London is cheaper than Washington DC after all

14th January, 2006

The Undercover Economist – FT Magazine, 14 January 2006

After two years as a roving freelance columnist, I am leaving Washington DC and returning, at last, to Albion’s shores to work for the Financial Times. But how much should I be paid? In moments of delirium I imagine that the FT will invite me to name my own salary, at which point I shall magnanimously refuse to take advantage. But that daydream brings out the Undercover Economist in me: what salary would be fair? Washington DC isn’t cheap, but London is notoriously expensive. The question, “How much more expensive?”, makes less sense than you might think. You can compare the price of particular goods – Budweiser and Coors are cheaper in DC than in London. But I don’t drink Budweiser or Coors, so what does it matter? A sensible price comparison would have to look at the things that I do buy.
This is hard. In London I drink good English beer, but good English beer is expensive in DC so I drink less of it. Decent red wine is cheap enough, so I have that instead. DC offers several places where you can get a good restaurant lunch for the equivalent of £5, so I often eat out for lunch. It would be expensive for me to maintain the habit in London, but I won’t, and that’s no coincidence. It’s impossible to separate what things cost from whether I buy them.
Still, if I am to work out a fair salary I could ask how much it would cost me in London to buy the things I bought in Washington DC. This is guaranteed to deliver a fat relocation allowance: the things I paid for in Washington DC, such as a central-city apartment, would cost the earth in London.
There’s another point to consider. Even living in Hackney I would be less than an hour away from the shopping and the arts of one of the world’s great cities. To get quickly from DC to the heart of one of the world’s great cities requires a helicopter trip to Manhattan. All this assumes that I would not adjust my lifestyle to take advantage of the different prices and opportunities available, and so overestimates the cost of the move.
When relocation consultants estimate the cost of living, they miss out the important stuff. As far as our imperfect methods can tell, the high prices in more expensive American cities outweigh the higher wages paid there. In other words, despite his dollar wealth, the typical inhabitant of New York is poorer in material goods than the typical inhabitant of Kansas City. What does that show? The fact that anyone is willing to live in New York rather than Kansas, despite relative poverty, shows that New York is full of pleasures that relocation consultants’ checklists cannot measure.
Economics has no trouble admitting that the best things in life are free: for us, the greatest joy of moving to London will be the fun of friends and family. They do not charge for the entertainment they provide.
So which is the cheaper city? I would rather have $50,000 (£28,360) in London than $50,000 in Washington DC. So for me, the cost of living in London is lower – not the cost of buying something on a consultant’s clipboard, but the cost of living happily.
Oscar Wilde’s description of cynics – people who know “the price of everything and the value of nothing” – is now applied to economists. The truth is stranger: I don’t know the price of living in London rather than Washington, but the value is clear enough. Perhaps I should ask for a pay cut.

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