the later.

7. “Americans” don’t do well. I included all of this group in the British, although I suspect based on location that a few are African-American. Could not find any data on this (too lazy to download the raw data and find out).