In this discourse, we delve into a critical examination of productivity claims in the U.S., as previously articulated by Paul Krugman. These assertions that the U.S. boasts a notably higher level of productivity, and consequently a better standard of living, merit deeper scrutiny. This concept of American exceptionalism—believing that the U.S. possesses the most productive economy—stands challenged when we thoroughly analyze the evidence surrounding rentier practices, exorbitant military expenditures, inflated healthcare costs, and soaring tuition fees. The notion that the U.S. maintains high productivity levels does not hold up against closer inspection.
By James K. Galbraith, Lloyd M. Bentsen Jr. Chair in Government and Business Relations, University of Texas at Austin. Originally published at the Institute of New Economic Thinking website
A response to Paul Krugman’s recent essay on U.S. and European productivity opens onto a broader question. If standard metrics yield contradictory results, perhaps the issue lies not within the economies themselves but within the measures employed.
In his July 5 essay on economic performance, Krugman contrasts two key metrics: real GDP per capita over time and a series of Purchasing Power Parity (PPP) income measures. He observes inconsistencies between these metrics: one suggests the U.S. is significantly ahead, while the other indicates that Europe is keeping pace. Krugman poses the question, “which of these narratives is true?” However, he neglects the possibility that the answer may be “neither.”
Take a look at Krugman’s Chart 1, which suggests that the “average” American is over sixty percent richer in real terms in 2026 compared to 2000, the apex of the internet boom. Sixty percent. This measurement includes essentials like food, clothing, transportation, housing, leisure activities, and more. Is that truly the case? Meanwhile, real median weekly earnings, according to the St. Louis Fed, have only increased by 10.5 percent.[1] Either Krugman’s assertion is erroneous, or it is severely skewed by income distribution disparities, or perhaps it’s both.
Krugman mentions the tech sector’s substantial contribution to U.S. productivity growth and the role of aggressive pricing strategies in presenting high measured rates of “real growth” in technology. However, why is U.S. tech productivity so elevated? He claims that the U.S. commands “most or all global tech production.” But doesn’t Taiwan Semiconductor Manufacturing Corporation factor in? What about the 250,000 employees at FoxConn in Shenzen? Is it possible that U.S. productivity is inflated because tech companies like Apple transfer the labor-intensive aspects to China while retaining high-value processes domestically? The methods of semiconductor production are not vastly dissimilar; rather, the variations lie in supply chain organization.[2]
Regarding technology pricing, Krugman presents his Chart 6 as the adjusted price of a “new” product—smartphones. However, that is misleading. The chart’s caption states it references “telephone hardware, calculators, and other consumer information items.” This undermines the characterization of smartphones as “novel.” Indeed, while the combination of functions is a modern innovation, the capabilities I utilize today—phone, fax, email, camera, recording, television, calculator, newspaper, magazines, video games, meeting spaces, travel planning, banking—each had their analog counterparts in the previous century. The price decreases reflected in the chart derive from the combined cost reductions of individual devices, now unified in one gadget. European tech firms also outsource to China, but their outsourcing ratio is lower than that of U.S. companies.
Indeed, the prices of such products have declined, and if we view them through the lens of their weight in consumption as in the year 2000, we appear somewhat better off. However, each of those functions holds less economic value now than they did twenty-five years ago.[3] If we base our analysis on the contemporary consumer basket—a benchmark that will likely become the standard—we find that technology items now occupy a smaller proportion of expenditures (and GDP) than previously, while income is increasingly diverted to more expensive necessities like energy, education, housing, insurance, and healthcare. Thus lies the real conundrum of information technology: significant advancements often become obscured in the economic transactions that define our marketplace, and as a result, they fade from output data as well. This phenomenon is known as the index-number problem; it’s a paradox without a flawless solution. Nevertheless, we understand that employing outdated base-year weights distorts reality.
To elucidate his alternative metric, purchasing power parity, Krugman refers to the “Big Mac Index,” seemingly a standardized item globally available. However, that claim is problematic. In the U.S., McDonald’s represents a typical fast-food establishment, somewhat outdated within the context of highway culture. In Europe, by contrast, visiting a McDonald’s often resembles a cafe experience. Thus, the Big Mac in the two regions does not hold the same value—this is compounded by Europe’s VAT and public health policies, which contribute to pricing discrepancies. While the International Comparison Project is valuable, PPP comparisons are fraught with such quality challenges.
Krugman accurately states that the comparisons he presents utilize “completely standard methods.” I do not criticize statisticians endeavoring to measure economic outcomes amid constant change. The issue lies in the inadequacy of these methods.[5]
A measure of common sense might provide clarity. If average Americans truly enjoyed over a fifty percent boost in wealth since 2000, would Donald Trump be President today? If Europe were genuinely thriving, wouldn’t the far-right parties like Germany’s AfD, France’s RN, and the UK’s Reform be rising to power? Clearly, there is something fundamentally flawed in metrics depicting the U.S. as experiencing unprecedented prosperity, and similarly in arguments that suggest Europeans—while not as affluent—are also enjoying considerable improvements in their quality of life. Economists should consider venturing beyond their data to observe the reality.
So, what of the U.S. and Europe? Neither region is impoverished, yet significant disparities exist within Europe—compare Denmark to Portugal, for instance, or Sweden to Bulgaria—greater than those among American states.[6] However, anyone who has visited both regions recognizes that, in comparison to China, both Europe and the U.S. are experiencing relative decline. Life in either region is no longer uniquely special. China now dwarfs both Europe and the U.S. combined.
Moreover, one might argue that Europe’s relative decline is occurring at a faster pace. Evidence of this trend can be seen in the ongoing contraction of major European industries, particularly in Germany, notably in sectors like automobiles, chemicals, and pharmaceuticals—industries that have historically been the backbone of German exports. In contrast, the U.S. economy is currently buoyed by advantages like the Permian Basin, a robust stock market, and a construction surge in data centers. Europe lacks these supports and faces additional challenges brought about by misguided energy policies, a fervent push for military armament, and intense Sinophobia exceeding even that of the U.S.[7] These factors, combined with the perception of U.S. Treasury bonds as a secure investment, may partly explain the euro’s decline relative to the dollar, which, contrary to Krugman’s assertion, is perceived by some as indicative of genuine relative decline.
Europe’s economic approach has been shaped by the neoliberal ideology prevalent during the formation of the Eurozone. For decades, this strategy has amounted to self-inflicted harm, exacerbated by Europe’s alignment with American geopolitical interests and a failure to define its own goals in the contemporary landscape. The belief that Europe merely requires more “reform” (flexible labor markets, extended retirement ages, reduced public services, debt restrictions…) and greater “integration” is utterly misguided. Europe needs to pursue a path of peace with Russia, foster cooperation with China, and develop a regionally focused strategy aimed at revitalizing areas such as Romania and Bulgaria, which have not advanced since the dissolution of the socialist bloc—akin to the New Deal that revitalized the American South in the 1930s. Achieving this will necessitate securing Russian and Middle Eastern energy resources and finding a resolution to the conflict in Ukraine along with the U.S. and Israeli pressures on Iran.
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- 1. According to the same source, real median household income is up 16.7 percent over the same period.
- 2. Major European tech companies do outsource to China, but their share is less than that of U.S. firms.
- 3. Basic economic value determinants like scarcity and the degree of monopoly power have both diminished in the information sector. This matter is elaborated in my upcoming book with Jing Chen, Entropy Economics: The Living Basis of Value and Production (Chicago, 2025).
- 4. Quality-related issues aren’t exclusive to Europe; analogous concerns can be found in the U.S. The crux of the matter is that assessing the myriad distinctions in much of our economic activities—beyond directly comparable goods and services—remains an intractable challenge, one that merely recording prices in stores cannot resolve.
- 5. John Maynard Keynes articulated a similar sentiment in The General Theory, suggesting that “To assert that net output is greater, but the price level lower than it was a year ago, suggests a proposition of interest yet unsuitable for differential calculus.” His broader arguments should serve as a guiding principle for those trying to decipher index numbers. Keynes opted for “two fundamental units of quantity: monetary values and employment quantities.”
- 6. Denmark boasts approximately double the per capita income of Portugal, and Sweden nearly triples that of Bulgaria. There exists no pair of U.S. states with average income differences as significant as those seen in Europe. Furthermore, the affluent in the U.S. are more visible, while their European counterparts often maintain discretion.
- 7. The question of which region suffers more from price-gouging is best left for experts like Isabella Weber of the University of Massachusetts—Amherst, recognized for her proficiency in this subject.
