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[quote=Anonymous][quote=Anonymous]OP--you're pretty quick to adopt sweeping conclusions without thinking too much.  Nobel Prize winner Paul Krugman had a long article about why this conclusion about Europe isn't accurate from his view.

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#PaulKrugman
But how accurate is this perception of European underperformance? While there are valid reasons to be concerned about Europe’s future, the trash talk reflects ignorance of the real issues. And even economically sophisticated, Draghi-type discussions are, I would argue, misleading. Europe is simply not poor the way Mississippi is poor. Moreover, by many measures — arguably the most important measures — Europe is, in fact, keeping up with the United States.

Does Europe have a lower standard of living than the U.S?

When comparing the economic performance of various countries, economists often begin with measures of gross domestic product (GDP) per capita at purchasing power parity. GDP is the total value of goods and services produced in a country, and GDP per capita is a relevant measure of the country’s overall standard of living. “Purchasing power parity” (PPP) corrects for differences in national price levels, which is especially important because fluctuations in exchange rates between currencies, such as the relative values of the dollar and the euro, can cause temporary fluctuations in measured GDP that have nothing to do with underlying economic performance.

Here is PPP GDP per capita in the three big European Union economies as a percentage of the United States over the past 25 years:

Chart 1

European economies do produce less per person than the U.S. does. Indeed, as many observers have pointed out, France and Italy have GDP per capita comparable to poor U.S. states like Alabama:

Chart 2

But let’s step back for a moment and ask: how reasonable is it to compare the economic performance of France, and Europe in general, with the poorest states in America?

Let’s start with impressions: France definitely doesn’t look or feel as poor as Alabama or Mississippi. Granted, subjective impressions are no substitute for hard data. But the “walking around test” isn’t worthless, either. If the look and feel of an economy don’t match up with the story told by standard numbers, that’s at least a gut check, a reason to look for the sources of the dissonance.

More substantively, nonmonetary comparisons between Europe and the United States are unlike the usual comparisons when one stacks poor nations against a richer country. Consider the following items:

· Globally, rich nations normally have higher life expectancy than poor nations. But life expectancy in France is 4.7 years higher than in the United States — and 9 years higher than in Alabama

· The overall US literacy rate is well below rates in other wealthy nations, and far below levels in Europe

· While the US and China dominate most information technology industries, with Europe a distant third — more on that later — access to and use of IT are basically comparable in the US and Europe

Understand that I’m not saying that the GDP numbers are wrong. What I am saying, however, is that the story “Europe is poor” is misleading.

A clearly important issue that is not captured by GDP per capita comparisons is income inequality, which is much higher in the US than in Europe. It is arithmetically inescapable that the high share of US income going to the top 1 percent and the top 10 percent renders most Americans worse off than the overall high level of GDP per capita would indicate.

However, quantifying this effect is, to be frank, a statistical can of worms, especially because some important goods and services — notably health care — are mainly government-provided in Europe while a significant share is privately-provided in the United States. My colleagues at the Stone Center on Socio-Economic Inequality, who are experts on the topic of income inequality, are not convinced by some widely cited analyses of this issue. So for now, I will simply assert that the role of income inequality in underestimating the performance of Europe versus the US is an important component, but one to which I can’t put exact numbers.

Finally, if we look at the sources of low GDP per capita, they are very different in Europe than in poor U.S. states.

More than 30 years ago I wrote that “productivity isn’t everything, but in the long run it is almost everything.” Nations become rich by increasing labor productivity — real GDP per hour worked. So you might assume that relatively low GDP per capita in Europe compared with the US is mainly a result of Europeans’ relatively low productivity.

But that’s a mistaken inference. The Organization for Economic Cooperation and Development has estimated productivity for a number of countries, with estimates that are similar to those from other sources. Here’s how those numbers for Germany and France, plus my own calculation for Alabama, compare with GDP per capita:

Chart 3

At 85.7%, per capita GDP in Germany is nearly 14 percent lower than the US average, yet German productivity, at 96.7%, almost matches US productivity. Thus the productivity gap explains only a little more than a fifth of the GDP gapin the case of Germany. French per capita GDP is 27 percent lower than in the US, but French productivity is only slightly lower than German productivity. Therefore, the productivity gap explains less than a third of the GDP gap in the case of France.

What do these numbers mean? They mean that head-to-head comparisons of GDP per capita are misleading without also understanding comparisons of labor productivity. While Europe has lower GDP per capita than the U.S., its labor productivity is relatively close to that of the U.S. What explains this divergence?

The answer is that America is the “no-vacation nation.” Historically, Americans were more like Europeans, taking part of the gains from productivity growth in the form of shorter work hours. But that process stopped after around 1970. Europeans, however, do take vacations, and as a result work fewer hours per year. This means lower GDP, but with the offsetting benefit of more personal time.

In short, lower European GDP per capita can be viewed largely not as a problem but as a choice — a choice to spend less time working but more time on other things. Which side of the Atlantic is making the right choice? I’ll leave that up to readers.

By contrast, poor U.S. states are poor not because of lifestyle choices but because they have low productivity. The productivity gap between Alabamians and other Americans explains more than three-quarters of Alabama’s low GDP per capita compared with the U.S. national average.

As I said, then, while GDP comparisons aren’t wrong, they can be misleading: Europe isn’t poor the same way that Alabama or Mississippi are poor. On the whole we should think of Europeans as being as competent at producing goods and services as Americans, but with lower monetary income because they’ve made different choices about how to use their time. Thus it’s misleading to conclude that Europeans have a clearly lower standard of living than Americans when they have essentially just made different choices.

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