The Grand Illusion: The US – Europe Growth Gap

There is a widely told story among elite pundit types that the US economy is soaring ahead, and Europe’s economy is mired in stagnation. As is the case most of the time when there is an elite consensus, it is wrong. A new post by Seth Ackerman shows that the differences in growth, and especially productivity growth (GDP per hour of work), are driven almost entirely by differences in measurement, not differences in economic performance.

This reality is likely to be a serious blow to proselytizers of the American model, where we let clowns like Elon Musk and Mark Zuckerberg run roughshod over any laws that limit their ability to harm workers, consumers, or the environment. Paul Krugman had already put a serious dent in their American model boosterism by pointing out that the alleged America-Europe productivity growth gap was really a California-everyone else growth gap. Krugman pointed out that if we pulled out California, productivity growth in the rest of the country looks pretty much like Europe.

(Productivity is the focus of these comparisons and not per capita GDP because there is a large GDP gap simply because workers in the US put in many more hours. In Europe, five or six weeks a year of vacation is standard as well as paid family leave and sick days. Thirty five hour workweeks are also common. The decision to work fewer hours is a value choice, where people can make different calls, not evidence of superior economic performance.)

But the piece by Ackerman goes even deeper. It turns out that even with California the US is not outpacing Europe. Our faster growth is due to our statistical agencies, not our brilliant entrepreneurs, low taxes, and freedom from regulations that restrain business.

The issues here can get a little tricky, so bear with me. When we add up all the goods and services that make up GDP, we are summing a vast range of different goods and services. GDP includes all the cars, computers, apples, heart surgeries, and haircuts made or performed in a year, and millions of other items.

We add them together by using their price to get a total that’s equal to GDP. But in order compare over different years, we need to control for price changes. We want to measure the actual growth in output, not inflation. This means we have to measure the inflation in each item and adjust the current market price for the inflation in that item.

That would be rather straightforward process if we are measuring the price of the same items over time. If the price of an apple doubles from 2015 to 2025, we just divide the 2025 price by 2 to get what it would cost in 2015.

The problem is that we are often not comparing the prices of the same items. The iPhone someone buys in 2025 would be very different than the iPhone they bought in 2015. To adjust for this difference, the Bureau of Labor Statistics (BLS) and other statistical agencies try to calculate quality changes. They count inflation (or deflation) as the price increases that exceed (or fall below) the estimated rate of quality improvements.

The estimates of quality improvements can be quite large. For example, the BLS price index for televisions fell by almost 70 percent between January 2016 and January 2026. I don’t often buy a television, but I doubt the price of a typical TV has fallen by 70 percent in the last decade. Most of this price decline would be due to the estimated quality improvement in televisions over this period.

Measuring quality changes is a long and complicated story, but for this purpose, the accuracy of the measurements doesn’t matter. The important point is that countries’ statistical agencies use different measures of quality adjustment. This means that their measures of real (inflation-adjusted) GDP growth will differ simply because their methodologies for quality adjustments differ. Even if the United States and France or Germany had the exact same increase in the items they produced, their statistical agencies would report different growth rates because they used different methodologies for quality adjustment.

To take a simple analogy, suppose we had two appraisers make assessments of the value of two outwardly identical houses next-door to each other. One comes back and tells us the first home is worth $500k. The other appraiser tells us the second home is worth $1 million. When we examine the appraisals more closely, we discover the second appraiser had also included the value of the furniture.

Either method is perfectly fine, but if we want to make comparisons, we have to use a common method. We have to agree on whether or not to count the value of the furniture.

The story of US productivity growth hugely outpacing the growth of European countries turns out to be similar to the issue of counting the furniture. There are periodic efforts by the University of Groningen’s Growth and Development Center(GDC) to systematically measure each country’s GDP using a common set of prices, where each television set, smartphone, haircut, and knee surgery is counted at the same price regardless of which country it is produced in. The GDC is recognized as being at the cutting edge in these sorts of apples-to-apples measures of GDP.

These measures tell a different story. According to these measures, there has been little change in the ratio of Europe’s productivity to productivity in the US GDP over the last three decades. This suggests that most, if not all, of the reported gap in growth between the United States and Europe is due to measurement issues, not a more rapid growth rate.

In short, it seems the secret to the superiority of the US economic performance isn’t the entrepreneurial genius of Elon Musk or Mark Zuckerberg, but the bureaucrats making quality adjustments at the Bureau of Labor Statistics. Maybe they should get a raise.

People should read Seth’s paper to get the more complete picture.

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