There we were, hopelessly lost in the New York subway. The clock was ticking; we were supposed to meet some friends for lunch and there was no option but to swallow our pride and ask for help. I approached two young women loaded with shopping bags. ‘No idea, mate. We’re from Brighton.’ When we eventually crawled out of the subway, my wife and I decided to play a new game: spot the British shopper. The women were especially entertaining — they hunt in packs, stay in slightly grotty hotels in Midtown, camp out at Bloomingdale’s, Macy’s and the cheap electronics shops on Broadway, and generally behave like children in a sweet-shop. For Manhattan may be prohibitively expensive by US standards, but to Brits it is a shopping heaven.
Identical goods sold by identical retailers cost much less in America. Even I was shocked to discover last weekend that a top-of-the-range video iPod costs $379.99, or £204.33 at current exchange rates, from Amazon.com, the US retailer; but that on Amazon.co.uk, the UK website, it sells for £268.99. Clothes, books, newspapers and consumer goods are bargains in America; so are all kinds of services, from manicures to eating out. Cars are also cheaper, as of course is petrol, which still only costs 37p a litre in America despite the rocketing oil price. Outside the big cities, hotels are also extremely good value.
The best way to find out just how much cheaper New York is compared to London is to hit the shops — and that is exactly what David Hillier and George Johns, economists at Barclays Capital, did in a recent study. They surveyed identical goods and stuck to shops of the same brand in similar locations, such as HMV on Fifth Avenue and Canary Wharf. They sampled clothes from Gap, toys from Toys ‘R’ Us, furniture from Ikea, newspapers, food, drink, cars, computers and CDs. The results were dramatic. Prices are on average 21 per cent cheaper in New York than in London excluding tax, and 27 per cent including tax. Sometimes the difference is eye-watering: a BMW sports utility vehicle is £10,834 cheaper in New York. Of the 84 different goods sampled, 64 were significantly cheaper over there.
Economists have long been intrigued by the persistence of these huge price differentials, which survived Margaret Thatcher’s economic revolution of the 1980s and the internet revolution of the 1990s unscathed. The recent decline in the value of the dollar has obviously helped, but doesn’t explain why goods and services were already a bargain before the greenback’s weakness.
A far more important reason for the price difference is that Britain is a higher-cost economy than America, and higher costs are eventually passed on to consumers. Most of these costs can be blamed on misguided government policies, though some are caused by the fact that Britain, unlike America, is small and densely populated.
Taxes and red tape are the largest artificial cost inflicted on the British economy. This is especially true for petrol, where some 70 per cent of the pump price is tax. Britain’s relatively high levels of VAT accounts directly for only about a fifth of the price gap. But the real impact is indirect: high taxes on petrol entail higher transport costs; higher business rates increase business’s fixed costs. The poor in Britain pay more tax, forcing employers to pay higher wages to attract workers. Britain’s relatively high minimum wage is another factor, while our planning laws also restrict the supply of retail and business space, forcing up rents, which are also passed on to consumers.
Retailers in the US can easily find cheap land on which to build their stores, hire inexpensive immigrant workers, and transport their wares very cheaply. British supermarkets are not to blame for higher prices; they are just operating with much greater constraints. Tesco makes only 3p profit out of every £1 spent in its stores; Wal-Mart has no choice but to charge more in its Asda stores for equivalent goods than it does in the US.
The European Union’s destructive influence is another important factor. American farmers are swamped with hand-outs, but the idiotic EU Common Agricultural Policy is immeasurably worse. Patrick Minford, the Cardiff Business School economist, also points to the EU’s many hidden barriers to trade in manufactured goods. Brussels has theoretically cut direct tariffs but continues to discourage cheap imports to protect European manufacturers by threatening importers who charge low prices with ‘anti-dumping’ fines. This has raised the price of furniture in the EU by up to three quarters and the price of television sets by around two thirds. Neutering foreign competition in this way has ensured that markets here remain less competitive than in the US.
Together with the red tape and higher costs, these restrictions help to explain why the average American enjoys a higher quality of life than the average Brit. They also mean that hordes of eager British shoppers will continue to brave the New York subway in search of bargains for a very long time yet.