Eve is here. The theme Galbraith discusses here, Paul Krugman’s repeated claim that the United States has achieved much higher productivity levels and thus improved living standards, is more important than it seems. This is a key aspect of American exceptionalism: that the United States has the best and most productive economy. The notion of high productivity in the United States does not stand up to scrutiny given the extent of rentierism, from our deep arms manufacturers to our significantly high and expensive health care costs to floating higher education costs.
Written by James K. Galbraith and Lloyd M. Bensen, Jr., Dean of Government and Business Affairs, University of Texas at Austin. Originally published on the New Economic Thinking Institute website
A response to Paul Krugman’s recent essay on productivity in the United States and Europe leads to a broader question. If standard indicators point in contradictory directions, the problem is probably not so much with the economy as with the indicators themselves.
In his July 5 essay on the economic performance of Europe and the United States, Paul Krugman compares two measures: real GDP per capita over time and a range of purchasing power parity income measures. He points out that the results are inconsistent. One shows that the United States is making rapid progress, and the other shows that Europe is keeping pace. He asks, “Which of these stories is true?” In addressing this question, Krugman overlooks the possibility that the correct answer is “neither.”
Consider Krugman’s graph 1. According to the study, the “average” American will be 60 percent wealthier in real terms by 2026 than he was in 2000, at the peak of the Internet boom. 60 percent. It’s a “real” word, meaning food, clothing, cars, homes, vacation trips, sporting events…the works. Really? Meanwhile, real median weekly wages rose only 10.5%, according to the St. Louis Fed.[1] Krugman’s numbers are either false or skewed to the point of meaninglessness by skewed income distributions. Or maybe both.
Krugman touches on an important reality by pointing to the technology sector’s contribution to measures of U.S. productivity growth and the driving force behind aggressive price adjustments in producing high measured rates of “real growth” in technology. But why is America’s technology productivity so high? Krugman writes that the United States has “most or all of the world’s technology production.” Really? Is Taiwan Semiconductor Manufacturing Corporation not counted? And what will happen to the 250,000 people working at Foxconn in Shenzhen? Does US high-tech productivity have anything to do with the fact that US high-tech companies (such as Apple) outsource their dirty work to China and keep high-value activities at home? There aren’t that many different ways to make semiconductors. There are many different ways to organize your supply chain.[2]
On the issue of high-tech prices, Krugman writes as if his Exhibit 6 were the adjusted price of a “new” product, i.e., a smartphone. But that’s not the case. The caption reads, “Phone hardware, calculators, and other consumer information items.” This overturns the concept that smartphones are “new.” Admittedly, this package is a novelty in recent decades. But everything that is mine existed and had a counterpart in the analog world of the last century: telephones, fax machines, mail, cameras, tape recorders, televisions, calculators, newspapers, magazines, video games, conferences, travel agencies, banking. The measured price drop is from the cost of all these separate gadgets, now integrated in your pocket. Large European technology companies outsource to China, but not as much as their U.S. counterparts.
Indeed, the prices of all these things are going down, and if we treat them as if they had the same consumption weight as they did in 2000, we’ll all look (somewhat) better off. But all of these features now have less economic value than they did a quarter of a century ago.[3] If we start with today’s consumer basket, the benchmark that will eventually be adopted, we will see that high-tech items now account for a smaller share of the budget (and GDP) than before, and that high-tech items will have a smaller weight in the index after the benchmark revision. Today’s income is being spent instead on many things that are more expensive than they were in 2000, including energy, tuition, rent, insurance, interest, and human services. The list is long. And this is the real contradiction of information technology. Great progress disappears from the transactions we call economics. Therefore, it will eventually disappear from the output data as well. This is called the index number problem. It’s contradictory and there is no perfect solution. What we do know is that using base year weights results in exaggeration.
To explain another measure, purchasing power parity, Krugman warns about the “Big Mac Index,” or the price of what he calls “a standardized product sold around the world.” Except it’s not. In the United States, McDonald’s is a roadside fast-food restaurant, a worn-out relic of highway culture. In Europe, as any tourist knows, it is generally closer to the local cafe. Restaurants are experiences, so Big Macs on two continents are not the same. And that’s quite different from Europe’s value-added tax and public health policies and how they affect prices in Europe. This kind of quality problem is inherent in PPP comparisons, without abolishing international comparison projects.
Krugman is a Europhile who believes in the old formula of high regressive taxes and generous social benefits, and clearly thinks this formula still applies. I think he was not warned when I was in Greece in 2010. “Don’t go to a public hospital. You’ll go home in a box.” Perhaps he has never visited a French university where faculty don’t have offices and commissaries are short on toilet paper. Did he recently try to travel on German trains, which are poorly maintained thanks to the “debt brake”? Not to mention the waiting times and the condition of the dilapidated handrails in Britain’s National Health Service. It is nearly impossible to capture all these quality differences with a PPP measure.[4]
Krugman is correct in saying that the comparisons he cites use “completely standard methods.” I don’t mean to criticize statisticians who struggle to measure economic outcomes in a changing world. The problem is that the method is not up to the mark.[5]
Still, a little common sense may come in handy. If the average American had actually been 50% wealthier in 2024 than he was in 2000, would Donald Trump be president today? Would Germany’s AfD, France’s RN, and Britain’s Reformers be at the top of government if “Europe” hadn’t stagnated? There is clearly something wrong with indicators that show that the United States is in a moment of unparalleled prosperity, and similarly, with indicators that show that less wealthy Europeans are enjoying comparable improvements in their lives. Economists who pay attention to these numbers should probably get out more.
So what about America and Europe? Neither country is necessarily poor, but the differences across Europe, such as Denmark and Portugal, or Sweden and Bulgaria, are far greater than the differences between American states.[6] However, anyone who has been there knows that compared to China, both Europe and America are in relative decline. Life in Europe and America is no longer so special. The area of China is approximately twice that of Europe and America combined.
Moreover, there is a good case for now that Europe’s relative decline is faster. This is evidenced by the continued contraction in Europe’s key industries, especially in Germany, especially in automobiles, chemicals and pharmaceuticals, the energy-intensive sectors that account for the majority of Germany’s exports. The U.S. economy, unlike Europe’s, is being boosted by the Permian Basin, the stock market, and the data center construction boom. Europe lacks these crutches, and has the additional drawbacks of paranoid energy policy, a mad rush to rearmament, and even worse Sinophobia than America.[7] These, along with the growing reputation of US Treasuries as a safe haven asset, may help explain the decline in the euro relative to the dollar, which, in at least some (contrary to Krugman) views, is a symptom of the current relative decline.
Europe’s economic strategy was anchored by the neoliberal ideology that was prevalent at the time of the creation of the euro area. This strategy has been an exercise in self-harm for decades. The harm was compounded by Europe’s failure to respect America’s geopolitical goals and define its own interests in the modern world. The idea that Europe only needs more “reforms” (flexible labor markets, early retirement, cuts to public services, debt brakes, etc.) and more “integration” is simply absurd. Europe needs peace with Russia, cooperation with China, and a regional development strategy targeting regions like Romania and Bulgaria, which have stagnated since the collapse of the socialist bloc, and a New Deal like the one that saved the American South in the 1930s. For that, and to save its own industries from collapse, Europe needs gas and oil from Russia and the Middle East, and for that it needs to somehow stop the Ukraine war and the US/Israeli attack on Iran.
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1. According to the same source, real median household income has increased by 16.7% over the same period. 2. Large European technology companies outsource to China, but to a lesser extent than US companies. 3. The fundamental determinants of economic value are scarcity and the degree of monopoly power, both of which are declining in the information sector. This issue is discussed in Entropy Economics: The Living Foundation of Value and Production (Chicago, 2025), co-authored with Jing Chen. 4. Quality issues are not unique to Europe. Any observer would be able to identify similar complaints from the American side. The point is that for most of our economic lives, valuing all the differences that don’t consist of directly comparable goods and services is an intractable problem that can’t be solved by sending a team to record prices in a store. 5. John Maynard Keynes made a similar point, writing in The General Theory: “The fact that net output has increased but the price level has fallen compared to ten or a year ago is a proposition of the same nature as the proposition that Queen Victoria was a better queen than Queen Elizabeth, but she was not a happier woman.While this proposition is not without meaning or without interest, it is inappropriate as material for calculus.”No.4. The entire passage on “Selecting Units” in the chapter should be engraved on the desk of everyone trying to understand index numbers. Keynes concluded that we should limit ourselves to “two fundamental units of quantity: the quantity of money value and the quantity of employment.” 6. Denmark’s per capita income is about twice that of Portugal, and Sweden’s about three times that of Bulgaria. No state in the United States has a median income disparity of more than 2 to 1. When it comes to extremely wealthy people, there are more people in the United States whose net worth is known. In Europe, we are more cautious. 7. I leave the question of which regions are most affected by price gouging to Isabella Weber of the University of Massachusetts Amherst, a renowned expert in this field.
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