No, Europe Isn't "Falling Behind" America

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Summary

The “Europe is falling behind the US” narrative largely rests on a GDP-measurement quirk, not reality. When you compare purchasing power (what people can actually buy) rather than current-price GDP, Europe has kept pace with America, especially adjusted for working hours. US productivity has grown faster, but those gains concentrated in tech and didn’t translate into broadly better living standards.

Key Insight

  • The whole debate hinges on GDP methodology, not raw output. You can’t use the EUR/USD exchange rate (distorted by the dollar’s reserve-currency status), so economists use purchasing power parity (PPP), a basket of goods priced in each country.

  • Two ways to track PPP over time, and the choice changes the story:

    • Current price series - re-price the basket every year. Captures actual purchasing power.
    • Constant price series - price once, then extrapolate using each country’s real GDP. Better at capturing productivity, but inherits each statistical agency’s inflation assumptions.

  • US statistical agencies adjust inflation down more aggressively than anyone (hedonic quality adjustment). Example: US says TV prices fell 85% (2005-2015); Japan says they rose 8%. Net effect, the US consistently reports lower inflation and therefore higher real GDP growth.

  • This produces absurd back-cast results. The OECD’s constant-price series (2021 anchor) implies Western Europe was 30% bigger than the US in 1990 and even Italy was 20% more productive, clearly false. The only way to fit America’s overstated growth is to assume it “started behind.”

  • The knockout argument: the pessimists conflate productivity with purchasing power. If you care about living standards, the current-price PPP series (e.g. the Penn World Table) is the right tool, and on it, Europe basically matches the US.

  • The paradox explained: faster US productivity (mostly tech) didn’t lift living standards meaningfully, suggesting gains went to producers/shareholders rather than workers. Cheaper iPhones benefited consumers on both continents equally.

  • Strategic takeaway: “become more like America” is not the obvious fix for European living standards that many EU policymakers assume.