According to the IMF, America’s GDP per capita (in PPP terms) is 35.6% higher than in Canada. In a recent post, I pointed out that to the casual observer, Canadian living standards seem fairly close to those in the US, albeit slightly lower. In this post I’ll try to address the question of why the gap in GDP per capita appears to be much larger than the gap in living standards.
Health care is a good place to start. The US spends just under 18% of GDP on health care, whereas Canada spends a bit less than 12% of GDP. In my view, much of the US spending on health care is pure waste, caused by heavy explicit and implicit subsidies, combined with severe restrictions on the supply of health care. But even if you assume that 100% of American health care spending is useful, the gap in spending could help to explain why the perceived gap in living standards is smaller than the gap in per capita GDP. A tourist visiting Canada notices things like houses, home appliances, cars, clothes, restaurants, infrastructure, and other aspects of living standards. Unless they visit a hospital, they are unlikely to notice the part of GDP that goes into health care.
A similar argument applies to military spending, an area where the US outspends Canada by 2.1% of GDP (3.4% vs. 1.3%). Once again, there are differing views as to whether this spending is useful or wasteful. But there is little doubt that military spending doesn’t factor into perceived living standards.
Those two factors alone can explain 8% of the 35.6% gap in GDP/capita. But there are numerous other areas that also might help to explain a portion of the gap. According to ChatGPT, the US spends 6.0% of GDP on education and Canada spends roughly 5.2% or 5.3% of GDP (both public and private). Again, tourists might not notice that difference.
I recently got a note that my umbrella insurance premiums would almost double next year. They cited this reason:
Rising personal injury settlements and litigation costs: California is known for high jury awards and legal settlements in personal injury cases, such as those from auto accidents or premises liability. This is influenced by factors like California’s comparative negligence laws and the absence of caps on non-economic damages in many cases, leading to larger payouts.
Driving around California, you see hundreds of billboards encouraging people to sue for real or imagined slights that they might have received. You got drunk and smashed up your car? Sue the bartender. I suspect that Canada has a less predatory legal system, which might contribute to higher living standards for a given quantity of GDP. (Please correct me if this is incorrect—I did not see those billboards on a recent trip to Canada.)
The US has a much higher crime rate than Canada, and as a result it probably spends more on crime prevention. This includes obvious expenditures such as police and prisons. But crime also has indirect effects, such as making urban living in Canada more pleasant than in many American cities. Metro Chicago is richer than Toronto, but urban crime affects how Chicago is perceived. This factor might also contribute to the perception that America’s living standards are not quite as high as you’d expect for a country that is 35.6% richer than Canada, which is itself a relatively affluent country by global standards.
In the end, I estimated that US living standards—in purely material terms—seemed more like 10% or 20% higher than in Canada, not 35.6%. I’d be curious what other people think, especially those of you with substantial experience traveling in both countries.
PS. Canada is a perfectly normal developed country. The most interesting question is not, “Why is Canada poorer than the US?” Rather, the key question is, “Why is the US richer than almost every developed country other than Switzerland and Norway?”
