Essay Summary: Living Standards Growth — US vs Northwest Europe¶
Overview¶
Matthew C. Klein sides with what he calls the "standard view": that living standards in Northwest Europe have been rising more slowly than in the U.S. since the mid-1990s. This is a response to the ongoing debate between those who accept the standard framing ("Side A") and a revisionist camp ("Side B") that claims the gap is largely an artifact of mismeasurement.
The Two Sides¶
Side A — The Standard View¶
- Northwest European living standards have been losing ground to the U.S. since the mid-1990s.
- This is consistent with the relative underperformance of European stock markets versus U.S. markets over the same period.
- Measured GDP per capita and productivity figures support the conclusion.
- The divergence accelerated after the 2008 financial crisis.
Side B — The Revisionist View¶
- Claims that the apparent gap is largely due to deflator mismeasurement — i.e., the price indices used to convert nominal figures into real ones are flawed in ways that systematically understate European performance.
- Argues that if deflators are wrong, real consumption and output comparisons are unreliable.
- Key proponents include Seth Ackerman, with support/engagement from Paul Krugman, Luis Garicano, Philippe Aghion, and Brad DeLong.
Klein's Counter-Argument¶
Klein addresses the revisionist deflator argument directly:
Regardless of who produces a good or service, consumers benefit from lower prices. Even if European output is mismeasured, the fact remains that U.S. consumers access many goods and services at significantly lower real costs.
Wage Comparison¶
- U.S. average wage: ~$78,000 (before tax)
- Denmark average wage: ~$65,000 (before tax, with significantly higher taxes on that income)
- After taxes and transfers, the U.S. advantage widens further.
Housing Cost Comparison¶
- Copenhagen: ~$2,000/month for a 550 sq. ft. apartment
- Boston/San Francisco: ~$5–6/sq. ft. (meaning a comparable apartment costs $2,750–$3,300)
- Housing is significantly more expensive in the U.S., a genuine counterweight in the cost-of-living picture.
ICP (International Comparison Program) Data¶
- Overall prices in Denmark: 8% higher than U.S.
- Restaurant and hotel prices in Denmark: 45% higher than U.S.
- Healthcare and education in Denmark: 28% lower than U.S. (reflecting public provision and price controls)
Key Takeaway¶
Klein's position is nuanced: he accepts the standard view's conclusion that NW Europe has indeed grown more slowly in living standards, but acknowledges that certain dimensions (housing affordability, healthcare costs) complicate the picture. The deflator critique is interesting but ultimately insufficient to overturn the headline finding.
Debate Participants¶
| Person | Stance |
|---|---|
| Matthew C. Klein | Standard view (judiciously) |
| Seth Ackerman | Revisionist (deflator mismeasurement) |
| Paul Krugman | Engaged in debate |
| Luis Garicano | Engaged in debate |
| Philippe Aghion | Engaged in debate |
| Brad DeLong | Engaged in debate |