Wednesday, January 19, 2011

Purchasing power USA vs. D

In my campaign to convince Americans to switch to renewable power, the higher cost is often an issue. I have long wondered why Americans are so worried about high prices when Europeans aren't.

One of the most interesting things about my visit to the US last summer was the feeling that prices were somehow much different. For instance, it only cost me around 260 dollars a week to rent a Prius, which – as I found out – starts at 22,800 dollars in the US. In Europe, the Prius starts at 25,750 euros, equivalent to over 34,000 dollars at the current exchange rate. In other words, the same car costs 50 percent more in Europe.

I wondered if that might be an anomaly with that particular car, but it's not. The Lexus RX 450 costs 43,000 dollars in the US but nearly 60,000 euros in Europe. Maybe it's just Asian imports? No, the Porsche Cayenne S Hybrid apparently goes for just under 68,000 dollars in the US but costs 79,000 euros in Europe. The Mercedes C 300 sells for 34,000 dollars in the US with all the extras, but it will cost you around 38,000 euros in Europe.

I wondered if the reason might also be that labor costs are greater in Europe, but it turns out that cars made in the US are simply of lower quality. For instance, Volkswagen now plans to sell the Passat in the US for around 20,000 dollars, with the cheapest version in Europe going for 24,425 euros (around 32,000 dollars). According to this report (in German), the car has a cheaper interior than the European version – though I have a hard time imagining a 50 percent price difference based on a cheaper dashboard, etc.

Under the hood and under the chassis, so to speak, we find additional reasons. For instance, the Volkswagen Jetta apparently has a cheaper rear axle in the US. I don't have all the details, but we begin to understand why Volkswagen has a reputation for being unreliable in the US – a reputation that will come as a bit of a surprise to Europeans.

It's not just cars either. The picture up above shows a 250 gram package of organic cherry tomatoes that I bought at a normal (not especially cheap) grocery store last fall. In the US, I had sticker shock when I saw what a pound of cherry tomatoes, which my daughter loves, costs. For roughly 453 grams, you have to pay four dollars, and they're not even organic -- that's nearly 0.90 dollars per 100 grams. The package above cost the equivalent of 1.67 dollars for 250 grams or around 67 cents. The non-organic tomatoes would, of course, be significantly cheaper.

Now have a look (and click to enlarge) at the second picture (yes, I told the people at my local bakery that I'd like to take a picture of their shelves). I was amazed to see that a loaf of bread in the US can easily cost four dollars, though you can certainly get a loaf of white bread at Walmart for closer to a dollar (see this discussion). If I remember correctly, a loaf of bread generally weighs around 24 ounces in the US, with some loafs coming in at 20 ounces. To make the math easy, 24 ounces is basically 1.5 pounds, which puts us at roughly 680 grams.

As you can see from the photo, you could get a loaf of K & U Sonne weighing 750 grams for 2.70 euros, which is basically 3.50 dollars, so not much cheaper than in the US. But the 1 kg loaf of Wiesentäler Brot to the left and above it is the one I usually buy (it makes really fantastic toast when it's a few days old); it runs me three euros. I don't think a fresh bakery can quite compete with loaves of white bread from Walmart, but fresh bread in Germany seems to be a good deal cheaper than the prepackaged stuff you get in the US.

Of course, prices vary wildly. For a liter of milk, I can pay 0.50 euros or 1.20 euros. The former puts me at about 2.50 dollars per gallon. But especially for fresh produce, the prices in the US were enough to make me want to eat meat. One reason may be that the produce section is often highly refrigerated and may even have tiny sprinkler systems in the US, whereas Europeans just set their produce out without any air conditioning or hydration system even in the summer.

So it's really hard to compare. When it comes to income tax, for instance, Germans are already paying 25 percent income tax at 48,000 euros, and the peak tax rate has already reached nearly 40 percent. In the US, at the equivalent 63,000 dollars you are only paying 17 percent income tax, and your peak rate is 25 percent. In return, universities are (practically) free in Germany, etc.