Dear Free Lunchers, it’s nice to see you again! A million thanks to all the great colleagues who kept the newsletter going while I was trying to put together some thoughts for a book. (Working title: “After America” — but please don’t ask how it’s going.)

Back in the global economic policy debate, here is a piece of conventional wisdom that frames both Europe’s policymaking discussions and the US’s lecturing to Europeans: the EU has long and consistently been falling behind the US in productivity growth. That is also the overarching lesson political leaders have taken from former European Central Bank president Mario Draghi’s 2024 landmark report.

The point of calling something conventional wisdom, of course, is to hint that things may not be quite so. That’s the topic for today’s newsletter, and one I have been pondering for some time — so forgive the length.

The EU’s underperformance relative to the US is the sort of thing everybody “just knows”. (That said, some of us have argued that differing fortunes across the Atlantic are a post-pandemic phenomenon, and that until 2019 Europe was keeping up.) In my experience, rare is the policy discussion in Brussels or an EU capital that isn’t introduced by complaining the US is outgrowing Europe.

But in February, Seth Ackerman, editor-at-large at Jacobin, lit a fuse under the conventional wisdom by showing just how sensitive it is to your choice of definitions and measures. Below is his killer chart:

Both sets of lines express the GDP of western Europe as a proportion of that of the US. Neither compares nominal GDPs in plain money terms, which would fluctuate meaninglessly with bilateral exchange rates. Instead they correctly adjust for domestic inflation and relative price differences between countries, known as purchasing power parity (PPP) adjustment.

Ackerman’s argument points out that there are two ways you can do this. To do a “real” comparison of growth across time, you can adjust each region’s output by the year’s domestic price levels to express everything in “constant prices”. Then, compare these two growth experiences using the same year’s PPP exchange rate. Another method is to apply the PPP exchange rate in each year to compare the GDPs, and only then look at how that comparison evolves over time.

Ackerman shows that in constant 2021 prices, western Europe has gradually declined relative to the US. But in evolving or “current” PPP terms, the two have kept pretty level for decades.

The same can, of course, be done for economy-wide productivity. In the chart below, I use the same measurement approaches using GDP per capita (instead of aggregate GDP) and the whole EU (instead of western Europe). All the data is from the World Bank.

Since the EU has more people and includes the former communist bloc of eastern Europe, its GDP per capita is significantly below that of the US. But this chart reveals the same contrast as Ackerman’s: in constant 2021 prices, the EU has been stuck at a steady gap behind the US. In current PPP, it has been catching up significantly — from 60 per cent of the US level at the turn of the century to 74 per cent today.

Two definitions, two very different stories, which lead to very different policy conclusions and judgments about Europe’s prospects. Draghi himself warned about measurement difficulties in his famous report but chose to foreground the more pessimistic numbers, concluding that:

His report was, as someone in the know expressed to me, commissioned to find a “burning platform” that would scare political leaders into action. The scare succeeded. The action, not so much yet.

Ackerman’s post was the prelude to a heated debate among economists. It was picked up by Nobel Prize-winning economist Paul Krugman, who sided with Ackerman that the EU is doing very well, thank you. Krugman has since followed up with more posts, including his own versions of the chart. In the opposite corner, Luis Garicano, professor at the London School of Economics and former member of European parliament, presented numbers to show the richer parts of Europe are indeed falling behind the US, and that Krugman is wrong.

Read the arguments from both, as I’m sure I’m about to do them injustice. With apologies, I think they are both right but talking past one another, and also missing a more profound difficulty. Here’s my potted summary of both.

Krugman’s main point is that when one economy increases production much faster than another, the price of what it produces can fall as a result. As a consequence, the second economy will see the relative value of its own production rise. As a concrete example: plentiful and hence cheaper US tech and software make everyone rich! Hence, EU GDP grows as fast.

Garicano pushes back, defending the constant-price measures. He argues these accurately show the US produces much more software or tech than before, regardless of whether the prices of those goods and services have fallen dramatically. Looking at current PPP conversion, he argues, misses this.

One way to interpret this disagreement is that they are discussing different things. Krugman says Europe is as rich relative to the US as it always was. Garicano says Europe has expanded its productive capacities less than the US has. These statements can both be true, insofar as wealth and productive capacity are not too closely tied together. Intuitively, productivity is about your ability to produce, not just your income.

One reason the concepts might differ is because of international trade: the world can buy US tech at roughly the same prices as Americans can. (This goes both ways: US productivity growth in tech may be greater than it otherwise would be because the country can sell its tech to the world.)

But this answer — that Krugman is talking about prosperity and Garicano about productivity — is not fully satisfactory, partly because this is not how they themselves interpret their arguments. Both claim to talk about wealth and productivity. Krugman says PPP-measured wealth relative to inputs is what productivity is, while Garicano denies that Europe has kept up even just in wealth terms.

But both also seem to miss important points. Even if Krugman is right about the EU keeping up in relative prosperity terms — and I think he is — it is relevant that the US has expanded production in some leading sectors faster than Europe. It matters for the brittleness and durability of Europe’s prosperity, and begs the question of why the continent has not expanded as much in tech as the US has.

Garicano, meanwhile, is clearly right to highlight that the actual expansion of volumes in important sectors should be seen as a kind of US advantage. But when he says “the gap in material wealth has shifted dramatically in America’s favor”, I think he neglects the story the PPP numbers tell. The PPP comparison is undeniably the right way to measure how much Europeans can afford relative to Americans, regardless of how sectoral production volumes have evolved. And that comparison shows little change over time.

At the root of the paradox is the incommensurability of all that goes into GDP. Apples and oranges, against the common saying, can be compared (you can count or weigh them, for example). But how do you compare or aggregate computer chips, Nordic existentialist films, Parma ham, large language models and luxury bags? It is the different composition of US and European GDP that makes the two contradictory growth stories possible.

Aficionados of the history of economic thought will see the echo of the Cambridge capital controversy here. This was an intellectual dispute in the early days of growth theory over whether it made sense to model the economy as having a homogenous mass of something called “capital”. Economists in Cambridge, England, said this wouldn’t make sense because existing capital takes a lot of incommensurable forms. Economists in Cambridge, Massachusetts, said they would do it anyway, measuring capital in dollars or pounds, and flaunted the mathematically tractable models that resulted. The conclusion, as I was taught it, was that the British were right but the Americans won.

The connection to our EU-US puzzle is that we aggregate growth in different sectors, just as we would aggregate different types of capital. We weight goods and services by their market price, which is the best measure we have of their economic importance. This means we cannot avoid picking price indices — such as GDP deflators and PPP rates. If we really want to do productivity comparisons in GDP terms between countries and over time, there will always be multiple answers.

What to do, then? The bad-faith approach is to pick the measure that best fits your political predilections. The intellectually honest approach may be the nihilistic one that says the question is ill-defined, or at least that it doesn’t have a single correct answer.

At the very least, be consistent. In particular, if you buy the relative stagnation story, you should also accept the other implications of the constant price numbers, which you can see by going back in time in the charts above. Thirty years ago, for example, the GDP of what is now the EU was almost 30 per cent larger than the US’s. Moreover, average GDP per capita then for the EU’s current 27 member states — including those that had just suffered a post-communist economic collapse — was the same compared to the US as today.

Are you willing to assert that? If not, don’t assert that Europe has been falling behind either.

● Before I went on leave, President Donald Trump’s attack on Iran inspired me to write this FT Weekend essay on decapitation strikes.

● Podcast-generating LLMs turn everything into a “white, educated, middle-class American default” — including empty PDF files.

● Is the metastasised US health system to blame for the country’s huge trade deficit?

● The oil shock has yet to hit the US.

● Power prices fell to minus €479/MWh in France on a sunny April afternoon. Who said renewables are to blame for costly energy?