Flawed metrics inflate US productivity as European industry contracts
Economist James Galbraith argues that widely cited US productivity advantages over Europe are statistical artifacts, masking a real and potentially more severe industrial decline in the eurozone that is weighing on the currency.
University of Texas economist James Galbraith has challenged recent claims by Paul Krugman that the US has achieved dramatically higher productivity and living standards than Europe. Galbraith contends that when standard metrics yield contradictory results, the correct answer might be "neither one." For market participants relying on these figures to gauge transatlantic growth, the underlying data is fundamentally distorted.
Official charts suggest the average American is over 60% richer in real terms in 2026 than in 2000. Yet St. Louis Fed data shows real median weekly earnings have risen just 10.5% over that period. This divergence stems largely from how tech sector productivity is measured. US firms like Apple outsource physical manufacturing to Asian supply chains, such as Taiwan Semiconductor Manufacturing Corporation and FoxConn's 250,000 workers in Shenzhen, while booking the high-value-added activities at home.
Furthermore, measured tech productivity relies heavily on aggressive price adjustments for consumer electronics. By tracking the collapsing cost of devices that consolidated functions from the analog era into a single smartphone, standard metrics use outdated base-year weights. This exaggerates real growth while ignoring that modern incomes are increasingly consumed by rising costs in energy, tuition, rent, insurance, and interest.
While US data may be artificially inflated, Europe is not stagnating—it is actively contracting. The decline is most visible in Germany's dominant export sectors, including automobiles, chemicals, and pharmaceuticals. These energy-intensive industries are shrinking under structural pressures that the US has largely avoided.
The US economy is currently supported by domestic energy from the Permian Basin, a robust stock market, and a construction boom in data centers. Europe lacks these buffers. Instead, it is burdened by what Galbraith describes as a "delusional energy policy, a mad rush to rearm, and Sinophobia even more severe than America’s."
This structural divergence offers a clearer explanation for the euro's weakness against the dollar than purchasing power parity comparisons, which struggle to account for vast differences in public services and infrastructure quality. For investors, the takeaway is that US outperformance is partially a statistical illusion, but Europe's relative decline is an economic reality shaping currency and equity markets.
