Economist explains why Europeans are getting poorer… and happier

Summary

This video script discusses the misleading narrative of Europeans becoming poorer compared to Americans, as suggested by GDP in dollar terms. It explains that while European incomes may have stagnated post-2008, the use of purchasing power parity (PPP) shows a different story, with Europeans maintaining their standard of living. The script challenges the focus on dollar GDP, emphasizing the importance of non-tradable goods and services in Europe's economy, and suggests that concerns over Europe's economic decline are more about global perspective and international trade.

Takeaways

• 📈 Post-WWII, European incomes were catching up to American incomes in dollar terms, but this trend changed after the 2008 crisis.
• 💰 European incomes stagnated while American incomes continued to rise, leading to reports of Europeans getting poorer.
• 🔍 A report by economist Mario Draghi suggests Europeans are 20% less productive compared to Americans.
• 🌐 Economic stagnation threatens Europe's ability to invest in aging population and security.
• 🤔 Despite the GDP per capita differences, Europeans' quality of life metrics like life expectancy and happiness do not reflect a decline.
• 💡 GDP in dollar terms is misleading for comparing European and American wealth due to the high percentage of non-tradable goods and services.
• 🌍 For large economic blocs, most goods and services are non-tradable, making dollar GDP a less useful comparison metric.
• 💸 Purchasing Power Parity (PPP) is a more accurate way to compare living standards within large regions like Europe and the US.
• 💵 The euro has lost value against the dollar since 2008, despite lower inflation and higher productivity in Europe.
• 🌐 Europeans have not felt poorer because most of their purchases are non-traded goods and services, not affected by the dollar exchange rate.
• 🏛️ Financial media and politicians focus on dollar GDP, which is important for international trade and investment, but does not reflect domestic economic health.

Q & A

What trend in European and American incomes is depicted in the graph mentioned in the script?

The graph shows that after the Second World War, the income of the average European has gotten closer to that of the average American in dollar terms, but after the 2008 crisis, European incomes stagnated while American incomes continued to rise.

What does Mario Draghi's report suggest is the main problem contributing to the economic stagnation in Europe?

Mario Draghi's report claims that Europeans have become 20% less productive compared to Americans, which is the main problem contributing to Europe's economic stagnation.

How does the script suggest that GDP per person correlates with quality of life metrics?

The script suggests that GDP per person tends to correlate well with various quality of life metrics such as the Human Development Index, life expectancy at birth, and self-reported happiness.

What is the limitation of using GDP in US dollars to compare American and European incomes according to the script?

Using GDP in US dollars to compare American and European incomes is less useful because in large economic blocs like Europe and the US, only a small fraction of goods and services are actually traded across borders, and most of the GDP consists of non-tradable goods and services.

What is the difference between GDP measured in US dollars and purchasing power parity (PPP) GDP?

GDP measured in US dollars compares the value of all final goods and services produced in a country using the current exchange rate to US dollars, while PPP GDP compares the purchasing power that people have to buy goods and services in their own country, taking into account both tradable and non-tradable goods and services.

Why does the script suggest that the difference between US dollar GDP and PPP GDP matters?

The difference between US dollar GDP and PPP GDP matters because it reflects how they account for both prices and the exchange rate, which can affect the perceived wealth and economic strength of a country when compared internationally.

What could be a reason for the euro losing value to the US dollar despite higher inflation in the US, as mentioned in the script?

The script suggests that the euro losing value to the US dollar despite higher inflation in the US could be a reflection of fundamental US strength compared to Europe, such as its cheaper energy, younger population, and better business environment for future companies.

How does the script explain the discrepancy between the reported economic decline in Europe and the quality of life metrics?

The script explains that most Europeans have not felt poorer because they buy mostly non-traded goods and services from their continent, where they do not use US dollars. This is why quality of life metrics like the Human Development Index, life expectancy, and reported happiness in Europe are doing just fine despite the lower value GDP stagnating compared to the US since 2008.

What is the significance of the exchange rate between the euro and the US dollar in the context of the script?

The exchange rate between the euro and the US dollar is significant because it impacts how European incomes are perceived in dollar terms. The script notes that after 2008, the euro has lost value against the dollar, which contributes to the narrative of Europeans becoming poorer in dollar terms.

Why might financial newspapers and politicians be concerned about Europe's economic decline despite the script's argument that Europeans have not gotten poorer?

Financial newspapers and politicians might be concerned about Europe's economic decline because it affects Europe's international power and the ability to make investments in areas like energy imports, which are paid in US dollars. Additionally, they may be worried about Europe's place in a world that is becoming more hostile.

Outlines

00:00

📈 Economic Comparison: Europe vs. America

This paragraph discusses the economic comparison between Europe and America post-World War II, highlighting how the income gap narrowed until the 2008 financial crisis. It mentions the stagnation of European incomes and the rise in American incomes, leading to reports of Europeans getting poorer. The paragraph also introduces the concept that Europeans may have become less productive and how this could affect the economy and government investments. It questions the narrative by comparing quality of life indicators like the Human Development Index, life expectancy, and happiness, which do not show the same level of impoverishment as suggested by GDP figures. The speaker suggests that GDP in dollar terms might not be the best measure for comparing the wealth of Europeans to Americans.

05:03

💡 Understanding GDP and Purchasing Power

The second paragraph delves into the concept of GDP and its limitations when comparing economies, especially within large economic blocs where most goods and services are non-tradable. It explains that while GDP is a good measure of economic activity, it can be misleading when converted to a common currency like the US dollar due to differences in what is tradable and non-tradable. The paragraph introduces the Purchasing Power Parity (PPP) as a more accurate way to compare the economies of Europe and the United States, as it accounts for both tradable and non-tradable goods and services. It contrasts the US dollar GDP with PPP GDP and explains why the latter shows a different picture of economic prosperity in Europe, suggesting that Europeans have not gotten poorer in terms of their purchasing power within their own economies.

10:04

🔒 Data Protection and Cybersecurity

The third paragraph shifts focus to data protection and cybersecurity, emphasizing the importance of safeguarding personal information in the digital age. It discusses the risks associated with data brokers selling personal information and the potential for identity theft and fraud. The paragraph introduces Incogni, a service that helps individuals remove their personal data from data brokers, thereby reducing the risk of cybercrime. It highlights the benefits of using Incogni, including the convenience of having the service handle the complex process of data removal and the provision of a discount code for viewers.

Keywords

💡Second World War

The Second World War, also known as World War II, was a global war that lasted from 1939 to 1945. It involved the vast majority of the world's nations—including all of the great powers—forming two opposing military alliances: the Allies and the Axis. The war resulted in significant changes to the political alignment and social structure of the world. In the context of the video, it serves as a historical benchmark to compare the economic progress of Europe and the United States post-war.

💡Income

Income refers to the money received on a regular basis for work or through investments. In the video, the focus is on the average income of Europeans and Americans, which is a key indicator of economic well-being. The script discusses how this income has changed over time and how it compares between the two regions.

💡Crisis of 2008

The Crisis of 2008, also known as the Global Financial Crisis, was a severe worldwide economic crisis considered by many economists to have been the most serious financial crisis since the Great Depression of the 1930s. The video discusses the impact of this crisis on European and American incomes, highlighting a divergence in economic trends post-2008.

💡Productivity

Productivity is a measure of the efficiency of production, typically expressed as the ratio of economic output to input. In the script, it is mentioned that Europeans have become 20% less productive compared to Americans, which is identified as a main problem contributing to economic stagnation in Europe.

💡Gross Domestic Product (GDP)

GDP is the total value of goods produced and services provided in a country during one year. It is a primary indicator of a country's economic health. The video explains that GDP is used to compare economies but also points out its limitations when comparing the wealth of Europeans to Americans due to the nature of non-tradable goods and services.

💡Purchasing Power Parity (PPP)

PPP is an economic theory that compares different countries' currencies through a 'basket of goods' approach. It is used to measure the relative value of currencies and to compare the real standards of living across different countries. The video suggests that PPP is a more accurate measure to compare the economic well-being of Europeans and Americans than nominal GDP.

💡Non-tradable goods and services

Non-tradable goods and services are those that are not sold across international borders due to high transportation costs or other factors. The video uses the example of a haircut to illustrate this concept and explains that the majority of GDP in large economies like the US and Europe consists of non-tradable goods and services, which are not directly impacted by exchange rates.

💡Inflation

Inflation refers to the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. The video discusses how inflation rates in the US and Europe have differed, affecting the value of currencies and the perceived wealth of citizens.

💡Exchange Rate

An exchange rate is the value of one country's currency in terms of another country's currency. The video highlights how changes in the exchange rate between the euro and the US dollar have affected the comparison of European and American incomes.

💡Human Development Index (HDI)

HDI is a statistical measure of well-being in a country. It measures average achievements in a country in three basic aspects of human development: life expectancy, education, and per capita income. The video uses HDI as an example of a quality of life metric that does not show the supposed impoverishment of Europeans compared to Americans.

💡Cybercrime

Cybercrime involves the use of computers and the internet to commit crimes. In the context of the video, cybercrime is mentioned in relation to the protection of personal data. The video sponsor, Incogni, is presented as a solution to help protect against cybercrime by removing personal data from databases where it could be vulnerable.

Highlights

After WWII, European income approached that of Americans in dollar terms.

Post-2008 crisis, European incomes stagnated while American incomes continued to rise.

Reports suggest Europeans are getting poorer compared to Americans.

Mario Draghi's report claims Europeans are 20% less productive than Americans.

Economic stagnation threatens Europe's ability to invest in aging population and security.

Quality of life metrics do not reflect a decline in European prosperity.

GDP is still considered the best metric to compare national economies.

GDP measures the value of all final goods and services produced within a country.

GDP in dollar terms is misleading for comparing European to American wealth.

A significant portion of goods and services are non-tradable and not affected by exchange rates.

Purchasing Power Parity (PPP) is a better measure for comparing economies within large currency blocs.

PPP GDP shows Europeans are not falling behind in terms of purchasing power.

Inflation in the US has been higher than in Europe post-2008.

Despite higher inflation, the dollar has strengthened against the euro.

Most Europeans have not felt poorer because they buy non-traded goods and services.

Financial newspapers and politicians focus on dollar GDP due to international transactions.

The strong dollar could reflect fundamental US strengths over Europe.

Despite concerns, Europeans have not gotten poorer in terms of purchasing power.

Europeans have better data protection compared to Americans.

Incogni helps protect personal data from cybercrime.

Transcripts

This graph shows that after the Second World War,

the income of the average European has gotten closer

and closer to that of the average American in dollar terms.

However, after the crisis of 2008, that picture has changed.

As European incomes stagnated while that of Americans continued to rise.

This has led to alarming reports by financial media

that Europeans are getting poorer and Americans richer.

And while some of that can be explained by Europeans working less.

A new report by arguably Europe's most famous

economist, Mario Draghi, claims that the main problem is

that Europeans have become 20% less productive compared to Americans.

This economic stagnation is a major threat to Europe's prosperity

because it will prevent

European governments from making much needed investments to deal with a rapidly

aging population and increased outside threats.

However, as a European economist who acknowledges that this chart is very real,

I still had a nagging suspicion that a crucial piece of the puzzle was missing.

Because whenever I make videos about Western economies,

it's usually the Americans that are complaining

about the state of their economy, not Europeans, of course.

Me just looking at my comments is hardly scientific.

But when I inspected the typical quality of life statistics,

such as the Human Development Index, life expectancy at birth, and self-reported

happiness, which normally correlate consistently with GDP per person.

This supposed massive impoverishment of Europeans

versus Americans does not show up at all.

This really got me wondering.

What's going on?

Did Europeans find the secret to having a good life without having money?

No. The problem is that using this specific measure of GDP

that almost everyone uses is a very misleading,

at least when it comes to comparing how rich Europeans are to Americans.

To understand why, let's do a quick review

of how economists compare economies.

While economists have long been looking for an alternative.

As of today, gross domestic product, or GDP for short, is still considered

the best metric to compare how well off people in different countries are.

In essence, GDP measures is the value of all final goods

and services produced in a specific country or region in a year.

Now, while that misses a lot of economic activity, GDP actually tends to correlate

really well with all sorts of different quality of life metrics.

But while, for example, life expectancy in terms of years

lived can easily be compared between two countries, GDP

cannot because countries often use a different unit of account for GDP.

That is, the value of British goods and services are measured in British pounds,

and while the Europeans mostly use euros and Americans use dollars.

Of course, the easiest way to compare economies that use

different currencies is to just use today's exchange rate

to, for example, convert Europe's euro GDP to Europe's dollar GDP.

Indeed, this is exactly how this graph was produced

by economists at the World Bank.

And just to be clear, there is nothing wrong with that.

In fact, when I compare economies on this channel, I most often use

GDP in dollar terms simply because the US dollar is the world currency.

So if your GDP drops in terms of U.S.

dollars, your citizens have generally become poorer.

From a global perspective,

that is, they can now buy less stuff on international markets.

So if, for example, we want to compare the international power of two small open

economies that trade a lot with each other in different currencies,

dollar terms, GDP is, in my opinion, the best metric that we have.

However, GDP measured in US dollars is less useful

if we want to compare American incomes to those in Europe.

You see, in such a large economic blocs, only a small

fraction of goods and services are actually traded across borders.

For example, in the US, total imports were just 15% of GDP in 2022.

On top of that, for many goods and services, transportation

costs are so high that it is extremely difficult to trade them across borders,

even if such products or services would be much cheaper in a neighboring country.

For example, if I go to the local hairdresser here in Belgium,

I pay €15 to get this specific haircut and it is worth every penny in my opinion.

Which is good because while I live fairly close to the Dutch border, I,

you know, traveling to the nearest Dutch hair

salon would be way more expensive than €15,

especially if I take into consideration travel time.

This is why economists often use getting a haircut as an example of a

non tradable good or service, where transportation costs are so high

that international trade does not make sense at all.

As you can imagine, the bigger a country or region is, the fewer

goods and services will be tradable as it gets more

and more expensive to travel to another country for an alternative.

Specifically, economists have estimated that non-tradable goods and services

could be as low as 22% for a big country like the United States.

In other words, while it may be simplest to use today's dollar

euro exchange rate to judge how rich Europeans are compared

to Americans, the vast majority of the GDP of both regions

is not directly impacted by this exchange rate,

because it is measuring mostly non-tradable goods and services.

This is why instead, economists often use these so called

purchasing power parity, or PPP for short, exchange rates

to compare the economies of big currency blocs like Europe and the United States.

In essence, the purchasing power parity comparison of GDP

looks at the prices of a representative basket of goods and services that includes

both tradable and non-tradable goods and services.

So PPP GDP compares the purchasing power that people

actually have to buy most goods and services in their own country,

rather than on international markets using the US dollar.

Interestingly, if we use PPP GDP to compare

European incomes to those of Americans, we will see that

Europe is not falling behind where it really matters.

Indeed, as you can see here, while the average EU and UK citizens

share of GDP is lower than that

of the average American who works longer hours, by the way,

we do not see the same stagnation as we saw

in the US dollar GDP graph.

But why this difference?

Well, since the difference between US dollar GDP and purchasing power parity,

GDP comes from how they account for both prices and the exchange rate,

we would expect that either Europe's inflation and or exchange rate

compared to the US could explain why Europeans

have gotten poorer in US dollar terms since 2008.

And as you can see here, after the 2008 crisis, prices in the US

have gone up considerably faster than in key European countries.

However, as we can see

here, for the case of, for example, the Turkish lira, a high inflation

currency should lose the value compared to a low inflation currency.

So, given that inflation was consistently higher in the US than in Europe,

we'd expect the dollar to have lost value compared to the euro.

However, if we look at this graph, we can see that instead

the low inflation euro has lost the value to the high inflation dollar.

While in 2008 you could roughly get $1.50 for €1.

Today you can only get roughly $1.12 for that same single euro.

So while this graph is correct, Europeans are poorer in dollar terms.

Most Europeans have not really felt this because most of what

they buy are so-called non traded goods and services,

which come from the continent itself, where they do not use the US dollars.

This can explain why quality of life metrics

that usually correlate with GDP, like the Human Development Index,

life expectancy and reported happiness in Europe are doing just fine

despite the lower value GDP stagnating

massively compared to the US since 2008.

But then why are financial newspapers and politicians

making such a fuss about Europe's economic decline?

Well, I think it is mostly a matter of perspective.

If you work for an international company, as a financial journalist, for example,

you will generally feel poorer on your trips to the United States,

or when comparing yourself to your American colleagues.

And if, like Mario Draghi, you are worried about Europe's place in the world

that is rapidly becoming more hostile, dollar GDP also matters a lot.

For example, Europe's new LNG energy imports

will have to be paid for in US dollars.

Finally, the fact that the dollar has remained so strong despite

higher inflation could be a reflection of fundamental US strength

compared to Europe, such as its cheaper energy, younger population

and better business environment for the companies of the future.

So yes, people are right to worry about Europe's

diminished economic strength on the world stage.

However, with this video, I've hoped to have convinced you that

despite a popular narrative, Europeans have not gotten poorer than Americans.

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