Transcription
A majority of Brits think that we are as rich or even richer than countries like America, Singapore, Australia, even Germany. When in fact we are, you know, quite some way behind most of those countries.
The widening gap between American and European prosperity is among the most important, yet lesser reported facts about the global economy. The clearest manifestation of this disparity is the chasm between per capita gross domestic product, which from the 1980s through to today now stands at $94,400 in the US, according to the International Monetary Fund, compared with 65,300 in Germany, 61,000 in the UK, and 52,000 in France.
And while America's prosperity advantage isn't new, the scale is. It is kind of startling that there is this big difference that has opened up between the US and Europe in terms of prosperity over the past couple decades, [clears throat] really going back to 2007. A big part of the answer is, if we're honest, that there is a huge tech industry and a big finance industry in the US. And so the presence of those high-tech sectors, the Silicon Valley and Wall Street, is going to skew the numbers in America's favor.
But remember, that doesn't answer the question of why Europe couldn't have its own finance or high-tech industry or its own billionaires. In fact, many of the people who are starting the companies and amassing the fortunes that skew the data in America are Europeans by birth. So you still have this puzzle of why they are doing all of that entrepreneurship and prosperity creation in America instead of their home countries in Europe.
Serious economists understand all too well just how far behind Europe is falling. In fact, the income gap was at the heart of a major report on the future of European competitiveness, produced in 2024 by Mario Draghi. My concern is not that we'll suddenly find ourselves poor and subservient to others. It is that over time we will inexorably become less prosperous, less equal, less secure, and as a result, less free to choose our destiny.
And now, voters remain largely unaware. Take for example a report by the Institute of Economic Affairs, a London-based think tank that advocates free markets. The main conclusion, British voters don't know how far behind they've fallen. Most strikingly, we we asked people, you know, the the US has 50 states. If if Britain was a US state, where would we be? And the average answer we get there is that the US would be about the seventh state. Based on average incomes? Yeah, exactly. So it's GDP per capita, I mean income per capita, yeah. So basically, Britons think they'd be at the top end, along with America's wealthiest states. Now, in reality, in in income terms, UK's 51st. Um and so, people do understand the UK economy is doing badly, but they don't quite get how badly things go in international terms. Um and and and and the fact that Britain is falling behind.
So why doesn't anyone do something about it? Well, economically, the divergence isn't always as noticeable on the ground. And Europe does look better if, rather than relying on nominal GDP data, one uses purchasing power parity figures instead. This is a better way of comparing living standards, as figures are adjusted for local price differences, so that you can actually see what money can actually buy. Using the PPP metric, US GDP per capita is $94,400, Germany's is $76,800, Britain's is $67,600, and France is is 68,600. That will tell you something about what's going on with quality of life, but it doesn't necessarily tell you about your households or your economies ability to command global resources, particularly things like energy, oil, your food, any of that sort of thing where actually these nominal comparisons matter a lot. And so, you can end up in the situation where people don't necessarily feel like they are falling behind because they can keep up their level of consumption, but in important ways on a global scale, they are and they will eventually notice that difference.
My own pet theory is that uh in fact, Brits do not travel very much to the countries that are booming and doing very well. They predominantly travel to countries that have the same problems as as us. Um 100 times as many people travel to Spain as to Australia, for example. Um Spain, you know, just a little bit behind us in GDP per capita nowadays, probably. Um to France, to Italy, all all comparable. So, people are not getting a sense of what it's like to uh be in a high-growth economy and I think that's part of the the difficulty.
>> In the United Kingdom, for example, an argument that you often hear is, "Well, I mean, we're actually better off than the Americans are because in terms of health care, we have our National Health Service, which is provided by the government, whereas Americans have to pay a lot of money for insurance." Um and that is true. I think that that will create an appearance of well-being, but it is only an appearance because first off, Europe is often spending money that it doesn't actually have in order to finance these welfare states, which means that they are eventually going to run into a limit of their ability to do that if they can't generate more prosperity. I think the other problem is that actually the welfare state is not very good at delivering the quality of life that you can experience in other places. So the National Health Service in the UK is notorious for long waiting lists, um poor cancer survival rates, uh generally poor quality of care. And so you know, it it appears like a benefit because it's free when you go to the doctor or the hospital, you still end up paying in other ways and you start wondering wouldn't people just be better off if we had a model that was oriented toward creating more prosperity so that we could afford nicer things instead of having to lean heavily on the welfare state to paper over the difference.
Aligning voters' perceptions with reality is the central political challenge [music] for reformers. And certainly one thing the IEA report argues optimistically that might help is better voter education. Talking about economic growth by itself is popular, but if [music] you want to achieve the policies to get to growth, you really have to then link it back to how it's going to make people's lives better, how it's going [music] to Well, we're going to do this because it means housing for your kids. We're going to do this reform because it's going to mean lower energy bills. We're going to do that reform because the the prices at the supermarket will go down.
I think a big part of the answer might end up being it will happen because it will have to happen once the money for the social welfare starts running out. And we are starting to see evidence that this is happening in some places. It's always very uncomfortable, but it is going to be an [music] important moment for Europe's economic future.