"Krugman asks us to confront the possibility that Dutch output per hour sat about 25 percent above the American level in 2000 and has fallen toward it since. He sees this as a reductio ad absurdum: surely the Netherlands was not that much more productive a generation ago. We are quite comfortable with the possibility that the Netherlands was ahead in 2000 and it has been falling behind the US year after year. This is Europe’s productivity problem, which the current-PPP comparison hides and which is the whole point of the last row of our table."
The constant price productivity dataset has much stranger implications than merely accepting the Netherlands was 20% more productive than the United States in 2000:
(1) Italy was also 20% more productive than the United States in 1995.
(2) Italy was also more productive than the United States in 1995.
(2) The United States would have been one of the poorest nations in Western Europe by this metric even the monetary union.
Measuring productivity in 1995 based on 2025 prices is a bad approach for cross-national comparison that leads to the exact paradox Krugman describes; this is treating the US high tech output as less valuable than it was at the time. Using the current price data is a better approximation for what we are actually trying to measure: economic welfare.
We as Europeans shouldn't delude ourselves into thinking cold war Europe was much richer than the United States. This problem is well documented and there have been attempts to rectify it, the PWT dataset explicitly tries to tackle this problem by measuring using an adjusted deflator that allows the prices of products to vary over time and not relying on the tabulation in national datasets as much as the OECD and WB do.
These datasets suggest that Western Europe has been a relatively close follower since 2000, hovering below the US at 80-90% of US productivity and mostly less than that using the current price TFP. It's instructive here to point out (as Garicano et al. have repeatedly stated across posts) that we also shouldn't delude ourselves into thinking economic reform is not necessary (even if wage & GDP growth are fine). To what extent Europe's tech lag is a security problem is related but still largely adjacent to what extent it is an economic problem.
But doesn't this still miss the broader point about standard of living that grounded some of Krugman's original posts on this debate many weeks ago? https://paulkrugman.substack.com/p/is-europe-in-economic-decline I understand that grounding these discussions in the proper evaluation of productivity data is important, but it looks like you're missing the forest for the trees here. Has this productivity gap that you all assert exists led to read differences in standard of living between the U.S. and Europe?
I'm not an economist and I always felt like PPP being more representative since it gives more a meaning on the real power of purchase in a certain time of the people who live in a certain country. But I could be terribly wrong.
But I have a question: you always compare US to France, US to Germany, US to Netherlands, etc. But the US is a federation and the massive increase in productivity is mostly due to California (not even: Silicon Valley). Is it correct or even fair to compare the whole federation to a single EU country? How the number would look like if we compare, say, Texas with France or Louisiana with Italy? Would we end up on the same conclusions? Is it really the EU falling behind in productivity compared to the US or rather compared to California? And does it matter if I can access the same tools that the Silicon Valley produces and use them to increase my productivity ( leaving aside the geopolitcal risk)?
This debate has been enlightening on both sides, but that last post script para is a slight cop out.
Krugman's question is not whether we accept NL was more productive in 2000 and has declined relatively since - it's whether we think it is meaningful to say we think it was 25% more productive (and better off) due to the 2020 prices of the 2000 output. That surely points to some limitations of the constant prices approach that are worth engaging with.
Recent BlackRock/iShares numbers: US trailing P/E 30.76, Europe trailing P/E 18.28. So the market pays about 68% more for a dollar of current US earnings than for a dollar of European earnings: 30.76 / 18.28 ≈ 1.68. Data source: ChatGPT.
Why does this matter for productivity? Assume the same Cobb-Douglas production form in the US and Europe, with the same capital share, but allow different A’s: Y = A K^α L^(1−α). Then capital earnings are proportional to output. So P/E is a forward-looking price of future capital earnings relative to current capital earnings. Since capital earnings are proportional to output, P/E prices expected future output relative to current output. Therefore, holding discount rates, risk premia, payout policy, taxes, accounting, sector composition, and capital deepening constant, the higher US P/E is market evidence that investors expect US firms to turn today’s earnings into a larger future earnings stream. Under Cobb-Douglas, that is evidence of higher expected US productivity growth.
I saw the Krugman reply last night as my first introduction to this exchange. Krugman identifies that US is increasingly tech weighted while in EU we are old industries (my term not intended to be pejorative). My mind immediately focused on this admission. One is at the center of dynamic change; the other is a bystander. Even if we assume wage parity/efficiency, what about all the rounds of wealth creation over the last 50 years? Even if the pension funds are able to invest, what about the ordinary people able generate significant wealth creation? EU/UK can participate- see Sweden.
"Krugman asks us to confront the possibility that Dutch output per hour sat about 25 percent above the American level in 2000 and has fallen toward it since. He sees this as a reductio ad absurdum: surely the Netherlands was not that much more productive a generation ago. We are quite comfortable with the possibility that the Netherlands was ahead in 2000 and it has been falling behind the US year after year. This is Europe’s productivity problem, which the current-PPP comparison hides and which is the whole point of the last row of our table."
The constant price productivity dataset has much stranger implications than merely accepting the Netherlands was 20% more productive than the United States in 2000:
(1) Italy was also 20% more productive than the United States in 1995.
(2) Italy was also more productive than the United States in 1995.
(2) The United States would have been one of the poorest nations in Western Europe by this metric even the monetary union.
https://data-explorer.oecd.org/vis?lc=en&tm=productivity&pg=0&snb=585&vw=tb&df[ds]=dsDisseminateFinalDMZ&df[id]=DSD_PDB%40DF_PDB_LV&df[ag]=OECD.SDD.TPS&df[vs]=1.0&dq=ESP%2BAUT%2BFIN%2BUSA%2BITA.A.GDPHRS..USD_PPP_H.Q...&to[TIME_PERIOD]=false&pd=1995%2C
Measuring productivity in 1995 based on 2025 prices is a bad approach for cross-national comparison that leads to the exact paradox Krugman describes; this is treating the US high tech output as less valuable than it was at the time. Using the current price data is a better approximation for what we are actually trying to measure: economic welfare.
We as Europeans shouldn't delude ourselves into thinking cold war Europe was much richer than the United States. This problem is well documented and there have been attempts to rectify it, the PWT dataset explicitly tries to tackle this problem by measuring using an adjusted deflator that allows the prices of products to vary over time and not relying on the tabulation in national datasets as much as the OECD and WB do.
https://www.rug.nl/ggdc/docs/the_next_generation_of_the_penn_world_table.pdf
https://ourworldindata.org/grapher/labor-productivity-per-hour-pennworldtable
These datasets suggest that Western Europe has been a relatively close follower since 2000, hovering below the US at 80-90% of US productivity and mostly less than that using the current price TFP. It's instructive here to point out (as Garicano et al. have repeatedly stated across posts) that we also shouldn't delude ourselves into thinking economic reform is not necessary (even if wage & GDP growth are fine). To what extent Europe's tech lag is a security problem is related but still largely adjacent to what extent it is an economic problem.
But doesn't this still miss the broader point about standard of living that grounded some of Krugman's original posts on this debate many weeks ago? https://paulkrugman.substack.com/p/is-europe-in-economic-decline I understand that grounding these discussions in the proper evaluation of productivity data is important, but it looks like you're missing the forest for the trees here. Has this productivity gap that you all assert exists led to read differences in standard of living between the U.S. and Europe?
They seem to be missing the cost side.
I tried to tag you in my comment but failed🤷♂️
I'm not an economist and I always felt like PPP being more representative since it gives more a meaning on the real power of purchase in a certain time of the people who live in a certain country. But I could be terribly wrong.
But I have a question: you always compare US to France, US to Germany, US to Netherlands, etc. But the US is a federation and the massive increase in productivity is mostly due to California (not even: Silicon Valley). Is it correct or even fair to compare the whole federation to a single EU country? How the number would look like if we compare, say, Texas with France or Louisiana with Italy? Would we end up on the same conclusions? Is it really the EU falling behind in productivity compared to the US or rather compared to California? And does it matter if I can access the same tools that the Silicon Valley produces and use them to increase my productivity ( leaving aside the geopolitcal risk)?
This debate has been enlightening on both sides, but that last post script para is a slight cop out.
Krugman's question is not whether we accept NL was more productive in 2000 and has declined relatively since - it's whether we think it is meaningful to say we think it was 25% more productive (and better off) due to the 2020 prices of the 2000 output. That surely points to some limitations of the constant prices approach that are worth engaging with.
But shouldn't the relative movements in PPP capture changes in relative terms of trade? This point is made formally by Kohli, JIE, 2004:
https://www.sciencedirect.com/science/article/pii/S0022199603000977
Recent BlackRock/iShares numbers: US trailing P/E 30.76, Europe trailing P/E 18.28. So the market pays about 68% more for a dollar of current US earnings than for a dollar of European earnings: 30.76 / 18.28 ≈ 1.68. Data source: ChatGPT.
Why does this matter for productivity? Assume the same Cobb-Douglas production form in the US and Europe, with the same capital share, but allow different A’s: Y = A K^α L^(1−α). Then capital earnings are proportional to output. So P/E is a forward-looking price of future capital earnings relative to current capital earnings. Since capital earnings are proportional to output, P/E prices expected future output relative to current output. Therefore, holding discount rates, risk premia, payout policy, taxes, accounting, sector composition, and capital deepening constant, the higher US P/E is market evidence that investors expect US firms to turn today’s earnings into a larger future earnings stream. Under Cobb-Douglas, that is evidence of higher expected US productivity growth.
I saw the Krugman reply last night as my first introduction to this exchange. Krugman identifies that US is increasingly tech weighted while in EU we are old industries (my term not intended to be pejorative). My mind immediately focused on this admission. One is at the center of dynamic change; the other is a bystander. Even if we assume wage parity/efficiency, what about all the rounds of wealth creation over the last 50 years? Even if the pension funds are able to invest, what about the ordinary people able generate significant wealth creation? EU/UK can participate- see Sweden.